American Public Education Inc (APEI) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2009 American Public Education, Inc., Earnings Call. My time is Latrice, and I will be your coordinator for today.

At this time, all participants are in on-only mode. We will open up the question-and-answer session towards the end of this conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes, and I would now like to turn the presentation over to your host for today's conference, Mr. Chris Symanoskie, Director of Investor Relations. Please proceed, sir.

Thank you, Operator. Good evening, everyone, and welcome to American Public Education's first quarter 2009 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 form on 8-K. Please also 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," "would," "should," "will" and "could." These forward-looking statements include without limitation statements about the second quarter and the full year 2009 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 risk factors 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, the CEO of American Public Education and Harry Wilkins, the Executive Vice-President and CFO. Now at this time, I'd like to turn the call over to Wally Boston. Mr. Boston?

Thanks, Chris. We are pleased to report that American Public Education continued to execute its long-term strategy this quarter and, as a result, we realize strong growth in registrations, revenue, and earnings. This year we set out to achieve three important objectives -- one, to expand our presence among certain civilian segments; two, to broaden our success with military professionals; and, three, to develop and launch new programs.

For the three months ended March 31, 2009, net course registrations from students using federal student aid under Title IV increased 87.5% to approximately 7,500 registrations. This represents 16% of total net course registrations compared to approximately 12% in the same period of 2008.

While Title IV is a good proxy for civilian growth, our overall civilian growth was actually 88% during the quarter. This includes civilian students who use sources other than FSA for tuition. We believe these results indicate that our efforts to expand awareness at APU as well as to successfully and efficiently advertise in selected civilian markets are producing positive results.

We continue to deepen our relationship with the military by signing MOUs, which are Memorandums of Understanding, giving us greater access and visibility at two high-profile military installations on the East Coast. We recently hired an additional military outreach team member who will be developing relationships and serving military members on certain bases in the Midwest. We also gained additional visibility among military professionals by visiting military bases in a state where we previously had no presence.

We submitted two master's degrees programs for approval by the Higher Learning Commission. Once approved, we will announce the name of the programs and begin offering them to current and prospective students. We have a robust pipeline of new programs in development that will help us continue to broaden our product offering, which is already among the most diversified in the online sector.

Moving to slide 4, as a result of our efforts, net course registrations from new students increased 40% to 10,500 registrations during the first quarter of 2009. This growth rate is consistent with our growth rate in the first quarter of last year, 2008.

Net course registrations increased 41% to 46,650 registrations, which is actually on the high end of our expected top-line growth rate of 35% to 40% over the next 18 to 24 months. The growth in our active student population also remains strong at 50% year-over-year.

Moving on to slide 5, while strong growth is important, even moreso is improving quality. To this end, our regular course offerings include a required course for new students, College 100. This course follows many of the well-researched student engagement and persistence pathways and is design to prepare students for the rigors of higher education and online learning.

Through this course, we assess students in reading and math for placement or recommend remedial coursework, if needed. We participate in the Academy for Assessment of Student Learning, which offers HLC member institutions a sequence of events and interactions that are focused on student learning, targeted at accelerating and advancing efforts to assess and improve student learning and designed to build institution-wide commitment to assessment of student learning.

We also administer a survey instrument called the National Survey for Student Engagement for NSSE, Nessie for short, to gauge the level of student participation as it relates to learning. Nearly 1,000 institutions also participate in this program with options to participate in the spring or the fall.

We are a member of the Transparency by Design initiative, a college accountability and transparency movement to assist adult learners in becoming educated consumers of online education. In 2009, the TBD initiative will launch a website to serve as an online learner's guide for adult students. This guide will help students learn to write questions to ask about their online alternatives, give them tools to gauge their readiness for online education and help them navigate the data provided about institutions. It will share and interpret data from the 14 participating institutions including student demographics, completion rates, costs, student satisfaction levels, and information about alumni.

We plan to continue seeking specialty accreditations for our programs as well. As recently in 2008 we received several specialty accreditations including one for our Child and Family Development program and our Emergency and Disaster Management program as well.

Additionally, our PAD system allows prospective and current students to interact with us exclusively online on their schedule. Our systems and processes help us measure and manage the activities of our faculty, student support personnel, and prospective and active students allowing us to continuously improve our academic quality, student support services, and marketing efficiency. We believe these proprietary systems and processes will support our institution as we continue to grow and provide us important competitive and cost advantages.

Our Student Satisfaction Quotient is our proprietary survey and methods to measure our success in providing customer service. All of our full-time employees receive bonus compensation based on achieving certain levels of student satisfaction.

Moving on to slide number 6, student satisfaction is critical to student retention. The survey illustrated on slide 6, the Level of Academic Challenge, is part of the nationwide NSSE series of assessments. This study is strong evidence that our courses require significant amount of academic effort, and that we set high expectations for student performance despite the fact that we are an open enrollment institution. The online educators category include six online universities in the current group of participating schools, and the West Virginia mean includes all participating schools in Virginia and West Virginia, which were a total of 25 in the most recent NSSE reporting period. A higher score indicates that students from that institution perceived more strongly that their programs had a high level of academic rigor, moreso than students at benchmark institutions.

Over the last several quarters, we have shared many of our assessment tools and results with you. The result of this survey is yet another example of our total commitment to quality and to our students' success.

Moving on to slide number 7 -- in conjunction with our continued commitment to assessing and improving quality, we view our mission as consistent with that of Congress and the Obama administration. The government's agenda is to make higher education more affordable and accessible as well as to create greater transparency around results and outcomes. We approve of the administration's support for increasing the funding of Pell grants and the simplification of the federal student aid process including the possible move to direct lending. We believe our affordability makes APUS an attractive option for future Pell Grant recipients as well as other higher education students with an interest in affordable tuition and in exiting college with low student loan balances.

Additionally, we believe our financial aid department is prepared to make a switch to direct lending with minimal disruption. American Public University System has always been at the forefront of affordability, quality, and transparency. For that matter, we have also been a leader at the use of technology to optimize university operations and enhance student satisfaction.

We are excited about the administration's visible support for higher education. We agree that it's important that the US restore its leadership in the percentage of systems with a college degree. Therefore, we look forward to the opportunity to work with government leaders to improve our nation's higher education system.

On slide 8, American Public University System is the leader in serving military and professionals. We believe that there is significant room for continued expansion within the military. Our leadership and our unique approach places AMU in the best position to address this opportunity. AMU is number one in TA enrollment, that's tuition assistance. We achieved that status by developing a deep relationship with key influencers inside the military and by serving this audience with integrity, affordable tuition and attention to detail.

The trust of the military is earned by understanding the needs of the military professional and addressing those needs through a consultative, relationship-based approach to student advising. Most importantly, trust is earned by providing a high-quality, hassle-free education that enables graduates to advance their careers. APUS, the leader in educating those who serve, enjoys referral rates of over 50%, high student satisfaction and strong academic outcomes. Our approach with military professionals can also be effectively applied to certain segments of the civilian market.

Moving on to slide number 9 -- over the last quarters we have carefully analyzed and deployed strategies to attract and serve certain segments of the civilian market, primarily professionals in the fields of public safety, national security, and education. We have learned what strategies work and, more importantly, what strategies do not work for our institution. Our success at attracting civilian students is giving us greater confidence that future growth can be driven by expanding our student population of civilians.

It is important to note that, on average, civilian students take six registrations per year while military students take four classes per year. Undergraduate Title IV students are required to take a minimum of six classes per year within a nine-month period to remain eligible for Title IV. We see that civilian students are more likely to take graduate courses, which are also more profitable for us. This should have a positive impact as our mix of Title IV students continues to increase.

We are also gaining confidence in our ability to expand civilian enrollment utilizing a relationship-based approach to selling and promotion. Evidence of our success can be seen in the continued strong growth of night course registrations from Title IV students and in the growth rate of applications from civilian students, which has recently accelerated to over 100%.

While our conversion rates in the civilian market are lower than those among military students, we believe there is an opportunity for us to improve our registration processes and shorten the duration between application and registration to improve conversion rates.

Moving on to slide number 10 -- throughout the remainder of the year, we will focus on increasing student retention, seeking additional specialty accreditation, improving conversion rates, watching new programs, and preparing to enter new market segments. We believe in our ability to continue increasing enrollment of military professionals at APUS, and we expect our expansion in select civilian markets to play an increasing role in supporting our overall growth.

I will now turn the call over to our CFO, Harry Wilkins, for additional details regarding our strong performance and to review additional details about our expectations for the second quarter and full year. Harry?

Thanks, Wally. If you look at slide 11, you can see that our financial performance for the first quarter of 2009 was marked by a strong top-line growth, operating margin improvement, and a strong balance sheet with no long-term debt.

Today we are introducing our second quarter outlook and increasing our full-year 2009 earnings guidance per share. If you look at slide 12, you can see that we enjoyed strong margin improvement in the first quarter of 2009. Our operating margins expanded from 23.5% to 26.3%. This was the result of strong revenue growth and leverage of our G&A expenses as well as improvements in instructional costs and services.

Going to the expense line items, you can see that instructional costs and services increased as a percentage of revenue. The decrease was, in part, the result of full-time faculty teaching more classes in the first half of the year. This trend will likely reverse itself in the second half of the year.

Also, we saw some leverage from fixed costs associated with TCE, student services, and academic advising. Those are the fixed portion of our instruction costs and services.

Selling and promotion increased as a percentage of revenue. Selling and promotion, at 13.1% is basically in line with our expectations. You may remember in a prior year we delayed the launch of our master's of education program and its associated marketing initiatives, and it led to an unusually low selling and promotion expense in the first half of 2008.

Looking at G&A expenses, they decreased as a percentage of revenue, and this decrease in expense as a percentage of revenue is because of our leverage from our fixed cost. And this is where we expect to get most of our operating leverage, going forward.

Interest income decreased as a percentage of revenue despite a higher cash balance, and that's because we are being more conservative this year than we were last year and how our cash is invested. We are more concerned with return of principal than return on principal, and our Board, in the summer of 2008, asked that we move cash into very safe investments, which aren't getting a very good return, but we're getting our principal back, and we continue to plan to accumulate cash as we go forward.

Our effective tax rate in the first quarter of 2009 was approximately 40%, and bad debt remains at less than 1% of revenue.

Slide 13 -- as of March 31, 2009, we had cash and cash equivalents of $53 million with no long-term debt. Depreciation and amortization grew in line with revenues to $1.9 million during the quarter, and our CapEx decreased moderately to about $1.8 million.

There is a strong possibility that we may have an opportunity to either purchase or build a facility in Charlestown in the next 18 to 24 months, and that could add $10 million of CapEx. We would acquire that building because we need about 10,000 to 12,000 square feet of extra space every year to house people as they expand.

On slide 14, we've spoken in the past and we continue to speak about our changing seasonality. We did that at great length on the fourth quarter earnings call. We illustrated that we are seeing more patterns due to our net course registrations not just simply sequential growth each quarter. Our net course registrations from new students also exhibit seasonality.

Historically, our first and second quarters have experienced roughly the same level of net course registration from new students or limited sequential growth between the first and second quarter. This was especially true in 2005, 2006, and 2007. In 2008 there was a bit of an anomaly. As you may recall, we had about 300 students who should have been registered for classes in the first quarter but got delayed due to some processes of financial aid and ended up getting registered in second quarter instead.

As a result, if you go to slide 15, we expect net course registrations from new students to increase 29% to approximately 11,350 in the second quarter of 2009. Yet the total net course registrations are expected to increase 40% for approximately 46,600 registrations. We believe that the seasonality and the changing student mix toward more civilian students is impacting our net course registrations from new students.

We anticipate the changes in our student mix will positively impact our net course registration growth as our civilian student population is growing faster, and they tend to take more courses each year.

Revenues for the second quarter 2009 are expected to be between $33.8 million and $35 million. That's a growth rate of between 35% and 40%. Net income is expected to be between $4.8 million or $5.2 million, which is a growth rate of approximately 22% to 23%, but keep in mind that the effective tax rate in the prior year second quarter was 34% because we got a refund that we booked in that quarter, compared to an expected tax rate of 41% in the second quarter of 2009.

Put that all together, and we anticipate EPS of between $0.25 and $0.27 per diluted share on weighted average shares outstanding of approximately $19 million. If you go to slide 16, as a result of our outperformance in the first quarter, our confidence in our future growth, we're increasing our full-year guidance for 2009 earnings and adjusting our expectation for net course registrations from new students to reflect our changing mix.

We adjusted our net course registrations from new students to 50,200 or more, an increase of 37% or more. Our expectation for net course registrations remains the same at 202,500 or more.

We are increasing our full-year revenue expectation by $1 million, for now between $147 million and $151 million. This represents growth of between 37% to 41% for the full year 2008.

EBIT is expected to be between $39.5 million and $40.5 million. That's a growth of between 54% and 58%. We are increasing our full-year outlook for net income to between $22.9 million and $23.9 million, or earnings of between $1.19 and $1.26 per diluted share.

If you go to slide 17, to put this in perspective, the mid-point of our expected growth in net course registrations is consistent with our long-term historical growth rate, which has been about 40%.

If you look at slide 18, the mid-point of our expected revenue growth is consistent with the growth expected in net course registrations, and our long-term historical growth rate of about 46%, which includes a tuition increase we had at the master's level in 2007, but otherwise no tuition increases are included [in that is all] organic growth from new students.

If you look at slide 19, we managed to grow the bottom line faster than the top line over the last several years, as we had some margin improvement. We think we can continue to grow net income slightly more than revenue, certainly, for the next 12 to 18 months and probably longer.

If you go to slide 20, in closing, APEI is in a solid financial position for continued growth. We provide an affordable, high-quality product delivered efficiently. We have strong top-line growth in the mid-30s to 40%, and expanding margins that should lead to bottom-line growth in the rate of 40% to 50%. There is nothing wrong with that. And, in short, despite recent and expected changes to seasonality and our student mix, we are achieving our stated long-term growth goals and improving our efficiency while planning for the future by investing in new programs and by entry in the new markets.

Now we'd like to take questions from the audience. Operator, could you please open up the line for questions?

Thank you. (Operator Instructions) Bob Craig, Stifel Nicolaus.

A first question for you is regarding the composition of total registration growth that we're likely to see for the year. I guess it's reasonable to assume that the military growth rate, which we saw come down in the first quarter is probably going to be sustained around the 30% level, and civilian or Title IV in that 80% range. Is that fair in your outlook for the year?

I think that's fair. It is very much a volatile market right now with us because the civilian growth -- last year the military growth was higher than we thought it was going to be, and this year the civilian growth is a little bit higher than we anticipated.

But, yes, I think what you're saying generally is going to be the case for the rest of the year.

Okay. The second question -- there has been some concern regarding the potential impact of the LOI changes at the Army coming up later this year. I'll give you a chance to publicly comment on that.

Bob, there are no changes that are going to impact that from our perspective. What originally happened, when they formed Go Army Ed, was they basically put a process in place where institutions had to pledge certain commitments and, roughly, slight under around 200 or slightly less than that. Institutions got signed up for the LOI process, and the only difference between an LOI institution and a non-LOI institution was an LOI institution got paid within 30 days after the start of the class, and the non-LOI institution got paid at the end of the class. So it was really a cash payment difference and little else.

And now that they've announced they're going to add other institutions. So what -- those other institutions have been around. We don't think that they occupy a significant piece of the military tuition assistance program, and we don't believe it's going to impact our business.

Okay, that's helpful. Last one, and I'll turn it over. Has the trend of re-enrolling students remained strong?

Yes, it has, as you can tell, by the fact that our net course registration growth continues to exceed our new student growth.

Plus we do have approximately 400 students every month who come back to us after they've been disenrolled. They are actually classified as returning students and no new students.

Yes, that isn't important because not all schools treat those students the same way. Many schools treat disenrolled students when they come back as new students. With us, you are only a new student once. We don't count for the new student if you leave the school for an extended period of time and then come back.

Mark Marostica, Piper Jaffray.

Thank you, my first question relates, Wally, to your point on the SSQ, and I was hoping you could give us some color as to how the SSQ trended in the quarter? And maybe highlight any specific components that either exceeded or didn't exceed your expectations?

I'm just trying to think about that, Mark. We give some color to some of the elements that we measure on the SSQ in our proxy that we file when we talk about, but we don't specifically talk about all the line items.

We earned our SSQ for the first quarter, which, as you may remember all of our full-time employees are paid that incentive bonus for student satisfaction. So the numbers increased above expectations and above historical levels. As far as getting into individual parameters, as the line items that we measure, we just made a practice to not do that for competitive reasons.

I understand. Can you comment on retention -- student retention specifically -- how that's trending. I think you mentioned on the civilian side, you feel that there more room for improvement there. Any color as to how that's trending and what you are specifically focused on to improve retention?

Sure. What we actually said about civilians was that we anticipated improving our conversation rate of civilian applicants to civilian starts, and that was what we said. But as far as retention goes, our retention is improving dramatically.

If you look at what we did in the fourth quarter and what we did in the first quarter this year, we continue to add returning student registrations at rates higher than previous years. The College 100 course that I talked about, our return rate for students years ago, not recently, but years ago our return rate for students because we're an open enrollment institution was barely 50%, and now we're over 80% in students who come back after that College 100 class, and one of the reasons is, if you look at Gardner and [Schuler], who basically invented the concept of University 101 at the University of South Carolina, the idea is to engage the student and to assess the student, and then from that program put them in the proper placement for either mathematics or reading or writing or, in some cases, remedial. And we think we've developed that, tinkered with it quite a bit and done a great job of improving our student return rate.

As you may recall, once we get a student to complete three classes with us, we're graduating over 80% of our undergrads, so we're pretty pleased with that, too.

And last question, I'll turn it over. Harry, you talked about seasonality of the business and gave us some color on the new registrations for Q2. How should seasonality manifest itself in the last two quarters? And then as you looked at fiscal 2010, can you give us some color around quarterly behavior in 2010 versus '09 on the seasonality point?

Yes, and one of the reasons why seasonality has always been tough in the military is because you never know -- the fiscal year-end for the government is September 30th, and sometimes they're under budget, they try to get students to take a lot of courses right at year-end, and sometimes they tell them not to take them until October. So that's something that's a little beyond our control and has always been difficult to determine.

But, generally, as we get more civilians, they're becoming more traditional students. They like to take classes in January but especially in September -- and not too many like to start classes in May and June. It's just not a traditional time for civilians to start classes.

So I think the military has always trended to take a lot of courses in the fourth quarter with us and then take a quarter or two where they slowed up a little bit, and then do pretty well in the third quarter and have the fourth quarter again next year.

You can see that on a -- if you look at our history of our charts for students, you can see that the military it was usually pretty flat the first and second quarter of the year. The civilians, I think, will be more heavily weighted in the fourth quarter.

And the other thing we're finding with civilians is there seems to be a little bit more lead time -- the time between application and actual enrollment seems to be a little bit more. We have these monthly starts where you really only have about three weeks to get everything in, and the military usually -- or get it in pretty quickly -- the civilians take a little bit longer. So those kinds of metrics that we use to measure potential growth and future growth are changing a little bit. But we're very pleased with our very strong application growth. It's up over 100%, and that should be a good lead indicator.

Trace Urdan, Signal Hill.

Guys, can -- maybe starting, Harry, can you tell us -- it looked like there was sort of a surge in leverage at the instructional cost line. Is there anything that would have accounted for that, in particular? Is this just flat-out population leverage or was there some other cost that rolled away there or something else that was unique in that cost line?

We actually have greatly increased the number of full-time faculty, and the full-time faculty are paid a salary. They get the same check 26 times a year, and they have a contracted number of students they have to teach. But a lot of them like to take off in the summer, you know, July and August. So many of our full-time faculty front-load their course requirement. So they're teaching more students in the first quarter than they will be teaching in the summer.

Then what happens in the summer, that reverses a little bit because you're still paying a full-time faculty salary while they're on vacation, but then you have to pay the adjunct to actually teach the courses.

So that's the trend. As we hire more and more full-time faculty, we'll see that trend probably continue. The first quarter we'll get really good efficiency of faculty, and then the third quarter will look like we don't. But it's just that -- it's not any long-term trend. It's something that should reverse itself by the third quarter, but that's really the reason for it.

Okay. And then the other question I had is just -- as you see the population shift, and it looks like we're picking up a little bit more in the civilian population now. Obviously, that's part of the story behind the higher spending at selling and promotional line relative to revenue. Is there anything you can tell us about that that isn't proprietary that gives investors some comfort that you're at a per-lead cost, or per-start cost level in the civilian population that you feel is really sustainable? I know we go back to this issue very quarter, but --.

We do.

We do. What we said in the past is we think is also we can keep that selling and promotion line item somewhere between 12% and 14% of revenue, that we think we can get the new students we need, and we can continue to have slight margin improvement. So you can see that during the last year, we increased selling and promotional by 4% of revenue, and yet we had significant margin improvement. So that's where we are, that's what we've been saying, I think we can do it.

We are spending a lot more to get the APU brand out there, but you can see the results of our civilian growth, so it seems to be working.

At 88% growth, Trace, we certainly didn't increase our expenses commensurate with that. They did go up, but they didn't go up 88%. So we're --.

There's no question you guys are absolutely delivering on what you said you were going to do, and you sort of maintained it at this level, going forward. But I guess maybe if I can kind of push back on that a little bit -- where does the 12% to 14% come from? Why is it -- what's underneath that number as a percentage of revenue that give you that comfort that that's the right percentage that scales as that part of the business grows?

I think a couple of things, and the exact numbers we don't have in front of us to give out, but we can sort of give you hypotheticals. That if you look at our average cost a year ago was roughly $500 per new student overall, and our referral rate is roughly 50%, slightly more than that. And if you assume that the military has a better referral rate than the 50%, and the civilians have slightly less than that. But understand that our culture is to generate the referrals and also combine with that the fact that we just don't use the lead aggregators that everyone else uses.

We are spending a lot more money on the Internet advertising, both click-throughs and banner ads and those types of things for certain civilian-oriented programs, but we're also putting people -- outreach people out in the field to call on certain groups like the educators and the teachers and the firemen and policemen, and those outreach efforts are paying off. They're increasing the civilian flow, and we're not doing it through some of the sources that other people are using.

So we feel pretty pleased that our marketing methodologies and strategies are working out. Yes, we're spending more, but we're comfortable that we're managing it within the line items that we talked about. And the other thing is the civilians are taking more classes per year, Trace, so we're getting roughly 50% more in revenue because of the volume and the classes they're taking over the military guys.

And, Trace, we already spend about all you need to spend on the military already. So as we grow, going forward, the majority of our additional marketing cost can be spent on civilians, because our military, we've been advertising everywhere you can advertise in the military for a long time.

Jeff Silber, BMO Capital Markets.

I just want to go back to the seasonality issue, and I apologize, I just want to make sure I understand it. I'm looking at your guidance for course registration from new students. Are you looking for about 29% growth in the second quarter and then for the entire year, you're looking for a little over 37%. So, obviously, that implies that that's going to accelerate towards the back half of the year. Is there any difference between the third quarter and fourth quarter regarding that acceleration?

Not a lot in our model, but the one thing that historically could affect that, as I just talked about, is the military fiscal year ending September 30th. There have been times in the past -- it hasn't happened in the last couple of years, but about four or five years ago, there were a couple of times when the military really tried to discourage students from enlisting in September, encouraging them to do it in October, instead -- the next fiscal year -- or the reverse where they had more money in the budget, and they encouraged students to take those courses earlier.

We don't have any control over that, and that can lead to a significant fluctuation between the third and fourth quarter, but it doesn't really affect the business. It's just a factor with doing business with the military.

And we don't try to model it. We just model it out, roughly, evenly. So we'll see what happens this year.

Okay, great, that's very helpful, I appreciate it. I want to go back to your comments about the potential opportunity to improve conversion on the civilian side. Can you give us some examples or some of your thoughts around that -- what you might be doing?

Sure. We've been pretty conservative with Title IV since we were really the first institution to come in after the 50-50 rule was removed. So from our perspective, we close off registrations 37 days in advance for Title IV, and we get packaging done, and one of the things that has happened is a new participant, roughly 50% of our students, get picked for audits. We think that as our experience goes forward, the Department of Education gets comfortable with that, that percentage will go down.

But we continue to make improvements in the processing of FSA. We think the direct loan switchover that we're planning on doing later this year may improve that as well, and the other thing that we're doing is we're actually combining financial aid people in the admissions department so the questions can get answered quicker while people are on the line with our admission department rather than switching them over to another department.

Okay, great, that's helpful. You mentioned your interaction with the Department of Education. I know there has been some concern from Wall Street's perspective about potential new oversight, and I know it's still a relatively small piece of your business, but are you seeing any of that? I know you made some comments before about some maybe potential oversight for companies that are faster growing. Any color on that would be great.

I think as long as we keep our growth rates that are manageable at 40%, I think we'll be fine. We've never had any regulatory problems, we don't anticipate the problems. When Wally was talking about our students, about 50% of them get selected for audit, he was referring to verification of the numbers on their FASFA. And that is a high percentage, and I'm not sure exactly why the Department of Education is selecting 50% of our students for verification, but we don't have any control over that. It takes a little bit longer to process a student when you have that. But we should see some efficiencies there.

I'm not particularly worried, Jeff. They've got a 50% rule, we're trying to stay around 40% because we've sort of gotten comfortable that we can continue to train and add faculty to maintain that level, and so we don't see any signs that that's a level that people are going to have a problem with.

Ariel Sokol, Wedbush.

Hi, guys, a couple of questions. One, are you seeing any overall changes in the competitive environment and, specifically, are you seeing any changes by competitors as we get closer to August when the post-9/11 GI Bill goes into effect?

Great question. You know, the level of activity as far as conferences go, hosted by organizations such as the American Council on Education or other regional organizations or even in California, for example, the California State System has hosted a number of conferences for its participants on taking veterans.

We've seen that, really, since last August -- a heightened level of activity. How it shakes out is really anybody's guess. The VA's interpretation of paying this highest state rate has really come under a lot of criticism lately in the sense that they took a flight school in the state of Texas and found the highest rate, which was about $65,000 a year, so if you get picked to go to Rice University, you're actually under the highest state rate in the state of Texas. The state of California doesn't call their tuition "tuition." They call it "fees." So they've actually set their official tuition for this program at zero dollars, and there have been a number of comments from congressman and senators that this isn't what was the intent of the program. So we'll see how that shakes out.

Meanwhile, we're educating our constituents on the program. We get a lot of flow, we get a lot of inquiries from dependents wanting to understand how that -- and we still maintain that the dependent transfer benefit is going to be pretty good for people that served at least six years in the service, and, from our perspective, our low tuition means a lot because if you're a dependent, you don't get all of the benefits that the service member gets, and so our low tuition will come in handy there.

Another question -- to go back to something that Trace asked-- I don't know if you can quantify or tell us what percent of the civilian students come from outreach marketing efforts and what percent of civilian students come from referrals? If you can just break that down for us.

Well, we don't have that data handy, and probably the data has only been available to use for about the last nine months. We changed our application form to get much more granular on the civilian side since it wasn't as big of a piece of our business.

But if you look at some of the programs, I would say that law enforcement, we'll still doing -- continuing to grow there just simply because the enrollments in some of the degree programs that are popular with the law enforcement sector. Same thing with fire and emergency management -- so that's working out well.

And, incidentally, on our education programs, which we're satisfied with that. We're actually finding that a fairly significant percentage of teachers are opting for other master's program such as our master's degree in history because of our affordability and the fact that they're already licensed at a teacher so they don't need an additional license through a master's degree.

Okay, and then a follow-up question -- so to the extent that students are being attracted to the school -- do you have a sense of what the attributes are? I think, obviously, the price point would be a big consideration, but is that the chief one? Is it the program offerings? Is it the brand?

I'd say the last one is the brand, because the APU brand has just not been promoted that well, and it's only been around since 2002. But I think it's affordability, and it's access. Our price point really is much better than most of the public institutions at the master's degree level, and it's quite competitive at the undergraduate degree level, and that's before all the tuition increases you're going to see this fall because of the budget problems with most of the states. And then at the undergraduate level, if you remember, we also include books.

But I think that the other thing is access. Most of the traditional schools have three or four starts a year. They do a quarter system. We're doing these monthly starts, and people are slowly finding -- even though we're noting that civilians are much more traditionally oriented towards the spring and the fall, the registration time periods -- some of the civilians who are working are starting to pick up the fact that these monthly starts mean they can get their classes whenever they have a lull or an easier period at work, and we're starting to see some transition there as well.

Corey Greendale, First Analysis.

I first wanted to ask about (inaudible) the mix shift that you talked about. I certainly understand why more growth in civilians means better overall registration growth, but I didn't understand why it means that the new registration growth is a little bit lower than you had suggested at the beginning of the year? Could you just hit me with that again?

What we're saying in the second quarter is that we have -- it's fairly flat registration growth due to seasonality. But what we're saying is we believe that 40% growth in registrations is a healthy growth for us; that we can maintain the quality of our programs with 40% growth. There is nothing wrong with 40% top-line growth.

With civilian students you need a little -- but less new students to get to 40% than you do with the military because they're taking more classes. So we're trying to manage the Company to maintain a nice, healthy top-line growth rate of about 40%. You don't need quite as many new civilian students to do that as you do military.

Okay, I understand. Sorry, the question I had was -- you had mentioned on earlier calls that you were looking at the possibility of some selective price increases for graduate programs. Is there anything to update on that?

We're just working on programming our computer. We had said that our systems would be ready by the end of the year to be able to accommodate that. So we'll have more information if and when we do that.

Okay, and, Harry, if I could ask you about the cash flow, which was down a little bit year-over-year. It looks like it's tied to receivables. Can you just comment on what's going on there?

That's a very good point. Receivables were up nearly $2 million over the end of the year, and that's because it's just timing. Our classes start on Monday, the first Monday of the month. You have a week of add/drop, and at the end of that week, we bill. So we bill the Air Force, we bill the Army, all the service branches. The Air Force and Army bills are pretty big, they're about $2 million. Sometimes we collect that money during the same month -- they usually pay in about 21 days -- sometimes we don't. So it's just a timing of the collections. It's not any issue to be worried about. It's just sometimes we collect the Army and Air Force payment in the same month we bill it, and sometimes we don't. In March, we didn't.

Kelly Flynn, Credit Suisse.

I just want to go back to the seasonality issue you explained on slide 14. Can you just remind us, in a bit more detail, of all that was behind the 300 student timing shift and also what you said about the unusually large military? I think that was just a phenomenon that went on last year. But is there any more detail on that that you could provide?

Yes, I can try. In the first quarter last year in the month of March, we had a huge increase in a number of civilian students and a number who wanted Title IV funds, and it was actually a bit more than we could handle the month of March. We had about 300 students that probably should have been registered in March but didn't get in until April, and it led us to make some significant systems improvements that got in place by June and July. So we really don't have anymore. I mean, we certainly have all the capability we need right now process Title IV problems, as you can see by the growth we've had. That was just like a one-month anomaly. We had about 300 students who got delayed by about two weeks in registering.

As far as your second question -- last year we had anticipated growth rates, and we were surprised by the military growth was a lot stronger; civilian growth came in right about where we thought -- about 80% growth. And the military growth was actually better than we had anticipated. This year the civilian growth is exceeding our expectations, and the military growth is about what we expected.

It is a dynamic environment. We have a new brand that we're launching -- APU. The number of new civilian students in APU is up over 100% this year, and that's why we're in a wider range of income for the full year. When we had our fourth quarter call, we said we expected earnings per share to be between $1.16 and $1.20 for 2009. Now we're saying $1.19 to $1.26. It's a positive increase, but it's a wider range. It's getting a little bit more difficult to judge the timing of these new students coming in -- and the mix and how many are going to be in a graduate program and how many undergraduate program.

It's a good problem to have, but it is -- it's a little bit more volatile situation in a positive way.

Chris [Shipman], William Blair.

On the education degrees, I was hoping that you could just cover with us quickly how much of that demand, so far -- I know it hasn't been a big piece, but how much of the demand, so far, has been coming from the military as opposed to civilian students? And then as kind of follow-up -- any color on what states those leads or students have been coming from?

A great question. First of all, I'd say over 80% of the education degree students are civilian. So that's the good news, that's helping us drive civilian population, and that's what we always thought it would be.

Secondly, the last time I was given some statistics on it, we have students in the program studying from 36 different states. So one of the things that is a temporary roadblock to us, in some states -- and I believe Kentucky is one of them -- we have to have our program accredited by NCATE, which is an accreditation organization that accredits teacher certification programs and NCATE won't come for a visit until you have graduates.

Now, the good news is we'll have graduates sometime over the next nine months, but then we have to have our visit, and so there are certain states that were not an attractive option. I think it's about nine states, as I recall, that until we get our NCATE certification, they will actually say that they won't accept a graduate in the teaching program until our program is NCATE accredited.

But we're actually pretty pleased that we've got students studying with us from 36 states, and eventually we think we'll have all 50, and we'll get our NCATE accreditation, and we're going to see this program grow and it's also just the fact that we go to education fairs, we're finding out we're getting teachers in our other master's programs, like our history degree. So we're happy with it.

Okay. And how many outreach people do you have right now, if you could give me an update.

For what -- the whole company?

For the education program, specifically.

I'm trying to remember -- it's at least two. We have three key degrees that we focus on -- the teaching degree, the guidance and counseling, and the administration and supervision. We have a former principal who is doing the administration and supervision, and we've got a nice number of students in that; and then we have a former teacher who is handling the teaching. Those two that I know we have on board, and we do have plans to add them as we add to states that we're covering, and organizations that we're covering as well.

Okay, and then a final question from me, and I apologize if somebody already asked this, but the lab courses in the quarter -- if you could give us an update there and when those courses will be phased out?

It's either going to be third or fourth quarter where we'll convert those one-credit courses, which are labs, and combine them with the associated three-credit course to make one four-credit course. But, still, right now, in 2008, in the first quarter, we had 1,300 one-credit lab courses that we counted as regular registrations. And in 2009, in the same period, we had around 2,000. So that's it.

Mike Orecchio, KSA MidOcean.

Just really two quick questions -- first, did deferred revenue decline quarter-over-quarter in Q2? Or was that part of some of the cash flow weakness?

Deferred revenue quarter-to-quarter in Q2. No, it shouldn't -- it decline, it should be up, but it depended -- deferred revenue is just based on the timing of when the students actually pay us and we recognize it over eight weeks. Deferred revenue, in any quarter could fluctuate based on the timing of the registrations or the timing of the payments. Remember, last year we had a number of students that signed up for classes, but we didn't get their payments processed in time. It could have affected that.

There are no significant changes in the deferred revenue. I don't think there's anything to worry about there.

Okay, and then just a second, really quick, regarding the one-portal initiative -- I guess the amount of LOI schools is going from about 150 to 2,000 and, really, just the only difference, like you said, just to reiterate is the way you receive payment. But isn't there also a difference from the soldier's point of view, i.e., getting assistance up front versus being reimbursed?

Well, to the best of my knowledge, every one of those schools that -- well, first of all, the first 150-some schools who were on the initial round of the LOI probably do 95% of the registrations historically. And so the ones that were left out were these -- just little small programs, happened to be local would recruit a soldier to at a local base.

From what I understood, the first time around, because we participate -- actually, one of our employees, Jim Sweizer is president of the CCME, was that most of the schools were actually signing promissory notes with their students so that the student wouldn't have to pay as long as the school got paid at the end of the course.

So I don't think the soldiers were inconvenienced at all if there was a school that had any significant presence. Like I said before, I don't see this changing the tactic, because the schools that are players in this game already signed up a long, long time ago to participate on the portal. So this doesn't concern us.

I guess yesterday, Ashford University put out a press release saying that they are now an LOI school, and they plan to, I guess, increase their presence there. I was just wondering if that was the first sign of many schools to come because of this policy change.

Well, I think Ashford is a different player than the other schools. Ashford is really a new entrant to the military market and probably because they're a new entrant, my understand was their 90-10 rule issue that they've probably got a lot more registrations than most of the other schools. So from my perspective, it may be a significant thing to them so that if -- they either don't have to do the promissory notes, or their soldiers don't have to be inconvenienced.

There are no further questions in queue at this time. At this time, I would like to turn the call back over to Chris Symanoskie for closing remarks.

Thank you, Operator. That will conclude our conference call for today. We thank you for your participation and for your interest in American Public Education. Thank you and have a great evening.

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