American Public Education Inc (APEI) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 American Public Education Inc. earnings conference call. I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of today's conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Chris Symanoskie, Associate Vice President of Corporate Communications. Please proceed.

Thank you, operator. Good evening, everyone, and welcome to American Public Education's fourth quarter and year end 2009 earnings release conference call.

This presentation is accompanied today by slides that are available on our website, our Investor Relations website, and are included as an exhibit to our current report on Form 8-K filed earlier today. During the Q&A session, we ask that participates limit their question to one per caller to enable broader participation.

Please note that statements made in this conference call regarding American Public Education or its subsidiaries that are not historical facts are forward-looking statements based on current expectations, assumptions estimates and projections about American Public Education and the industry. These forward-looking statements are subject to risks and uncertainties that could cause actual future events or results to differ materially from such statements. Forward-looking statements can be identified by words such as anticipate, believe, could, estimate, expect, intend, may, should, will and would. These forward-looking statements include without limitation statements about the first quarter, the full year 2010 and 2011 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 uptake publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Today, we are joined by our President and CEO, Wallace E. Boston, Jr., from our offices in Columbia, Maryland; and from an investor conference this Phoenix, Arizona, we're joined by Harry Wilkins, our Executive Vice President and Chief Financial Officer.

Now at this time, I would like to turn the call over to Mr. Boston.

Thank you, Chris. Good evening, ladies and gentlemen.

In today's conference call, I will comment on our full-year 2009 results, discuss important operational developments, and review our key objectives for 2010. Harry Wilkins, our CFO, will discuss our fourth quarter financial performance, elaborate on factors driving financial results, and review our expectations for this year and next.

As illustrated by today's announced results, 2009 was a tremendous year for our organization. Student enrollment at the American Public University system increased 41% to 63,800 students, and net course registrations increased 41%. These solid growth rates are the result of strong increases in both military and civilian student enrollment, continued improvement in student retention, and an increasing percentage of students returning for a second degree. These developments fuelled a 39% year-over-year increase in revenues to $149 million.

Operating income increase 55% during the year, in part by the inherent operating leverage of our online model and our focus on automation, as well as by the continuing shift to a broader civilian student population. Civilian students on average take more classes annually, a higher percentage of them take graduate programs, and they exhibit higher retention, especially in the first three classes. For the year 2009 we reported net income of $23.9 million or $1.27 per diluted share, an increase of approximately 48% over the prior year, and approximately $0.07 per share above the original outlook issued back in March of 2009. Our long-term focus allowed us to achieve our annual goals while successfully managing a changing student mix, further penetrating civilian markets utilizing our unique marketing approach and improving our academic quality.

During the year, we made investments in our future growth by launching new programs such as our MA in Legal Studies and a BA in General Studies, and have developed and we submitted several new degree programs for approval by the Higher Learning Commission. Over the next few weeks, we expect to announce those three new programs, two of which are Master's Degree and one Bachelor's degree. These programs will be scheduled to be offered to students in the second half of 2010.

In 2009, we also received numerous specialty accreditations and gained increasing recognition by our peers and others in the field of academia. This recognition is exemplified by our being honored with the Ralph Gomory Award for Quality Online Education, and by the Sloan Consortium, a renowned non-profit group of higher education institutions dedicated to improving the quality of online learning. We were the first for-profit institution to win award from the Sloan Consortium, which is a top award in the world of online higher education.

Switching to slide number four, last year we continued to see strong interest from both military and civilian students. For the full year of 2009, net course registrations from students using Title IV increased 90%, and net course registrations from active duty military students increased 31%. We are very pleased by these results. APUS is the largest provider of higher education to active-duty military, with tremendous visibility and strong relationships within the military community. The characteristics and strategies that made us so successful with military students is also beginning to work well in civilian markets. We are finding that information about our quality, affordability and unique academic offerings also resonates well within the civilian communities we serve.

Switching to slide number five, we like to update the following student demographic details at least annually. Approximately 34% of the APUS student population is civilian, and 66% are active-duty military as of year end 2009. As our civilian student population goes, we expect to experience an increase in the overall percentage of students taking graduate programs. Approximately 23% of our students are graduate students, 61% are pursuing Bachelor's degrees, and 16% are pursuing Associate's degrees. As expected, the percentage of net course registrations from Title IV students increased to approximately 19% of total. About 56% of net course registrations are from students using tuition assistance, or are active-duty military, approximately 5% are using veteran's benefits, and the remainder are paying cash or using other sources. We have also provided you with a breakdown of enrollment by school on slide five of the presentation filed with the SEC today.

Moving on to slide number six, we believe that our approach to higher education is unique, and will create lasting value for our students and other stakeholders. One can never underestimate the importance of affordability and quality. Both are important long-term drivers of our growth and success. Affordability, quality, and a large working adult student population, ultimately leads to one, students graduating with a lower debt burden; two, a low reliance on private loans; three, a lower cohort default rate; four, higher student satisfaction and referral rates; and five, relatively lower regulatory risks. At every student contact point, including our marketing efforts, we see our ourselves as building a long-term relationship of trust with consumers, professional associations, and the various communities we serve.

We made some great hires this past year to help expand our approach and ensure we are fully prepared to serve a much larger student population in the years ahead. More recently, we hired W. Dale Young as Senior Vice President and Chief Information Officer. He will be responsible for leading the university's information technology department, with a focus on continuous business process improvement, expanding academic assessment tools, course delivery systems, and improving the student and the faculty experience. While we are known for our date-driven approach to measuring student learning, we are increasing our attention on the metrics that best define these categories, including metrics regarding retention, student satisfaction and student learning. We see managing to these metrics, rather than simply to the growth of new students, is not only prudent during this time of heightened regulatory debate, but the optimal way to ensure long-term success.

Moving on to slide number seven, our plan for 2010 is to serve the needs of our new and existing students, as well as the needs of the communities and the partners they represent. We estimate that we will manage to a revenue growth rated between 35% and 38%, and grow net income by 36% to 37%, while continuing to focus on academic quality and student outcomes throughout the year. We will maintain our focus on student retention and driving higher customer satisfaction, while launching new degree programs and specializations.

In 2010, we plan to implement a new state-of-the-art learning management system, or LMS. This system will be an open-source platform, enabling us to collect more metrics on student learning, allowing the development of new classroom features and technologies, and providing an improved quality feedback loop that will enhance student satisfaction and retention. The reoccurring and nonrecurring costs associated with the new LMS are included in our guidance. Consistent with our long-term strategy, we intend to hire approximately eight new outreach managers to focus on additional market segments, bringing the total number of outreach managers serving both civilian and military communities to 32. Moving forward and for the long term, we will continue to execute our proven, lower-cost relationship-oriented marketing strategy, as well as utilize a consultative approach to enrollment advising.

In closing, we have unique and proven approached to addressing the many exciting growth opportunities available to us. I'm confident that our approaches to quality, retention, referrals, analyzing student learning, and marketing, all position us well for long-term growth in a rapidly-changing environment.

Now I would like to turn the call over to our CFO, Harry Wilkins, to discuss fourth quarter results and our outlook in more detail. Harry?

Thank you, Wally.

If I can refer you to slide nine, we enjoyed a strong finish to the year 2009. Net course registrations increased 39%, and were driven by strong growth among our key audiences, military veterans and civilian students. We reported fourth quarter revenues of $43.7 million, which is an increase of 39% over the prior-year period. This growth included no price increases, and included a little bit of a headwind, actually, as our December start occurred on the 7th of the month. Remember, we start classes on the first Monday of every month, and then recognize revenue in the number of days per month. Improvements in operating margins ultimately led to earnings per diluted share of $0.44 for the quarter, which is a 66% increase over the fourth quarter of 2008 and $0.02 per share ahead of our previously-issued guidance. Earnings were actually weighed down a little bit by the low interest income on our conservatively-invested cash balances.

As a reminder, we're moving forward with our previously-announced plan to raise graduate tuition from $275 to $300 per credit hour, $900 for a three-credit course, for courses beginning in April 2010 and later. At this level ,our tuition is still priced significantly below that of most public and private institutions at the graduate level. We currently have no plans to increase tuition at the undergraduate level.

Moving to slide ten, we became substantially more efficient this year, with operating margins increases from 24% in 2008 to 26.8% in 2009. Selling and promotion expense came in a little bit better than our forecast at 13.7% of revenue, primarily due to higher than expected revenues in the fourth quarter. We have not seen any major changes in the cost of certain advertising channels, despite a slightly improved outlook for the US economy. As you know, advertising in civilian markets is a little bit more expensive than the military community, and our spending may increase as we continue to invest in building the APU brand; investments, by the way, are really paying off in good results.

However, remember that our overall strategy is built around a completely different approach than our peers to marketing. It relies on a targeted, relationship-oriented approach to marketing, that is a lower-cost model over all when compared with an approach that uses lead aggregators, major media campaigns, and buying leads. As long as we do not use lead aggregators and a broad-based marketing campaign like our peers, we should be able to maintain a very attractive spending level in selling and promotion expense.

In addition, it's important to recognize that the civilian student has positive economic value. They generally take more classes annually, they generally opt for graduate programs more, and they exhibit higher retention on average, especially during their first three classes, which is the critical period for us to get them to become mature students. We continue to see healthy improvements in G&A leverage and a modest improvement in instructional costs. We believe that G&A is still our most leveragable cost item.

Moving to slide 11, we have a very strong balance sheet. We're up to $74.9 million in cash with no debt. Our depreciation expense increased modestly to $5.2 million, and our CapEx was where you would expect it to be, about $10.8 million for the year. We would expect with normal growth to see our CapEx at about a $12 million run rate for 2010, except that we have a few one- time costs in 2010 that we have talked about before. We're building a new academic center in Charles Town, which will add about $10 million in CapEx next year. Our new LMS, and our office expansion of our facilities in Manassas to accommodate our growth, will add another $1 million to $2 million, which will give us a total CapEx in 2010 of about $24 million. Our bad debt expense remains about 1% of revenue.

Moving to slide 12, and our guidance for next year, next year will be a very exciting year for us. For the full year 2010, the Company believes that it will increase net course registrations to between 35% and 38%; revenues to between 36% and 39%; and net income is anticipated to increase 36% to 37%, which is about $1.73 per diluted share or more. Included in the guidance are costs associated with the rolling out of our new LMS, and its implementation -- some of those costs are nonrecurring -- as well as moving costs associated with expanding our Manassas facilities and moving into the new academic center in Charles Town.

In the year 2011, the Company believes that it will grow net course registrations approximately 32% to 35%. Keep in mind that there will be some seasonality to registrations and revenues throughout the year, while our selling and promotion costs are actually more evenly spaced throughout the year. Just to point out some additional items regarding seasonality, in June 2010 our first monthly start be on the 7th of that month; that's another one of those months where the first Monday is the 7th. There's also later start dates in September and December in 2010.

It is important to note that we will continue to have a changing mix of students, as we move from military to civilian, and still maintain a very strong overall growth. For the first quarter of 2010, the Company anticipates net course registration growth of between 36% and 38%, revenue growth of between 38% and 40%, and net income to increase between 35% and 36%.

Moving to slide [13], I'll wrap up the financial commentary today on this slide. This is a beautiful chart for a CFO, and probably for you too as investors. You love those charts that go up and to the right. We continue to grow strongly with operating margin improvement. The marketing dynamics -- the market dynamics that have helped us achieve our goals has continued to be very strong. These long-term trends in our recent growth position us very well for next year.

Operator, at this time, I would like you to open up the line for questions if you would, please.

Thank you.

(Operator Instructions).

Your first question comes from the line of Suzanne Stein of Morgan Stanley. Please proceed.

Hi. Can you just address the student reaction to the increase in tuition for the graduate courses? Are you expecting anything unusual, kind of beyond normal seasonality in Q1, just in terms of registrations maybe being pulled forward in anticipation of this?

We really -- this is Wally. We really haven't seen any noticeable change one way or the other. We did a six-month announcement ahead of time, and so if anything, they smoothed themselves out over the past six months but, you know, there has been very little negative reaction. I mean, one or two people will second some emails in, but for the most part, we're still very reasonably priced at the graduate level. So I think the advanced notice and the feedback have gone fine, but we really haven't noticed any significant acceleration due to people wanting to take classes before the increase.

Okay. And then maybe can you just address what is embedded in your guidance, just as far as your expectation for the level of troops for the year?

I -- we really haven't embedded any guidance as far as additional deployments. I mean we -- you know, we gave you our first quarter guidance, and there was a -- an offensive launched in Afghanistan that, you know, I guess theoretically since we know some of the numbers for the first quarter, at least January, you know, and as well as we had soldiers who asked for deferrals because they were deployed to Haiti on rescue missions, but that's kind of typical, and we have already taken that into account. We're not seeing any signs of additional significant deployments anywhere throughout the remainder of the year but, you know, we do stay on top of that and build that into our forecast.

And of course if we did have any significant withdrawals that would benefit us, and that's not in the forecast either.

Great. Thank you.

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

Hi, good afternoon. I also wanted to ask about a couple of assumptions in the guidance. Can you quantify -- I know, Harry, you gave the CapEx associated with the LMS and the move, but what are you assuming in operating costs for those items?

We haven't given guidance, specifically, for that. We haven't really incurred too much to this point. We have hired a fairly senior manager to manage the project and the conversion, and there will be some cost associated. We have to retrain about 1,200 faculty members in the new system, and 60,000 students, so we anticipate at this time those costs to be not more than $1 million; but, you know, we really won't know until all is said and done. But our guidance that we have given so far this year includes our anticipated costs.

Okay. And the guidance looks like it is assuming relatively flat net income margin. Since we don't get operating income margin issued, is there anything going on below the operating income line, like tax rates, that would be suppressing that? And can you just get -- preliminarily, say would you expect margin to increase in 2011 along with the enrollment, or should we just assume that your margin is going to stay flat with 2009 kind of indefinitely?

Well, we haven't given any guidance to margins in 2011 yet, but no, we do believe that we can get leverage with G&A over time. We will go through periods, though, where we have to step up to the next level of growth, and 2010 is one of those years. We're going to be moving about 40% of our administrative staff into new facilities during the year, we're rolling out a new LMS, so we have some one-time costs in 2010, a lot of which will be capitalized but some of which will be expensed; and that's built into our guidance. So I would anticipate beyond 2010, we should see some margin improvement.

Okay. And is my assumption correct, it's just a flat operating margin, and there's nothing going on with the tax rate that would be suppressing net income margin?

There is no -- there should be no significant changes in the tax rate in 2010 from 2009.

Okay. Thank you.

Your next question comes from the line of Bob Wetenhall of Royal Bank of Canada. Please proceed.

Hi. I just want to firm up -- it's pretty impressive guidance you guys issued today, How much additional benefit away from G&A can you take out, in terms of reducing S&P as a percentage of revenues? And same for instructional costs and services?

Bob, we're not giving the guidance on that, but we typically said that civilian students cost us more to acquire, but they also take more courses annually than the military students, and so we have seen some creep on that over the last three years, which I think there is a slide on that in today's PowerPoints.

Our goal is to balance the way we recruit civilians, and continue to do that at a lower cost than what we see with people who use lead aggregators, and -- and manage that cost appropriately, and we think we have done a good job of doing that over the past year with the increases in the bottom line matching up with a nice change in mix, and that's the way we hope to do it going forward.

Yes, and Bob, I would add that if you look at the mature companies in our industry, their G&A costs are 8% to 10% of revenue, whereas ours is about 16% now, down from 22% two years ago. So I think our G&A will come down over time to that high single-digit percentage of revenue number, but it will take a while to get there.

If you had to say the impact of the one-time nonrecurring [P&A] investments that you are making that will flow through the P&L, would you be willing to say percentage-wise next year what that is, or put it into dollar terms?

Not on this call, not at this time. I would rather wait until we get a couple of quarters into it.

Okay. Great. Very nice job. Thank you.

Thank you.

Your next question comes from the line of Amy Junker with Robert W. Baird. Please proceed.

Hi, thanks. If I can just follow-up on a couple of the past questions, because I know we're going to get asked this going forward, but kind of bigger picture -- we're not looking for guidance, but the bigger picture is, is there still leverage in the model as we move forward? Is this year really just because you are increasing your expenses, which is keeping margins down, and going forward we could still hope to see margin expansion?

Yes. That's exactly right.

I would hope that is the case. We just happen to have a particular year where we need to move people into facilities. We've continued to grow at a pretty high clip in Charles Town. We have a number of old historic buildings that we're going to move out of, and move into a new 44,000 square-foot building in Manassas. We have stretched the location that we're at, and we actually have to move into a new location. So that's one-time, and hopefully we won't see that for a few more years; or I guess if we do, we'll just grin and bear it.

And on the LMS, we have had our existing LMS since 2000. So we've done a good job of staying with an LMS for a long, long time, and it's one of those situations we're looking at Web 2.0, and a lot of the technical capabilities that -- you know, we wanted to go with a platform that's state-of-the-art and is a platform that lets us, measure metrics both inside and outside of the classroom a lot better than where we are today. So, you know, assuming we picked the right platform, and we'll announce that when we pick it, we -- or when we sign the contract, actually, we hope that that's another 10-year investment versus, you know, something that we change every two or three years.

We have gone through periods like this before. This reminds me a little bit of 2005, Wally's first year as CEO, when we really brought in some higher-quality management team members. We expanded our facilities, and we really invested in the growth that particular year, and that has lead to five unbelievable years of growth in terms of top line, bottom line and margins. We expect the top line and bottom line growth to continue.

But once every five years, you need to kind of step up to a new level. That's where we are. We've hired a new COO in the last six months, a new CIO, in terms of personnel a new person to lead this LMS project, we're getting a new LMS in this place this year, we're greatly expanding our facilities in Manassas and Charles Town, and we're really getting set up for the next, you know, three to five-year plan of sustained growth, and without really having too much of an impact on the bottom line. I think it's a good plan, and I think we can execute it.

That color's helpful, thanks, I appreciate it.

And if I can sneak in one more, with the top line growth being as strong as it is, you know, you gave some guidance for 2010 as well as 2011; what are the two or three key drivers of that growth as you look forward? Is it new program introductions? Is it something different than what you have been doing? How would you describe that?

I think it's continuing to do the same. We announced that we have three new degrees that we'll start marketing in the second half -- or start accepting students in the second half of 2010, but we -- we have been very focused on improving retention, and I would say that -- that that's a good thing in a number of ways. It's just a good thing because the more students we retain, the less we have to out and find, and it's also a good thing that when you have some of the activities that we have had from a [neg-reg] perspective, you know, we have the metrics to show what the issues with our students are, why we retain them, why we don't retain them, and I think we'll continue those efforts for the next couple of years. So our guidance incorporates that as well as new students.

I find that, you know, perhaps some of the criticisms that we got from the regulators as the industry were that people were focused too much on new students, so that's why we're giving top line guidance, but it includes all three. You have to find new students to replace the ones who graduate, and hopefully the few that drop out, but nonetheless -- that's part of the game, but at the same time we should be focused on making sure that we're contributing solid academic programs that lead our students to persist.

Great. Thank you.

Our next question comes from the line of Arvind Bhatia with Sterne Agee. Please proceed.

Thank you. Just a quick clarification on the selling and marketing line. I know you didn't necessarily give a lot of guidance, but should we look at that trend of what we saw in 2009 versus 2008, that trend to continue in 2010? Is that what is embedded, or are you assuming a slightly different increase? And then just a housekeeping question on share count, I assume that that is going to remain flattish as well? There's no buyback or anything like that baked in here?

Harry, you want to answer those?

Yes. Well, let's do the buyback question first. Our Board has said historically until we get to about a $75 million level in cash, they didn't think we had -- you know, it wasn't enough cash to worry about. But I do think we'll look in this year and next year toward what are we going to do with our cash, because we're just not getting any return on it in today's marketplace. So I think we will consider alternative uses of our cash, although we really haven't -- our Board hasn't decided what to do at this point.

The other question is, yes, I think what we have said for the last two years, and we continue to say, is that the civil students cost a little bit more to attain, but they have more economic -- they have other economic features that more than offset that. The number of courses they take per student is higher, their tendency to take more graduate courses, where we have higher margins, especially this year with the tuition increase, those trends will continue. So I think yes, the long-winded answer to your question is yes, I think if you look back to 2007, 2008, 2009 now, each year we have had about 1.5-point to 2-point increase in selling and promotion, and yet our margins have increased over that time, because the economics are just better with the civilian students. So I think that trend will continue, and I think we'll continue to get more leverage from the economic benefit of civilians.

Great. Thank you, guys.

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

Thanks so much. In looking at your guidance for net course registrations for both 2010 and 2011, and again I do appreciate you kind of reaching out to 2011 as well, but if my math is correct, it looks like you will be nearly doubling the size of the Company over the next couple of years. One, do you think you have the infrastructure to handle that? And two, with your Company getting so large, you might be hitting the law of large numbers soon; how confident are you in that forecast?

Well, I think we're very confident in it; otherwise wouldn't have issued it, Jeff. But we do constantly look at where we're heading, not just in terms of course registrations, which are the most obvious predictor of total revenues, but also in terms of the students themselves. And, yes, you know -- but that's also, if you look at your CapEx, that's why we're investing in a new LMS, that's why we're investing in a new 44,000 square-foot building in Charles Town, that's why we're adding an additional leased property in Manassas, and [leasehold] improvements for that. So we're trying to stay ahead of the curve without being frivolous in our spending.

We think that the same prudence we exercise in the tuition we charge to the students, we want to exercise in how we spend, you know, the assets that the shareholders have entrusted to us. So I think that we're investing appropriately. We added two significant positions, an EDP and COO this past year, and then a new CIO, who was a long-term partner at PricewaterhouseCoopers. And we -- I can't exactly forecast where we might have to add other senior positions but, you know, we are -- I would say we're constantly adapting our organization to the size of the organization and to the needs of the students and to the needs of the faculty, and so I really think we have baked all of those things in. Yes, 2011 may seem aggressive to some folks, but we do show the same gradual decline that we've had for the past couple of years in our growth rate, but, yes, it is off of a much bigger number and we think we can achieve it.

All right, fair enough.

In your comments about some of the new marketing managers that you will be hiring, I know in the slide you give some examples of some of the segments you're going after, environmental, community colleges and security management. Can we get a little bit more color why those were chosen?

Sure. We think our price point matches up nicely with the community college sector, and in particular, if you look at where our four-year degree is priced with other online options, with students who are leaving community colleges, or in some cases like in the State of California where they can't gain access to the four-year colleges at all because of the drop in enrollments due to the state budget crisis, we just think we're a much-more attractive option, and we don't have to offer a 42% discount like one of the other online firms did recently. So we have decided we hired a very good outreach person for that, who actually was head of the Rural Community College Accusation, and we think that's a good market to pursue.

On the sustainability side, we have been big on sustainability, we've had two degrees in Environmental Science. We were the first for-profit and perhaps the first online school to sign the American College and University Presidents' Commitment to the Climate, and we think that we're seeing quite a demand from our students on that, and so we're leveraging our skill sets in those areas. And, you know, I guess -- let's see, community colleges, environmental, and security management has just been a strength of ours for a long, long time, and we think security management -- some people consider that -- you know, think they of a security guard, and that's not exactly what it is in this era of cyber-terrorism and other things. So we have quite a level of expertise between our Intel degrees, our IT degrees and our Security Management expertise, so we think that's that's another area to pursue.

All right, great. If I could just sneak one more in, did you give share count guidance for this quarter and for the year?

We have not. And we'll -- we'll include that in our first quarter guidance. We probably should have, but we haven't done it, and I'm not going to do it on the call right now.

All right. Appreciate it, thanks.

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

Thanks, hi everybody. First question is regarding the DOE provisional status, and I'm wondering, Wally, what impact do you think that may have had on growth or targeted growth for 2010? I notice your programs will be introduced in the second half of the year, when hopefully that provisional status is lifted; does that imply an accelerating new program offering into 2011?

Actually, Jerry, you know, you -- the provisional status that we're on isn't the same as the provisional status when you first get accepted into the Title IV programs.

Uh-huh.

So when we were first accepted into Title IV, we couldn't add new degrees for FSA eligibility until after we got off of the provisional status. This provisional status is a little different, in that we actually have to go back to the department to add degrees, but it's not like they're off the plate like they were on the first provisional status. So, you know, we have added some degrees over the -- I guess we have been on provisional since August of 2008, when we triggered the 25% threshold with the ABS capital distribution of stock and, you know, we have been on that provisional status since then, and we have added degrees since then, but the department has approved after the HLC has approved them, so I don't really see that changing anything.

The reason we put the second half is we're -- we can't put the new degrees up on our website until we get the final letter that is signed by the Board of the HLC, and so when we do that we'll send out our press releases as to which degrees they are, and by the time they get added into our catalog, and we spend a couple of months of marketing, we don't think that the students will actually start in those degrees until July, but it has nothing to do with our provisional status.

And that's also true on the certificate programs as well?

Yes.

Okay. Okay. Great. And then one for you, Harry, with regard to first quarter guidance, that income guidance being a bit lower than the full-year growth rate, what sort of influences are on that first quarter guidance, i.e the -- I think it's 35% to --

Yes, I think traditionally we have seasonality -- our fourth quarter is by far our most profitable quarter, and I think you'll see the same thing play out in 2010. If you look back at 2009, I think -- our S&P spend is fairly consistent each quarter, but our revenue, you know, is much higher in the fourth quarter. So when you are looking at quarterly trends, they play out a little bit differently than the yearly trends.

I'm thinking year-over-year, the net income growth target of 35% to 36% in the first quarter, versus --

I can't think of anything specifically right now, Jerry, I mean --

Okay.

But we're comfortable with this guidance, and I think it's going to play out this way.

All right, guys, I'll turn it over.

Your next question comes from the line of Adrienne Colby of Deutsche Bank. Please proceed.

Thank you for taking my question. You commented last quarter that you were seeing increased leads from the traditional 18 to 24-year-old bracket. I'm just wondering if that has actually translated into increasing enrollments within that demographic? If you could give us a rough idea of what percent of your students are there, if it's mid-single digits, high or low?

Harry, do you want to answer that?

No, I mean, I'm actually attending an education -- it's a global services conference, but just about every education company in the industry is speaking today in Phoenix, Arizona, and I have talked to the other CEOs of the companies and they are -- everybody is experiencing the same thing we are. which is an increased interest in traditional college students in online education. At this point, you know, nobody has [chosen to] quantify that that much, and we probably won't either. We're just saying that we're seeing a tremendous increase in the number of leads from traditional college students, and we don't really market to that segment of the population.

The mainstay of our business is working adult students, but the average age of our students has come down; from what was over 31 years of age a few years ago, it's now at 26 and-a-half, and it continues to come down, because we do have an increasing volume of traditional college-aged students, and I expect that to continue. That segment of the population is seeking more online, more non-traditional college education, and I think it's perfect for us to be there as the lowest-cost provider in that marketplace, with the most variety of programs, and I think it's a perfect market for us; but, again, it's still a little early in the game to predict any trends.

Thank you.

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

Thanks, guys. I just wanted to hit on the implication for revenue per registration, looking at this year. Given the move towards graduate students, and the pricing increases there, I guess I would have expected a little bit of a larger delta between the revenue guidance and registration guidance. Is there something else going on that we should be aware of? Is the lab course dynamic still changing the revenue per registration metric that we would see, or is there something else we should be taking a look at?

The lab courses are still about 5% of our total courses, it's really not that significant, and we still haven't decided when we're going to implement that new policy to count the labs as one four credit course instead of a three-credit course and a one-credit lab. There's no really significant trends. I don't think there's anything significant you can read into it at this point.

Okay. And then a follow-up on the LMS questions, any sense of timing when we should start to see that roll through in terms of a project execution, or when the students may start to see it? Just thinking back to when companies in the space gone through technology implementations and how they've managed through it. Just want to get comfortable that, you know, students won't see any change in their front-end systems or processes, or how they interact with you guys, or at what point should we be paying more attention to this issue as you look through 2010?

I think as soon as we sign our contract with the vendor, we'll give some guidance over the estimated timeframe to implement it, Brandon. We've -- I mean, the good news is that we have got an in-house project manager with a lot of expertise at this hired and on board. You know, we have got a transition plan. We have got a long-term relationship with our existing vendor, you know, so we're under no pressure to move it over. We're actually -- you know, this is sort of a technical thing, but we're pouring over our content first to a server that's outside of both systems, so that we can prepare the content initially and stress test the new system. In fact, the two final -- you know, two finalists, we're doing that stress test now.

So, you know, I think that once we -- we ink our contract, we'll announce who we have selected and we'll announce an estimated timetable, but students should not see anything negative. We have actually had faculty and students participate in what we called a sandbox exercise, when we made our selection down to four. We asked a select group of super-users on the faculty side, and some representative students, to take a look and got their feedback. So, you know, we're not going to switch until we feel good about it, and we're not going to switch until we have thoroughly tested it.

But even so, we have a lot of options. For example, we could switch graduate students only first. So, you know, we'll make all of those decisions once we sign the contract and sort of know what the best pace is; because, after all, when you have got over 60,000 students, you want to do it right one time, but it doesn't mean that you have to do all 60,000 at once.

Got it. Fair enough. Thanks, guys.

Your next question comes from the line of Mark Marostica of Piper Jaffray. Please proceed.

Good evening. It's actually Mark Skitovich. I was just wondering if you could provide any specifics related to market share gains you may have achieved at any particular branch of the military in 2009? And as you look at 2010, are there any limitations on further share gains within any particular branch? And where are you most optimistic here? Thanks.

We -- you know, we were actually waiting -- the military just had their CCME conference last week, and usually they release the numbers of enrollments per branch of service, and the -- the Head of that department, who usually releases that, was having some transition problems with her computer, and did not get the slide deck that she had prepared, but she also said they were not going to release it this year, and they were going to choose to release it at a later date, so we don't have any official counts.

We believe we have continued to gain share in every branch of service; even if we're number one, that we're still continuing to gain actual share inside the military, and you can see that even on a very large number that we finished 2008 at, we ended up with a 31% enrollment growth with the military, which we were very pleased with. So, you know, once we receive the official numbers, we'll make sure that we put them out in a press release so that everybody can see them.

Okay. Great. I mean you are still in, I would think, sort of low single digits, in terms of penetration by each branch. Is there any particular tipping point that can sort of propel you higher at some point, or is just grinding in the trenches and just sort of steady increases from here?

No, I -- and by the way, we actually think we're in the very low double digits, so -- I think we've said we thought in the past that we were somewhere between 10% and 12% market share. We do think that there are ways besides just grinding it; you know, some of the degrees that we've just added we think will be a nice complement, and that there will be market share that we can derive out of the military for those degrees. We have additional degrees that are in development.

So we aren't fully satisfied as far as meeting the need of the military with specific degrees, it's just some degrees are a little more complicated than others when you are in an online environment. But over the next couple of years, we can continue to do it by expanding the degrees we offer, as well as just continuing to build an ongoing sense of trust and reliability.

Okay, great. That's helpful. And then one unrelated question. If you look at sort of the trend line of civilian acquisition costs, I'm just curious, are you starting to see any scale benefits yet, or is this still trending higher as you expand the mix in this area?

Well, it's not the scalability so much as we're continuing to build a brand, so we are spending money on brand-building, and that's a very slow rollout. We don't have the $100 million that Proctor & Gamble can spend when they launch a new brand, so we've chosen to do our brand-building initially for American Public University in D.C., where in addition to radio and television ads, we've also done mass transit on the Metro and the buses and billboards. So that's a slow rollout, but D.C. is a key city of influencers for the particular markets, not just the military but the public service markets that we're serving.

So we're spending money on building that brand because we've found that by doing that it actually helps hit our score on our organic search for our Internet marketing as well. So we'll continue to spend money on brand until APU resonates as well or better as AMU.

Great, thank very much.

(Operator Instructions).

You have no further questions at this time. I would like to turn to call back over to Mr. Chris Symanoskie. Please proceed.

Thank you, operator.

Before we adjourn, I'd like to thank all of today's callers for their participation and 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. Good day.