American Public Education Inc (APEI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the American Public Education Incorporated Second-Quarter 2010 Earnings Conference Call. My name is Jennifer, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to hand the call over to Mr. Christopher Symanoskie, Associate Vice President of Investor Relations. Please proceed, sir.

Thank you, operator. Good evening, and welcome to American Public Education's second-quarter 2010 results conference call. Presentation materials for today's call are available in the Webcasts section of 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 participants limit their questions 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 third-quarter 2010, as well as other 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 Factors section and elsewhere in the Company's Annual Report on Form 10-K filed with the SEC. The Company undertakes no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.

This evening, it is my pleasure to introduce Dr. Wallace Boston, our President and CEO and Harry Wilkins, our Executive Vice President and Chief Financial Officer.

At this time, I will turn the call over to Dr. Boston.

Good evening, ladies and gentlemen. In today's conference call, we'll review our recent results, operational highlights and discuss some of our strategies for continued growth in academic excellence. Harry Wilkins, our Chief Financial Officer, will discuss our second-quarter financial performance in greater detail and provide additional perspective on our financial position.

Student enrollment at American Public University System increased 35% year-over-year to 72,300 students as of the end of the second quarter of 2010. Total net course registrations increased 34%, and net course registrations from new students increased 24%. The increase in both military and civilian student enrollment is largely attributable to the high value and quality of the academic programs at AMU and APU, the high percentage of students returning for a second degree and a focus on continued improvement in student retention.

Net course registrations from Title IV students increased 66% to 14,000 in the second quarter of 2010. Furthermore, strong growth in Title IV net course registrations, which now represent 22% of total net course registrations, illustrates that our mix shift to a largest civilian population is continuing. As of June 30, 2010, approximately 36% of APUS students are civilian; 64% are active duty military.

In the second quarter of 2010, revenues increased 30% year-over-year to $46.3 million due to increases in enrollment and a graduate tuition increase in April 2010. We have not increased our undergraduate tuition since 2001 and currently have no plans for such action.

Operating income increased 34% during the quarter to $11.7 million, driven by improved operating leverage and a reduction of accrued incentive compensation payments. We reported net income of $7 million or $0.37 per diluted share, an increase of approximately 32% over the prior year's net income of $5.3 million or $0.28 per diluted share.

We're extremely proud of the growing recognition we've received for academic quality and for the successes and capabilities of our experienced faculty. For the second time in two years, APUS was honored with an Effective Practice Award by the Sloan Consortium. This honor was in recognition for the universities work on semantic mapping of learning assets. Recently, the APUS Dean of Security and Global Studies was appointed as a member of the US Department of Defense Threat Reduction Advisory Committee to provide independent advice and recommendations to the Secretary of Defense on matters related to combating weapons of mass destruction and to further President Obama's security priorities.

In addition, Dr. Phil Ice, our Director of Course Design, Research and Development, has elected to Adobe's Higher Education Leaders Advisory Board, one of only four academic leaders worldwide to be selected for this high-profile advisory responsibility.

Moving to slide four, Advancing Our Current Strategic Plan, these developments illustrate our success at fulfilling our institutional mission in that our strategic plans are highly effective. We have begun to accelerate existing plans that address civilian markets because we have recently observed changes in the historical pattern of growth in our net course registrations from active duty military students. This began in mid-June 2010 with a slowing in the growth of net course registrations from active duty military, and we cannot be certain whether net course registrations from active duty military students will return to previous expectations, little more slowly than expected remain flat or decline.

We believe that the change in net course registrations from active duty military students is largely due to the increased operations tempo and recent overseas deployments across all branches of the US military, particularly the level of activity in United States Marine Corps.

We suspect that increased demand on many active duty military personnel combined with limited Internet access associated with some deployments is likely to limit the ability of certain active duty military students to pursue higher education in the near term. Our students are heroes and professionals with very serious jobs that are becoming more difficult as military activity increases and as world events dictate.

Over 94,000 troops are currently involved in intense mountain warfare and warfare preparations in Afghanistan according to estimates from the Department of Defense. Several components of major Army divisions are presently transitioning to and from Iraq and Afghanistan as part of the military's plan for the Afghanistan surge. July was the deadliest month for US troops in the nearly nine-year Afghan war. Troop levels in Afghanistan are expected to raise, while troop levels in Iraq are expected to decline from approximately 92,000 troops. In total, over 290,000 troops are deployed in the Greater Middle East wars, including the Air Force, which is focused on supplying the troops and supporting the transitions.

In addition, several thousands of sailors and marines recently participated in joint military drills near South Korea and another 20,000 sailors and marines are currently involved in RIMPAC, which is the rim of the Pacific international war games, the world's largest maritime exercise, involving 25 Navy ships, submarines, and 14 other nations off the coast of Hawaii.

In the Marine Corps, where AMU has a substantial leadership position, several battalions are in transition or on drills, including deployments to the Horn of Africa. The Coast Guard and many civilians with expertise in emergency and environmental matters are also our students, are also deployed and focused on the Gulf oil spill disaster cleanup and recovery.

Despite what we believe are temporary operational factors softening active duty military participation, we continue to strengthen our brand in the military. However, we cannot fully estimate the extent to which the growth of our net course registrations will be impacted by military activity and we do not know all of the factors that are causing it to occur.

We are pleased with the growth of net course registrations from civilian students as robust and our plans for addressing civilian opportunities have been successful, as we are accelerating existing strategic plans to address civilian markets with an emphasis on public service professionals and adult students in selected markets. In this way, we hope to mitigate some of the near-term impact by further diversifying our student population. We've cautiously increased our market spend and will monitor it carefully in order to maintain our margins and keep our existing business model intact.

We strongly believe in our unique operating model, our relationship marketing strategy and our mission. We are taking short-term steps to accelerate civilian enrollments, while continuing to believe that the best long-term strategy from a business and regulatory perspective is to increase enrollments through referrals as much as possible.

Among other initiatives, we expect to further ramp up our APU branding efforts, expand our public safety, law enforcement relationships, establish new community college relationships, and continue our successful outreach to veterans. By the way, net course registrations for students using VA benefits increased 118% year-over-year. In addition, we will continue to build on our relationship with Walmart and work diligently to serve Walmart associates whenever they choose to enroll.

Walmart conducted a soft internal launch of the Lifelong Learning partnership in June and we expect their internal promotional activity ramp up further in August and September. We continue to be very pleased with our educational partnership with Walmart. While we're in the early stages of the partnership, several hundred associates have enrolled at APU during the soft launch period. We believe that the partnership program will continue to expand, especially after the holiday shopping season.

We remain on track to launch three new degrees in late 2010 or early 2011; a Master of Science in Information Technology, Master of Science in Psychology, and an RN to Bachelor of Science in Nursing. These new degree programs will contribute to our growth when launched in late 2010 and early 2011.

I'm also pleased to say that our LMS conversion to Sakai remains on schedule with initial pilot conversion of 13 graduate courses under way. We plan to convert approximately 180 courses per month following the pilot starting in October with the expected completion of graduate programs by year-end of 2010 and undergraduate programs by the end of 2011. All new programs and courses will be launched in the Sakai platform.

Turning now to regulatory matters. As an institution of higher learning committed to academic excellence and expanding access to higher education, we support broad and collaborative efforts to improve student outcomes and further the success of our higher education system. While the Department of Education's proposed rules regarding gainful employment contain numerous complexities, our current survey review with the proposed rules and available data leads us to believe that American Public University System will be in compliance with the 8% debt-to-income thresholds.

However, uncertainties still exist regarding the proposed rules and our ability to comply with final rules. While approximately 90% of our students are currently employed, we do not currently track the personal income and median debt loads of all of our APUS students. As a recommended change to the proposed rules, we suggest online institutions be permitted to limit Title IV distributions to direct cost, tuition fees and books.

In closing, while we work through temporary challenges with enrollment of active duty military students, we will accelerate our successful improvement strategies for attracting civilians. Our unique approach and business model are highly effective and we hope to return to higher overall growth rates when military deployments and activity settles and as our civilian student population scales to be the primary driver of our growth rate.

Now, I'd like to turn the call over to our CFO, Harry Wilkins, to discuss results in more detail. Harry?

Yes, thanks, Wally. If you turn to slide six, which shows our Increased Operating Efficiency, APEI's second-quarter revenues increased 30% to $46.3 million. Growth was lower than the net course registration growth of 34% due to the timing of starts in June with an additional week of revenue flying into the third quarter.

We continue to see improvement in G&A leverage in the second quarter with another modest improvement in instructional costs and services to 37.6% of revenue. Selling and promotion costs increased to 17.6% of revenue. As we discussed last quarter, there was some catch-up in the marketing spend in the first quarter where we underspent our marketing budget.

General and administrative expenses grew slower than revenues and were approximately 16% of revenue in the second quarter of 2010. Overall, the margin and net income outperformance relative to expectations in the second quarter was related to a reduction of accrued incentive compensation payments. The reduction is primarily due to our expectation that we will not be required to pay the portion of our annual incentive plan that's tied to the financial performance.

For the second-quarter 2010, we reported net income of $7 million or $0.37 per diluted share, an increase of approximately 32% over the prior year's net income of $5.3 million or $0.28 per diluted share.

If you move to slide seven, which shows our Third Quarter Outlook. As Wally indicated previously, we have recently observed that the growth of our net course registrations from active duty military student has slowed more than we expected. We believe that this may be due to increased operations, military activity and recent overseas deployments. Thus we expect slower growth in net course registrations in revenue.

As illustrated on slide seven, we expect net course registrations to grow between 20% and 22% in the third quarter of 2010. Revenues are anticipated to increase between 29% and 31% during the quarter, driven primarily by the increase in overall net course registrations and the timing of the starts in June.

Net course registration growth from active duty military students declined to approximately a flat percentage year-over-year in July, and similarly in August. As the growth of active duty military students continued as previously expected, our overall outlook for net course registration growth and revenues would have remained unchanged or in the mid-30s for the full year.

As a result of the adverse changes in the pattern of growth in active duty military registrations, we have been increasing our marketing spend to increase civilian registrations at a faster rate than we had originally planned. At the same time, we expect our faculty expenses and student support cost to increase in preparation for the possibility of expanded future enrollment related to the Walmart partnership.

Specifically, the teaching requirements of the institution's program directors were reduced to increase the focus on both classroom quality control and the hiring of new faculty. And we've hired new customer service teams to help support our new students. Also, a higher number of full-time salary faculty take vacations in the late summer, requiring that we employee temporarily a higher percentage of agile faculty to serve students, which causes usually a seasonal increase in third quarter instructional costs.

Investors should also note that because a significant portion of our general and administrative expenses do not vary proportionately with fluctuations in revenue, we expect to see fluctuations in our results of operations as a result of seasonal changes with slower growth than we expected. Thus, net income is expected to increase between 5% and 10% for the third quarter of 2010 as indicated by our outlook. As a result of uncertainty related to military enrollment in the Walmart partnership opportunity, we will return to our prior practice of not offering an outlook beyond the current year and we plan to issue fourth-quarter guidance at the time of our third-quarter earnings release, which will be early November.

If you move to slide eight, we continue to have a very strong balance sheet with no debt. APEI remains in a very strong financial position. We have $86.2 million in cash and no debt. Our depreciation increased modestly to $3.0 million and CapEx was about where you'd expect at about $8.5 million, two-thirds of which is maintenance CapEx and the remainder is the continued construction of our new academic center in Charles Town, West Virginia.

We expect CapEx, excluding the new academic center, to be about $10 million for the full-year 2010, slightly lower than originally expected. The new building is expected to add another $9 million in CapEx this year. Our new LMS and office expansion in Manassas, Virginia may add another $2 million for a CapEx total of approximately $21 million to $22 million in 2010. Our bad debt remains approximately 1% of revenue.

If you move to slide nine, our Board of Directors authorized a $20 million share repurchase program intended to result in no fewer than 18 million shares outstanding. We believe this will provide a better return to our cash, which is currently invested in conservative short-term investments, as well as partially reduce the share dilution associated with employee stock options.

Lastly, I'm pleased to report that our recertification application for Title IV participation has been approved and APUS has been removed from provisional status.

In closing, APEI is in a strong financial position. While we anticipate challenges with regards to military enrollment in the near term, we expect our strategy will lead to stronger overall growth, as our student mix transitions to a greater percentage of civilian students and as military deployment activity normalizes. We believe that our plan to advance civilian enrollment, the fastest-growing population within our university is the right strategy for long-term growth and success.

And at this time, we're happy to answer any questions from call participants. Operator, please open the call up for questions.

(Operator Instructions) Our first question comes from the line of Trace Urdan with Signal Hill. Please proceed.

Hi, guys. Wally, could you speak a little bit more about why you believe that this deployment that is the cause for the surprise and not a loss of market share, increased competition that folks have been speculating about for some time? We've not really heard any other companies discussing this falloff in military enrollments. And I'd like to hear a little bit more about your sort of level of confidence that you've got, the recent pegs here?

Well, thanks, Trace. I think, as you might know, we did quite a bit of analysis. We track our enrollments by military base and we look at the changes in those enrollments up and down. And when you look at where we have seen decreased enrollments in the last month and where we forecast decreased enrollments for the third quarter, it's at basis where a substantial portion of the force has been deployed. So, for example, in the Marine Corps, Camp Lejeune and the base on the West Coast, which I'll think of in a second, are the two largest Marine Corps bases and both of those bases are, as some of the local merchants tell us, almost like ghost towns with the marines in Afghanistan for this current surge.

So the Marine Corps is where we have our largest market share as a percentage of their students were studying in higher ed and we have their two largest bases, which are currently very actively deployed. But we've looked around and we've checked other sources that services only publish their enrollment data on an annual basis, but from some unofficial conversations, we don't believe that this particular situation is limited to us.

In our particular situation, since we're number one with the largest market share and the only public company reporting that data, the one you see might be another guess, if you could obtain data from them that we believe that this is entirely due to the most deployment not just Afghanistan, Iraq where if you take the March 25 article in the Washington Post, the number of forces combined in Afghanistan or Iraq now exceed the maximum during the peak of the Iraq war, as well as we have soldiers in Kuwait who are taking down equipment and either refurbishing it for shipment to Afghanistan or shipment elsewhere.

And then we have the small matter with the two naval exercises, one off the coast of South Korea, which is due to the simmering situation with North Korea and then the other one, which was a regularly scheduled multi-nation exercise. But in both of those cases with the naval forces, when they're out of sea they don't communicate, they maintain radio silence and their Internet connections are very limited. So all in all, it's sort of a conflagration of a number of events. And we think it's temporary, we just can't predict when it might recover.

And it's impacting returning students and new students, Trace.

Yes. I can get that. Thank you. That's very helpful. I'll get back in the queue.

Okay.

Our next question comes from the line of Bob Wetenhall with RBC. Please proceed.

Hi, good afternoon.

Hi, Bob.

Can you run through -- sorry, well, you said third-quarter net income growth was expected to be 5% to 10%?

Yes, that's correct.

So just for working off your previous guidance, how should we think about fourth quarter? And can you guys give us a little bit more direction? I mean just using your language, it sounds like this is a temporary aberration, but there's a lot going on and it's tough to gauge to the extent where the deployment issues will continue to impact new course regs. So how can we -- what's the right way to think about your business at this juncture?

Well, the right way to think about the business is that the military right now, while they're fully deployed in the Gulf with the spill other, while they're fully deployed in the Pacific, the Navy and marines with that exercise in the Pacific, while they're kicking down doors in Fallujah with the marines is not a position right now where they can take classes.

When that -- that won't happen forever. The military, we still are number one in the military. The education is the number one recruiting tool for the military and the military is very committed to educating their population. They realize that it's important to educate 21-century soldiers.

So when the soldiers can take classes again, they'll come back. We don't know when that's going to be, that's the only problem. We have no doubt that when deployment -- when the military is deployed in areas where they can have Internet access, that they'll come back to classes, and we'll benefit from that. We just don't know when that will occur and the deployment was much larger than we anticipated until a month or so ago (multiple speakers).

Would you say this is something on a scale you haven't experienced before?

Yes, I think so. Back in 2003, when we had our first invasion -- or the second invasion of Iraq, but the most recent invasion, we had a total of 4,000 students. So 4,000 students out of the roughly 400,000 students who are studying in the military was a much smaller number now that we have closer to 50,000 students or approximately 50,000 students active duty. It's a much bigger impact on us.

And right now the military students are still about half our population. So what we're pleased about is that the civilian growth is so robust. And that we have opportunities to really get the word out about APU with our Walmart partnership, which we think will be good for our school. So we're optimistic that when the military deployments allow our personnel to take classes that they'll come back with us.

Understood. And just one quick follow-up. On a forward basis for S&P, is it -- would you recommend just going with that kind of 20% to 21% range as the new normal?

No, no. I don't think that we will sustain at that level.

Okay.

Once the military comes back, we will need to.

Got it. Okay, great. Thank you very much.

Our next question comes from the line of Kelly Flynn with Credit Suisse. Please proceed.

Thanks. Can you tell us what you think new registrations will be for third quarter on a year-over-year basis? I mean your total regs guidance was helpful, but I mean given all the moving parts here, we kind of need to know that number?

We have not guided to new student registrations for the third quarter. So we're not going to do that right now.

Well, you're going to create a problem with people of expectations here. I mean, based on my model, it looks like it's going to be flat year-over-year, I mean, is that reasonable?

I think we believe that the military will be flat and possibly even slightly negative for the third quarter, but the civilian number should be up. So we're just at this time calculating an exact number. This would be imprecise given the volatility of the military.

Okay. And then for the civilian number, I'm trying to make sure that is the civilian growth of that -- I think you said 53%, is that on the same basis as the Title IV registrations number you provided in prior quarters, so like it was 71% growth last quarter and it's 53% this quarter, is that?

Our Title IV student growth was 66% this quarter. Our total civilian growth was 53%.

Oh, okay. So, yes, then can you explain what the difference is between those two numbers, the civilian and the Title IV?

Sure. We have some military students who are able to use Title IV.

Oh, okay. All right. I'll turn it over. Thanks.

Sure.

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

Hi. Good afternoon.

Hi there.

First, can you just comment on what you're seeing in July and August so far for students using VA benefits?

The VA benefit continues to be up. VA benefits year-to-date through June were up 118%. We haven't given guidance for the third quarter, but it continues to be quite strong.

Okay. So if that's an indication that it's greater competition -- though this is not greater competition, because presumably that would affect the VA population, as well as active duty military?

[Absolutely true]. And it's gone from about 4% of our population last year to about 8% so far this year.

Okay. And can you just speak to the thinking behind accelerating the civilian market? Now I understand that obviously you've got certain thoughts on kind of what a reasonable growth rate is, but is the idea that you have resources that are going to be under-deployed basically faculty kind of sitting around, because of the slowing in military and that's why it makes sense to accelerate the civilian market now?

I don't think it's going to be faculty who is sitting around, but we do have other staff positions, information technology, admissions counselors, et cetera. So we thought that -- it's a tricky thing since the bulk of any short-term increase in civilians would be primarily through additional Internet marketing spend. And you have to be careful because if you start increasing the spend on some of the keywords that you buy and some of those competitors increase, it just results in an all-around increased number based on the way that Google and the other services use a collective bidding process.

So we're going to spend, but we're going to spend judiciously and try to [axle] some of this temporary situation with the military, with civilians. But we're going to be very careful, because we don't want to generate a situation where the cost of our leads goes up unnecessarily.

Okay. If I could ask one -- just last quick one, Harry, did you break out the investments you're making specifically for Walmart separately from the civilian market in general?

We have not broken that out at this point.

Is it fair to assume that the increase in sales and promotion is not that that Walmart is still [fine out] doing the marketing on your behalf?

That's correct.

Okay. Thank you.

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

Hi. I was wondering if you could give us an update on the regulatory front in terms of what other issues aside from gainful employment, which you spoke to, if there are -- other issues are outstanding that give you pause?

Well, I think that Inside Higher Education, Doug Lederman did an excellent article yesterday where they looked at the 1,600 or 1,800 public documents that got [sucked in with good] responses. Clearly a measurement of credit hour, we agree with CHEA and many of the accrediting bodies and a significant number of -- I think it was 72 different non-profit agencies or bodies that submitted a comment that the credit-hour test is going back to the Dark Ages. It doesn't apply that traditional schools, as well as online schools look at learning outcomes and we'd concur with that.

I think that for the most part, for example, the safe harbors while we don't have the same style of marketing that a number of other companies do, we don't think that no safe harbors is a good idea. We think there's probably a couple of them that just merit clarification such as what about it, buying leads from outside parties if that's what you're going to do or buying any sourcing from outside parties or what about company-wide incentive bonus plan that doesn't do anything related to new students.

But other than that, obviously, there's a focus between Congress and the Department of Education are concerned about the growth of for-profit entities. We think we continue to do this in a quality manner. We think that some of these regulations are designed for people who operate at fringes and hopefully, whatever the final regulations are, won't impact us that much.

Thank you.

Our next question comes from the line of Amy Young with Robert W. Baird. Please proceed.

Hi, thank you. I was hoping I could follow up on a question just aggregating the third quarter, hit to margin from the slowdown in the military and the increased spend related to marketing for the civilian and the spend on Walmart. I mean, can you just help us understand -- I know you're not giving guidance beyond the third quarter, but as we move forward, if we wanted to assume for argument sake that the military starts remain challenged.

I mean, should we continue to expect that we'll have several hundred basis points of deterioration in the margin on a go-forward basis or was there a pretty big amount of spend that's happening in the third quarter with the Walmart deal that wouldn't necessarily continue?

Well, I think you have to break out. There is no marketing spend related to Walmart at all. So the spend that we're doing that is with a number of intake functions to make sure that we wouldn't get overwhelmed at the significant number of students or Walmart associates decided to enroll at the same time. We also had a spend related to academics to make sure that we could hire -- continue to hire faculty and keep our class size about the same and maintain our quality.

Looking at the breakout between how we're going to bring in new students in selling and promotion, the real goal on this is to bring that sales and promotion costs back to a representative number. Harry, do you want to comment about what we would like to target whether we can hit that or not, but --?

Yes. I mean I think to answer your question, we do not anticipate maintaining selling and promotional expenses 20% of revenue. The third quarter is kind of a time we just have to spend a lot more money in marketing, and revenue was going to be a lower number. So that's why the percentage is higher. Going forward into the fourth quarter, I think we'll be more where we anticipate it was going to be, which is like 17% to 18%. That's what we guided to previously.

And I guess I meant more as margins as a whole, because I know the spend isn't happening in sales and marketing, but is there a spend related to Walmart that will continue into the fourth quarter? And if you said just a couple of hundred students, and I wanted to clarify too, those are enrolled or I don't know if a couple of hundred students have just inquired about the program, but it's probably not enough to offset that at this point if we should continue to see a pretty meaningful drag on margins?

We plan on continuing to spend a little bit ahead of the Walmart growth, which we think will hit more so after their busy season. Walmart is a fairly seasonal business, as you know. And we don't anticipate a lot of enrollment in November and December with Walmart, but we will be spending ahead of the anticipated growth beyond next year. But it shouldn't have -- that's having an impact on margins.

And is it fair to assume that we shouldn't get much -- we probably won't get much color on what that potential Walmart partnership could mean for 2011 until probably your fourth quarter conference call?

I think you mean the fourth quarter results or the --?

Correct. Well, the fourth quarter conference call, right, that would happen in early 2011.

I think that there is a chance that there will be in August and September outreach their associates. So there is a chance that we would -- at the end of our third quarter call might be able to comment on what enrollments are looking like for the year, but as we said on the original call in June, we've always expected that the enrollments would pick up after the holiday season. So we will give you flavor when we have enough information to give you flavor.

Great. Thank you.

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

Thank you. I just want to go back to when you found out about the slowdown in the military side of your growth. At that point, I guess, as you started to reevaluate your growth, was there discussion internally to communicate the change at that point to the Street or were you seeing some signs that things could get better? What I'm trying to understand is, has there been further deterioration since June or things have been kind of flattish after that?

I think that one of the things that's different about our military students and our civilian students all along is that our civilian students will register about 45 days out because of the intricacies of getting the FSA approved, whereas our military students will see a heavy enrollment typically in the last two to three weeks before semester starts really based on their assignments.

And so we were well into June or we were past the drops for the month of June when we were looking at July registrations and realizing that we weren't seeing a typical last-minute influx of students for July both returning and new, and we're now into August and we didn't see much for August either. So that's why we gave this guidance and we obviously did a bunch of research into which bases were impacted and what the ops' tempo were at those bases and it's going to be tough to predict. I mean the President says that the troops will be out of Iraq by August 31. Who knows what that means and who knows if that is -- if that can be accomplished.

Okay. So let me ask a different question then. On Walmart, I know you're not going to give a specific guidance, but let's look out, say, a year or year-and-a-half, if military for whatever reasons stays flattish to down for a long period of time, could Walmart make up for your lost growth in military and could you then be still back on track for your prior growth target longer-term?

Well, I think anything is possible. I think it's just too far out to predict. If the military were to hold, for example, at a certain level, we've always thought that at some point, our military growth could slow and we actually budgeted a slower growth rate for this year. But to have it just go off a cliff and flatten out like it has sooner than we thought. There are 93,000 or 92,000 soldiers in Iraq currently. If they come back and they don't get deployed to Afghanistan, I think we'll get a reasonable share of them as students. So anything and everything could happen and I -- unfortunately, it's -- we don't have a crystal ball and our ability to forecast it is subject to a situation beyond our control. But I do think it's possible. I also really can't forecast where we might be with Walmart until they get through their busy season.

And final question, you announced your buyback. I assume you can start to execute on that within 48 hours. Is that correct?

Yes, the third trading day.

Okay. Great. Thank you.

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

Hi, thanks. I jumped on it a little bit late, so I may have missed it. Did you mention how large the Marines were as a percentage of your military enrollment or total enrollment or just some kind of a range that we can get a feel for?

We didn't and I'd have to get that number. We'll see if we can issue that later, but the Marines are the group that when you look at the percentage of our market share of the Marine Corps, it's the largest and probably two reasons. One, our Founder was a Marine and then General Alf Gray, 29th Commandant of the Marine Corps was our Board Chair for a long, long time and he's currently a Board Chair Emeritus. So we've had a great reputation inside the Marines and a much stronger affinity to them.

Okay. Again, if it's redundant, I apologize, but beyond the Marines, it sounds like you mentioned the Navy stuff going on in Asia, but how broad of a differences are between the branches in terms of the impact you've seen in the last couple of months in terms of slowing registrations? Is it really big in the Marines and small in the Air Force or is it just across the board?

Well, the overall numbers are flat. But the Marines are really our biggest impact and they're frankly negative.

Okay.

And the -- I would just say that the Marines are a big negative number, which is why we're flat overall and we're slightly ahead in the other areas.

Okay. Fair enough. And then --

The coastguard is a big number two for us that we're number one in the coastguard by far and they are really fully deployed now also with the Gulf oil spill.

Okay. Thinking about the -- let's call it the next four or five months here with the military volatility and the Walmart ramp, from a faculty perspective, you guys have had adjunct and full-time faculty model that's kind of squared away pretty well. How do these things change that dynamic? And I guess probably more broadly, as Walmart kind of ramps up the next year or so, how do you anticipate the faculty mix changing because of that partnership?

Well, we currently have about 1,300 faculty members, 285 of them are full-time and about 1,000 of them are part time. We don't really see a change in that mix that much, Brandon. We did announce that we had decreased the load of our program directors who were responsible for hiring faculty members in different degree disciplines. And we did that on purpose, because should we get an unplanned surge in students either a bump backup, because of military coming back from Iraq and not being redeployed or a bump back up because of Walmart or bump back up because of this increased civilian spend, we want to make sure that we can maintain the quality because A) that's a good practice, and B) given all the other things that are going on in the regulatory world, we want to make sure that we maintain our quality.

Okay. Great. Thanks. I appreciate it.

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

Thanks. While you're such an avid inside higher [education] I'm guessing that you maybe saw their report this morning that Senators Webb and Durbin had sent a letter to the Defense Secretary and asking for information about how the new GI Bill spending is going. And I'm wondering if you -- just in your anecdotal experience with the new GI Bill, I mean do you see anything in that? Do you see that there are guys out there that are sort of abusing the GI Bill dollars that are out there? Is there anything that you've noticed in your work in that space?

I can't really comment because I don't know of abuse. I'm not sure that's the right word. When I read the letter --

I think they said -- they meant -- yes, they talked specifically about pricing and that might be --

Right. First of all, in our particular case, we haven't increased our undergraduate price since 2001. So we're certainly not in that group with pricing. But the funny part about the pricing is that from what I've seen, I've actually seen more interesting twists with pricing in the Yellow Ribbon program with the non-profits than I've seen with the for-profits. So I would hope that any analysis of pricing related to the GI Bill actually portrays an analysis of both sectors, Trace.

Okay. Well, I think he asked for everything. It was not specifically directed as for-profit. But you've seen from a competitive standpoint that there has been some different prices being charged, I guess, maybe?

Well, what I've seen is -- I'm sure you know how the Yellow Ribbon program works where you take the -- the way the new GI Bill works is it takes the highest in-state tuition rate in the state, not an average, but the highest period. They select the right state. And then if you are a private institution and you agree to match half of the difference between your published tuition rate and that in-state rate under the Yellow Ribbon program, then the VA will pay the other half.

And what I've seen that to me seems a little disingenuous is that some of the private non-profits agree to do that, but they do it for like seven people (inaudible) seven people. And it seems to me that that's disingenuous. You ought to let every person who is a veteran and able to participate under this Bill who can be accepted into your institution, achieve this benefit rather than say, well, I'm going to do it for seven. So I would say, I haven't heard of anyone jacking up tuition. But then again, we tend to stay in a very narrow field, but I would say that if there is an area where it could certainly be the story that it would be with the Yellow Ribbon program and by the way, our tuition is so low, we don't participate in it.

Got it. Thank you, Wally. That's helpful.

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

Thanks so much. I just want to get back to the marketing spend. I just wanted to clarify something. Where is the bulk of the additional spending going? Is it going into third-party lead generators, is it going into more admissions counselors? If you can just give us some color, that would be great.

Yes. We're not adding anymore enrollment advisers than the ones that we've planned for the Walmart outreach team. We are adding some -- a handful of military outreach people and a handful of civilian outreach people. And then, the half of the spend relates to our own Internet lead generation as well as we have a couple of lead-generating firms who, over the years, we have tried and were satisfied with the quality of their leads, the conversion rate and the manner in which they generate those leads, i.e., they go to sites like beer.com or someplace like that. But they are able to focus on our particular niche programs as well as our affordability.

Right. Great. And then I just had a question regarding the Walmart deal and any impact on your military enrollment and I know this might be stretching a little bit, because I know it's really two different schools. But do you think that has anything to do with it? Is there some sort of impression that maybe you're not getting as much focus of the military since you are focusing on Walmart in the civilian market and maybe sorting you there?

I don't know that, Jeff. And we actually check a lot of the crazy bulletin boards where people will post lackey rumors. And we're not seeing that. We have a student union, an online student union where the students can feel free to make comments on any subject and we monitor that. We really haven't seen it. I think that -- and certainly based upon the couple hundred that have enrolled so far, that's not going to be something that surfaces anytime soon.

Okay. I appreciate the color. Thanks.

Sure.

(Operator Instructions) Our next question comes from the line of Jerry Herman with Stifel Nicolaus. Please proceed.

Thanks. Good afternoon, everybody. Just a clarification, guys, with regard to the volume numbers or registration numbers. Earlier, you indicated that T IV was up 66% to 14,000 and it represented 22% of course registrations, correct? In other words, 22% of the roughly 64,000 that you had. Is that right?

[22%] of our population was students, I think.

Net course reg -- we said net course registration at 22%, yes.

And can you help us with in a similar way on new course -- or net course registrations from new students? In other words, you know what I'm -- I'm trying to disaggregate military versus non-military in some way.

Well, I mean our military population total through June was up about 19% and Title IV was up 66%. Overall, it -- aggregate was 34%.

Okay. So the 66% got you to 14,000 on the still -- on the Title IV side. You're right?

Yes. You're talking just new students. Title IV was up in new students about 67% through June and the military new students were up about 8%.

And that's through June, so in other words, that's year-to-date?

That's correct.

Okay. Great. Okay. Thanks, Harry. It's helpful. And then, just a quick question with regard to selling and promotion. I think you just said that you're not going to be increasing the enrollment [for outstanding] major degree. Yet, the non-military side becomes more important. Can you talk about lead generation at this point? What you're seeing with regard to lead flow, particularly in July and August?

Well, I think we're --

We're not giving guidance for the students, yes.

Yes. That's tough. I mean we feel confident in our ability to spend some money and generate additional civilian students, Jerry. That's --

Okay. And then, just one quick question about the share repurchase. You've mentioned that you would be able to buy shares as long as there was no fewer than 18 million. Is there some constraining factor there or is that just the way the parameters on the share repurchase program? Is there -- I'm thinking of things like change in control or other shareholder-related issues?

I don't think there is any change in control or other issues. I think the Board looked at a number and thought that 18 million was a reasonable number for now. They always have the right to look at that number and decide to change their mind. I think the number of shares that will be repurchased under that scenario or that could be repurchased ranges anywhere from some 300,000 to 400,000 currently.

Okay. Great. Thanks, guys.

Our next question comes from the line of Kelly Flynn with Credit Suisse. Please proceed.

Thanks. Just try to go back to this but just this civilian growth of 53%, I mean, do you have the numbers for the past couple of quarters, what the growth was the past few quarters?

I think this is the first time we actually broke it out between the Title IV and the civilian. So we, typically, for the past few quarters, gave out our Title IV growth number and this time, we actually broke it out between civilians and the Title IV, the people using Title IV. So we gave you an extra number with civilians. So we really couldn't go back with [what I will do].

Okay. Yes, that's what we have been tracking. And I guess I was someone operating under the impression that that was a proxy for civilian, but it's not. So I mean did the civilian accelerate versus Q1? Did it grow faster in Q2 than it did in Q1?

Civilians? I don't know the answer to that.

Okay. Yes, it would be helpful if you could get us that number, because it's sort of in a vacuum, that 53%, is it really that helpful?

Sure.

Thanks.

Our next question comes from the line of Bob Wetenhall with RBC. Please proceed.

Hey, just wanted to understand, so 22% of net course regs active now or under T IV, what are expecting that to be by year-end, if you could just put a bookend around that?

Bob, I think it depends on how successful we are with civilian marketing and which percentage of the civilians pay cash and which percentage of the civilians use Title IV. I mean we have about -- approximately 20% of our students pay cash, which is actually a good number given some of the regulatory threats of looking at 9010 by adding military and FSA.

So predicting the Title IV mix by the end of the year, I mean our intention is we're going to try to backfill the [flatness] of the military with increased civilian registrations. But how many of them come from corporate reimbursements, for example, which would be self-pay or cash versus the Title IV, that'd be tough to predict.

If -- and that makes a lot of sense from a managing your enrollment strategy. Just trying to say if you had to estimate on a net course reg basis, at year-end military versus civilian, what do you think the mix will look like at that point in time?

It's really too hard, that's why we're not giving guidance for the fourth quarter. It's just too hard to predict when this military deployment is going to back off to the extent that this -- they'll be able to take classes again.

Got it. And just kind of by Harry's tone, it suggests that you think this is a temporary thing as opposed to a long-term pattern?

That's what we believe. We've got enough intel and enough years of experience in dealing with the military that -- they're pretty exhausted. I mean we have anecdotal stories of soldiers who were students of ours who have been deployed seven times.

That's enough to make people tired and not sure whether they want to [re-apprehend list]. In some cases, if you're in that 10 to 15 years what the service you want to basically stay in there, until you can get your 20-year retirement and that means that if you're going to get deployed every other year, you're going to get deployed every other year.

Got it. That makes sense. Thank you very much.

Sure.

At this time, I'd like to hand the call back over to Mr. Symanoskie for closing remarks.

Thank you, operator. That concludes our call this afternoon. We wish 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 and have a great day.