American Public Education Inc (APEI) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the third quarter 2010 American Public Education Incorporated earnings conference call. My name is Katelynn and I will be the operator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference.(Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today's call to Mr. Chris Symanoskie, associate vice president of investor relations. You may proceed.

Thank you operator. Good evening and welcome to American Public Education's third quarter 2010 earnings conference call. Presentation materials for today's call are available in the webcast 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 fourth quarter of 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 factor section and elsewhere in the company's annual report on form 10-K filed with the SEC, the company's quarterly reports on form 10-Q filed with the SEC and the company's other SEC filings.

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'll turn the call over to Dr. Boston.

Hi there. Good evening, ladies and gentlemen. In today's conference call I will review the results of our operations for the third quarter and discuss our strategies for continued growth. Harry Wilkins, our chief financial officer, will discuss our third quarter financial performance, the outlook for the fourth quarter, and provide additional perspective on our financial position.

As announced last quarter we experienced a slowing in the growth of net course registrations from active duty military. We believe that this was primarily due to increased operations tempo and recent overseas deployments across all branches of the US military. In the third quarter of 2010 net course registration from students using military tuition assistance increased 10% year-over-year, and makes up approximately 48% of our total net course registrations. More recently we have seen the decline in growth of net course registrations from active duty military stabilize.

Deployment levels in Iraq and military deployments at sea has decreased which bodes well for future enrollment at AMU. However, we remain cautious because of the continued high deployment and activity levels in Afghanistan, where there is less infrastructure and ongoing military operations.

As of August 2010, there are 188,465 service members deployed globally according to the U.S. department of defense. As a result, we have prudently accelerated existing plans to address civilian markets in order to mitigate some of the near term impact of what we believe are temporary operational factors impacting military growth.

We are pleased with the initial success of these efforts and with our overall traction in civilian markets. Net course registrations from students using Title 4 grew 58% and now represent 25% of our total net course registrations. It is worth noting that we seem to be busting some of the recent industry headwinds in civilian markets with net course registrations from new students using Title 4 increasing 51% compared to the prior year period.

Growth in net course registrations from students using veterans benefits who are also classified as civilians increased 111% in the third quarter. We think the growth of our civilian student population is proof that our unique approach to marketing can be highly effective in that sector and that the incremental advertising spend in civilian markets is currently producing positive results.

Overall, total net course registrations from new students increased 9% year-over-year, and was negatively impacted by a decline in new active duty military students. Total net course registrations increased 25%, and student enrollment at American Public University System increased 31% year-over-year to approximately 77,700 students in the third quarter.

In anticipation of serving a larger student population resulting from continued growth, corporate partnerships and new market segments we are making investments in administrative facilities and in our learning management system. To date our transition to the Sakai Learning Management Platform continues to be successful with conversion of 20 graduate programs encompassing 603 course sections and 6800 registered students. We expect graduate programs conversion to be complete by year end 2010, and undergraduate programs by midyear 2011. All new programs and courses will be launched in the Sakai platform.

Later this month, we plan to hold a grand opening celebration for our 45,000 square foot academic center in Charles Town, West Virginia. The environmentally friendly building has been constructed to LEED gold standards and will serve as office and meeting space for 140 faculty, academic staff and academic advisors.

Lastly, I'm pleased to report that we have deployed a portion of our growing cash balance to purchase company stock pursuant to a stock repurchase program authorized last quarter by our board of directors. As of September 30th, 2010, the company repurchased 340,000 shares under its repurchase program for an aggregate amount of $9.2 million. As of November 5 the Company repurchased a total 600,000 shares under the repurchase program.

Moving over to slide number four, we are a mission driven institution. That means our strategic plan is primarily derived from the APUS mission. Our long term strategic plan underscores our commitment to affordability and academic quality while expanding access to higher education, and broadening awareness of our university through referrals, relationship marketing and a consultative approach to student enrollment.

Among other strategic initiatives we expect to continue investing in the APU brand, expanding relationships with law enforcement and other public service communities, establishing new community college relationships, and continuing our successful outreach to veterans. In addition, we will continue to build on a relationship with Wal-Mart, and work diligently to serve Wal-Mart associates and other corporate opportunities that may occur.

Also expecting to contribute to our growth next year are three new degrees launched in October, as part of our 2011 catalog. A master of science in information technology, a master of arts in psychology, and an RN to bachelor of science in nursing are currently open for registration with classes beginning in December.

Since our founding in 1991 by retired Marine Corps Major Jim Etter we have operated with a student centric approach that includes a focus on high academic quality, a relationship oriented approach to marketing and consultative approach to enrollment and advising. We believe our admissions personnel, compensation system, staff training and overall approach to enrollment are aligned with the vision of our founder and what we believe to be the objectives of the US higher education policy.

In addition, the methods we use to measure student learning and continually improve the quality of our programs leads to strong outcomes and results in a university experience with high student satisfaction and referral rates.

The department of education recently made changes to the final version of the 13 program integrity rules which contain numerous complexities. Our preliminary review of the final rules and available data leads us to believe that American Public University System will be minimally impacted. However, uncertainties still exist regarding the implementation and our ability to comply with interpretation of final rules as well as the pending gainful employment rule.

As part of those changes the DOE issued final rules stating that an institution offering online programs must meet state requirements and provide documentation of such approvals to legally offer higher education in that state. The rules for each state are subject to change and uncertainty. However, we believe we are in compliance with current state licensure requirements. We have reached out to and have a relationship with 49 out of 50 states and the District of Columbia.

We believe we have licensure in every state that currently requires approval for out of state online programs, or we have been provided exemptions by states that offer exemptions for regionally or nationally accredited institutions. Some states do not require approval and others may require certain actions be taken. We are cognizant, however, that with increased pressure from the Department of Education, states may change their laws and regulations or begin to interpret them differently. For additional details regarding these and other risk factors please refer to our most recent 10-Q filing.

In closing we believe the enrollment of active duty military students continues to be impacted by deployments and a high operations tempo. More importantly, we are very pleased with the growth we are seeing in civilian markets where the affordability and quality of our programs is well received by our key audiences. Our branding efforts and our marketing strategies are proving successful, and represent investments in the fastest growing part of our business, and as always are critical to our long term growth. Despite uncertainty in the broader economy, the lack of clarity surrounding new regulations and military deployments, we are optimistic about the growth opportunities in civilian markets and our long term prospects for growth which are based on solid fundamentals.

Now I would like to turn the call over to Harry Wilkins at this time to discuss our financial results in more detail. Harry?

Thanks, Wally. If you refer to slide six, which is our third quarter update. In short, API's third quarter was better than expected with a 32% increase in revenues, to $48.3 million. Revenue growth was driven by a 25% increase in net course registrations plus additional revenue related to the timing of monthly starts. Effectively, an additional week of revenue flowing in from the second quarter as a result of a later class start in June.

Operating income increased 11% to $9.3 million in the third quarter, which reflects the negative impact from higher selling and commercial expenses primarily as a result of incremental spending in civilian markets. Keep in mind, that operating income includes $326,000 of health committee related legal expenses. And a $676,000 reinstatement of an accrual that was reversed in the previous quarter related to the portion of our annual incentive plan that is tied to financial performance. Given that the Company's outlook has improved significantly, we may now achieve certain goals established previously by the board of directors so we are reinstating a portion of our annual employee bonus tied to financial performance.

Net income also increased 11% to $5.6 million or $0.30 per diluted share. API remains in a strong financial position, with $86.6 million of cash, and no debt, and while we are accruing a higher provision for loan losses in anticipation of a larger civilian population we have experienced improvement in the collection of receivables and our bad debt expense is less than 1% of revenue.

For the nine months ended September 30, 2010, our CapEx was $14.4 million. For the full year we expect CapEx of approximately $21 million to $22 million which includes about $9 million of CapEx related to the new academic center and approximately $2 million related to the new LMS and office expansion in Manassas, Virginia to accommodate our growth.

During the third quarter the company repurchased 340,000 shares of stock on the stock repurchase program, for an aggregate amount of $9.2 million.

Move to slide seven. Income data as a percentage of revenue, we saw improvement in G & A expenses leverage in the third quarter to 17% of revenue compared to 17.7% of revenue in the same period of 2009. Again, G & A expense included health committee legal costs and a portion of the re-accrued compensation expense. We experience a modest improvement as a percentage of revenue in instructional costs and services to 40.3%.

Selling and promotional costs as a percentage of revenue increased to 19.9% as expected. We ramped up our civilian spending in marketing expense in an attempt to offset some of the disruption from the slowing of our growth rate in the military. We expect that selling and promotional expenses as a percentage of revenue will decrease sequentially in the fourth quarter to approximately 17% to 18% of revenue. As a result of the initial success of the incremental marketing spend in civilian markets we plan to continue with a slightly elevated level of investment in branding and advertising in the near term.

These spending levels are expected to moderate as military growth improves and/or as other initiatives such as our Wal-Mart relationship gain traction. Keep in mind that a high percentage of active duty military students are referrals. In civilian markets our referral rate is lower and the referral base is much smaller. But our civilian population is growing rapidly and as we develop a larger pool of civilian graduates and expand our civilian presence we hope to increase our civilian referral rates and gain marketing efficiencies. In short, we have demonstrated that we can generate civilian growth at a reasonable cost without price increases.

In the long run, we believe the opportunities exist to improve margins. For example, higher margins could result from any one of the following developments. Improving civilian referral rates, a modest increase in the military growth rate, traction with the Wal-Mart associates program, a price improvement, modification of our book grant for civilians, and a mixed shift to predominately civilian students.

Slide eight shows our fourth quarter outlook. Due to what we believe are emerging signs of military enrollment stabilizing and our successful civilian marketing efforts, the Company expects acceleration in the growth of net course registrations in the fourth quarter to between 26% and 29% year-over-year. And net course registrations from new students to be between 18% and 20% compared to the prior year. The Company anticipates fourth quarter revenue growth between 27% and 30% compared to the prior year.

Owing in part to a slightly higher selling and promotional expenses as well as the timing of starts with a difficult comp of the fourth quarter of last year, earnings per share is expected to be between $0.45 to $0.47 per share.

In closing, API is in a strong financial position, with solid long term prospects. While we anticipate challenges with regard to military enrollment in the near term, we believe we are now seeing signs of that stabilizing. Our student mix is expected to continue to transition to a greater percentage of civilian students. The transition is happening more rapidly than originally anticipated.

Moreover, we believe that our plan to expand civilian enrollment, the fastest growing population within the university, is proving to be very successful. We have the right strategy, a powerful operating model and high quality programs to drive long term growth.

Operator, at this time we would like to open up the call for questions.

(Operator Instructions). Your first question comes from the line of [Susan Stime] of Morgan Stanley. You may proceed.

Hi, can you talk more about the timing of the Wal-Mart relationship and when will we start to see an impact on civilian enrollments and what are you doing to kind of gear up for that.

Hi Susan this is Wally. We continue to believe as the folks at Wal-Mart shared with us up front, that enrollments will see major increases over where they are now, which is several hundred, after their busy season ends which is the holiday season. So we have spent money in increasing the number of servers we have, and designing specialized landing pages for their associates to come to, coordinating linkages of our IT system with their system to verify employment for example, as well as setting up specialized teams of people for intake and student advising.

So while we spent some money upfront for the relationship, as you might imagine it's important to get off on the right foot, and so we believe we are prepared, and we believe that they are in the process of coordinating the marketing and the program for associates with hopes from both them and us that enrollments will begin to see accelerated action in the first quarter of next year.

Okay. And then how are things going as far as other corporate relationships? Are you expecting this to become a significantly larger part of the business going forward.

Well, I think we were pretty candid that we have had people seeking corporate relationships for us in the past. And this one was not a response to an RFP; we were contacted. And I think because of that contact it actually shortened -- it was about an eight month, from the start to the final signing of the contract and the announcement. My experience not at this company, but other companies with B2B relationships is that those relationships typically take between 12 and 18 months.

So you know we continue to have relationships that seem to have decent potential, we actually added a person to our corporate outreach group, but we don't have anything significant to announce at this time. And you know being able to predict that is something we really can't predict with certainty.

Okay, thank you.

Your next question comes from the line of Arvind Bhatia of Sterne Agee.

Thank you. Good afternoon. Just want to go back to Wal-Mart real quick. As far as the signs that you are sort of looking at for growth next year, in that business, is there any inquiry -- are there some inquiries that you are seeing already that give you some confidence that what Wal-Mart is telling you will prove to be right?

And then as far as for 2011, you know, transfer your military students, are you going to assume that what you are seeing right now is going to be the case for the first half, and then acceleration in the second half. Help us how we should be thinking about it.

Wow, neither one of those questions is easy to answer.

As far as any projection with Wal-Mart goes, I think we still stand by where we were from the day we announced it, which is we thought we would see growth in 2011, and it is really too soon, even though we have had several hundred associates register at this point. They really don't represent the bulk of their associates for a number of reasons, including the fact that most of the rank and file are heavily involved with this holiday season. So we aren't issuing any specific guidance on what color we would see for that enrollment, other than that we believe the first quarter of next year will be higher than where we are for the fall of this year.

As far as military guidance for next year, you know we haven't issued any, and the good news from our perspective is that the situation we experienced in the third quarter seems to have stabilized. But you know there are a number of developments on the military front ranging from the continued deployment in Afghanistan, where there's a lack of internet infrastructure to budgetary issues, base realignment, some possible changes with how the military looks at institutions. And so to make a judgment call on whether we see some seasonality between the first half of the year and the second half of the year next year, our crystal ball, quite frankly, isn't that good for looking out that far.

Let me try another way then. Net course registrations for new students -- is your fourth quarter guidance, can we take that to the bank in the sense, have all the puts and takes going forward. Can we use sort of that reacceleration that you have seen from the third quarter to the fourth quarter as a good way to think about the trends in the near term.

Harry, do you want to try to answer that.

I think we are giving guidance quarter to quarter right now. And we think we are confident in the guidance we have given for the fourth quarter, and we will update that as appropriate.

Okay, great. Thanks guys, good luck.

Your next question comes from the line of Peter Appert of Piper Jaffray.

Thanks. Harry, I may have misheard you. Did you say that based on timing issues there's an extra week of revenue in the third quarter?

Yes, Peter, it's one of the unique things about our accounting that we have -- our classes start the first Monday of every month. And in June, the first Monday was the 7th. What that means is that the first seven days of June, and we record revenue from the date the class starts by day. So we only had 23 days basically of revenue recorded in June. That was the second quarter. So we kind of have an extra week worth of revenue from June that hits the third quarter.

But on a year to year basis, this would have been similar to last year.

It would have -- not similar, there's probably about $1 million hit from that. That was greater in the third quarter, because of the second quarter.

Got it. And then one other thing, your guidance obviously suggests pretty impressive acceleration in new course registration here from the third to the fourth quarter. Is that all civilian driven? Or are you assuming some improvement in the military?

Some improvement in the military. Military is stabilizing. But it is mostly civilian driven. We are very pleased with the velocity with which our students civilian population is growing. We are seeing acceleration of growth with civilians.

Thank you.

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

Hi, thank you. Can you give us an update on what you are seeing in terms of internet lead generation. If you're seeing changes either in conversion rates in quality or pricing?

I think what we have seen for the year has been increased bidding and many of the keywords that we and others use, relating in inflationary adjustment upwards just for the same keywords that we bought a year ago.

As far as conversions, I think we haven't noticed any degrade in the number of conversions in most of our unique words related to our unique niche degrees. I think that we have seen some slight dropping off for convergence, in more generic terms, and I'm not saying that we use these words like online degrees, but you know whatever the specific words that would be less related to our niche degrees and more related to studying online.

You know, I think that's pretty typical when you have an increased focus on competition, and a particularly segment, and the way the Google algorithm works it really leads to increased inflation with the more activity there are on keywords. So that's pretty much the snapshot.

We try to avoid buying words that either have very low conversion rates or that cost us too much incrementally, given the lower point in our tuition and the fact that we want to manage our marketing expenses at a reasonable level.

Thank you.

Your next question comes from the line of Ariel Sokol of UBS. You may proceed.

Good afternoon, a couple of questions. The first one. It seems like you are doing pretty well, how has the Company avoided the headwinds experienced by your peers. What gives you the confidence you won't see those headwinds moving forward at least in Q4.

Well, Ariel, we have never really marketed like our peers. So I can't share from experience what may be happening from that perspective, whether they are changing the way they do it because of some of the program integrity rules that are coming out.

But from our perspective, we have always maintained a belief that affordability was a much bigger issue with students and potential students than anyone in higher ed, whether it's for profit or nonprofit, was willing to lay claim to.

So we think that with the economy still not coming out of recession that affordability is a big issue, that our tuition which in many cases the tuition and our suggested attendance costs are less than the loan limits, is an attractive option for a particular part of the population and that with our increased spend branding APU, which is still a relatively unknown brand, that people are starting to pick up on that.

Great. And then a follow up regarding B to B relationships. Is it your sense that employers might be gravitating to APU, given that your peers have apparently seen substantial, perhaps well deserved reputational advantage?

Actually, I -- you know, no one has mentioned that, so -- you know, I wouldn't really care to speculate. It sounds nice, and I would love to think it happened, but I really haven't heard that anecdotally at all.

Okay, and the last question. So as everybody constantly mentions, Senator Harkin likely holds a hearing in December focusing on the military, what are your contacts in the military suggesting to you about the way for-profit schools are viewed in the military? Have there been any changes over the past couple of months that you are aware of?

Well, you know, there was a hearing by the armed forces committee in October, I believe. And probably many of the same questions that are going to get asked in December were asked then. And the Department of Defense put forward a posture that they treat all schools alike, and that anybody who is making false claims or an aggressive marketer, you know they will push standards to enforce. They also talked about this new [MIBR] procedure that they, a rule that they are promulgating that will provide an audit or inspection opportunity for online programs the same way they do with the programs that teach on base.

We were part of that program development, had the ability to comment on the proposed regulations over the past couple of years and in fact we welcome that. But as far as the -- I think the military has been pretty neutral on looking at an institution's quality based upon whether it's proprietary or not, and certainly we appreciate that. I think they are focused on institutions meeting the needs of their students and maintaining a quality and ethical front.

Thank you.

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

Thanks so much. I wanted to focus on the VA component of your net course registration. The growth was phenomenally strong, I'm not sure if you have disclosed this before, but have those growth rates accelerated? Is that why you think you are going to get continued accelerating growth from the civilian market? What are you guys, are you guys focusing on that market more than you have before? Any color would be great.

Well, we're actually not focusing on that market more than we have in the past. That's the marketing answer. We continue to have outreach to veterans as well as active duty service members. As far as how we calculated the forecast for those numbers I think I'll ask Harry to give you some color on that.

Yes, we've had very strong -- since they have come out with chapter 33, we have had very strong growth. It was 118% a quarter over quarter last quarter, year over year for the quarter. So 111% this quarter. So we don't know how long that will continue at that rate, but certainly we're resonating well with veterans now.

The veterans have always been a small part of our population, now it is up to 9%. It was only 4% this time a year ago. So we expect that will continue to grow. We have a very good reputation in the military. And as a lot of AMU students -- now that they can have their dependents take advantage of this benefit, we think we will have some of our graduates sending their dependents to our school when they are able to do that. So I think that's what is happening.

Okay, great that's helpful. Just a quick follow up. Harry, you mentioned that I think it was $676,000 restatement, was that all on the G & A line, and is that something else that we might see next quarter?

It's not all on the G & A line. And that is nine months worth, so you will see some of that, a similar number, a number in the fourth quarter that is about a third of that. But it's -- it's mostly in G & A, but also -- I mean it includes bonuses for people working in the marketing department, people that worked in - our instructors, so it is spread throughout our expense line items.

Okay, great. I'll follow up off line. Thank you so much.

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

Hi, good afternoon. Question about the civilian market. Could you just talk about whether there were areas of particular strength within the civilian market? And I mean that both programmatically and market and degree level? Whether graduate was stronger than bachelor, vice versa?

Corey, good question. Our bachelors degree market continues to be strongest overall for growth. At the same time, with the civilians we do have a higher percentage of civilians who opt for graduate courses, but it's still not over 50%, it is below 50%. I think the last time I looked at it, it was around 38% of civilians opt for grad programs versus in the military, it is about 15% of the military opt for graduate programs. So it is a higher balance there, but as far as a particular program, there are none that come to mind that have particularly higher than normal activity. I think the growth was all across the board.

And you know we continue to look -- we announced three programs that are available for registration beginning in December that are new for the first time, and so we are hopeful that they will add to the potential number of new students we have coming in. But nothing abnormally high, and quite frankly, I guess now thinking about it, if there was something that was particularly high, I might not disclose it anyway, due to the artful competitors who listen to these calls.

I appreciate that. And one quick follow up. On competition, if you -- when you talk to people who enroll, do you have a sense for what other schools they tend to look at by comparison and does it -- do your competitors tend to be other proprietary schools or more traditional schools?

We should probably update this. We haven't looked at it in a while. But 87% of our students transfer on credits from other institutions or from ACE evaluated military training. And the last time we looked at it our average student has four transcripts including the arts and smarts from the military. So that's generally about two transcripts from traditional institutions, and I would say that the last time we looked at it that more than half of those transcripts from institutions were from non-proprietary institutions.

Okay, interesting thank you.

Your next question comes from the line of Jerry Herman, of Stifel Nicolaus. You may proceed.

Thanks. Good evening everybody. Hi guys. A question is about online, T-4, in particular the scrutiny that has also been applicable to Title 4 online. There's been sort of a theoretical threshold of 50% growth, i.e. notification of such growth from the accreditation agencies to the DOE. How do you guys think about that threshold? Particularly in light of the T-4 side getting more important.

Well, Jerry the threshold is overall growth. It isn't by payer type, so our overall growth is well below the 50%. In fact, that regulation is what was put into the reauthorization of the higher education act. So while the T-4 may be high, at over 50%, it's actually a much -- our T-4 enrollment, as you know, is much lower as a percentage of our overall enrollment. We said it's now up to 25%.

So we don't know of a regulation; at that same time it doesn't mean that the department or anyone else including accrediting bodies can't come out and take a look at it. We continue to stand by the fact that we believe we have been managing our growth in a measured way that allows us to not just retain but to improve our quality, and we think that our percentage of returning students is a good demonstrated outcome of what we have been able to do with that focus.

I know earlier you mentioned you really haven't strayed too far away from your original discussion with regard to Wal-Mart. Are your margin expectations pretty much in line with what you previously thought? Anything that's moved in any direction on that regard.

As far as that particular relationship, we're not anticipating any differences or any movements one way or the other.

Okay, great. Thanks, guys.

Your next question comes from the line of Kelly Flynn of Credit Suisse. You may proceed.

Your next question comes from the line of Amy Yonker of Robert W Baird. You may proceed.

Hi. Thanks. Harry, can you talk a little bit about your thoughts or expectations for free cash flow, both for this year, and then I know you're not giving guidance for next year, but do you expect that free cash flow will grow roughly in line with net income. Or is there something that could cause it to grow either faster or slower, that we should be thinking about?

I think it will continue to grow along with net income. We will continue to have a need to expand our facilities in Charles Town. And it depends on how quickly the civilian growth -- one thing about the civilian growth, is it does require a lot of financial aid processing and that usually equates to people. So if the civilian growth continues to track the way that it is, which is very much of a resurgence in growth, we may have to build some facilities. But I think it's safe to say that our cash flow will -- that our net income will flow right to our balance sheet.

Okay, and just expectations for this year.

The expectations for this year, I think we're happy with the guidance we have given thus far.

Okay, and then lastly, just on the share repurchases, typically when you give guidance you talk about net income guidance as well as EPS. Can you help us understand what your expectations are for share count in the fourth quarter? You know, given the number of share repurchases you've done?

Yes, I think it should be about -- I shouldn't have -- because it is an average, shares outstanding, that kind of mitigates the repurchasing it in the last 2 quarters. So I wouldn't expect to have a significant change, certainly it will not go up, obviously. But people are going to exercise options and we will have some more shares outstanding. And I don't know whether the board will continue. We're almost -- we will have exhausted our buyback by the first part of -- sometime this month actually. So whether the board decides to continue with that or not, at the next board meeting in December, that could also impact that number. But I don't think it's just -- I would just go with your estimates where we are in the third quarter.

Perfect. Thanks, guys.

Your next question comes from the line of Bob Wetenhall of RBC.

Hi. I'm a bit relieved to see what looks like your military enrollment is stabilizing. But it also looks like you are spending a lot of money to attract civilians which is obviously helping out with your growth. Just in terms of your margin structure, it looks like the 326 is nonrecurring. Is that $676,000 something that you would normally be closer to $1 million for a full year and it would be $250,000 a normal run rate?

Yes.

Got it. Okay. Do you guys have in terms of -- if you can provide any more color on marketing spent, it sounds like it is going to step down in the fourth quarter. Would you will be willing to provide a little bit of a bookend about as a percentage of revenues in 2011 where you think that is going to go? Is this something that will stabilize at this current level?

Bob, I think that the answer is we have to look at the market, and the best -- our ability to best manage that market is really quarter to quarter. So right now it's just too soon to tell. Obviously we feel happy with the extra money we spent in the third quarter, and the projected outcome for civilians in particular for the fourth quarter.

You know, there are a number of nuances that are occurring between the inflation on some of the keywords, some of the potential changes with firms using lead aggregators that may occur because of the Neg-Reg. And we'll just see how that influences the cost of the keywords. Because outsider of referrals, our big spend has been with our own internally generated keyword purchases as well as banner ads.

So I would say that those trends are influenced by bidding, and until we see get a better perspective on what is happening in the fourth quarter, it is really too soon to give guidance, where we think it will end up next year.

Is it possible that it could be 20% of revenues?

Well, I would hope not, but you know because our goal has been to keep it in the teens. So we think that keeping it in the teens allows us the ability to keep our tuition low and to not have to increase it. So our preference would be to not get it up there.

Great. And just a quick question for Wally, would it be fair to characterize military enrollment trends that you are seeing now as stable and consistent with what you saw in the prior quarter? Just flat lining?

I think we said we believed they have stabilized and you know it's too soon to tell whether they will track back up again based upon continued deployment in Afghanistan. But the good news is we think they have stabilized for now.

Great, thank you very much.

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

Hi Guys, good afternoon. I want to go back to one of your comments. I think Wally had talked about being pretty satisfied with the success of the civilian marketing efforts. How do you guys think about where that line is between spending too much money, or kind of spending not enough money, or is there an ROI that you are looking for on a relative basis? I guess big picture, how do you think about success versus non success in civilian right now?

Brandon, I think the important thing for us and I would imagine any institution is to try to be able to spend your marketing dollars effectively, so that you bring in students that are going to stick with your institution, because they are the best match for your institution. That is pretty difficult when you have a brand in the case of APU, that is only about eight years old and really has not been promoted except for perhaps the last three. And so we try to do our best.

We passionately believe in our referral base marketing that is still the primary reason why we have a lot of foot soldiers out there. It is for the purpose of generating referrals. It is also why we concentrate on niche sectors in the civilian markets like law enforcement, fire and emergency management, government employees, corporations. And it's going to continue to be our focus. We think that if we had the money, which we don't, but if we had the money to just blanketing the air waves with ads, designing to attract everyone, means you will get some students that when they find that their institution is not the right match, are going to leave.

Our goal is to try to avoid that churn. And that churn just doesn't occur with for-profits and online schools, but it occurs with schools everywhere. It is one of the classic questions is how well can you do your strategic enrollment management, and so we try to spend correctly, and balance that where we talked about going up this quarter to the number we went up to was hopefully an anomaly and we're giving guidance for the next quarter where we are backing it back down.

We continue to measure on a monthly basis whether or not the leads we generate with the dollars we spend and where we spend them are bringing in the right type of students. It is not an exact science, but it's something we work at every day.

All right. In the 10-Q, I think you guys mentioned the ramp in faculty and some customer service staff in advance of Wal-Mart, started kind of an earnest second quarter. How has that trended here in the third quarter? Are you at a spot where you have the customer service part built out and now it is just scaling faculty as the enrollments scale? Or is there more spending we should expect in the next two to three months in advance of what should be a decent ramp next year?

I think we are stable on the fixed cost spend in anticipation of it. I think that to the extent that as enrollments increase, and we need to increase our variable costs we will do that. But we are fine. There's no more incremental fixed cost we need to spend that I'm aware of.

Fair enough. Thanks guys.

Your next question comes from the line of Trace Urdan of Signal Hill. You may proceed.

Thanks very much. Have you guys been pleased or have you noticed anything with respect to the persistence of these veterans that are coming in in greater numbers? Do they look like your other students, are they better or worse in terms of how well they persist?

You know, Trace, persistence is one of my focuses. I don't know the answer to that. But I do know that upfront there's actually a little bit of churn with the initial registration, where we have some veterans under the new bill who drop at the last minute after registering because they find out that they are not eligible for the housing allowance. So that's a little disappointing. It is beyond our control. When people report about our lobbying expense, our lobbying expense has been to get that housing allowance restored to online programs, and not for some of the other issues other schools have. But we -- after that initial drop, I think we have seen a pretty stable population.

Okay. And then Wally I was surprised to hear you in my kitchen yesterday, that NPR story was great. I wonder if it is a signal in any way on the effort of Wal-Mart's part to begin to promote its programs either internally or externally? I find those things never usually happen by accident. I'm wondering if you are aware of any plans that they have to promote the program with you as they start to head into the end of the year.

I think they have always had intentions to promote the program, at the end of the year for enrollments next year. So, but as far as specificity and timing that's really something that I'm trying to run our business, and just make sure we are prepared. I don't have any inside information on that right now.

Fair enough. Thank you.

(Operator Instructions) Your next question comes from the line of Kelly Flynn of Credit Suisse. You may proceed.

If there are no further questions in the queue at this time, I would now like to turn the call over to Mr. Chris Symanoskie for closing remarks.

Thank you operator. This concludes our call for today. We wish to thank all of today's callers for your participation, and interest in American Public Education. Thank you, and have a great evening.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a great day.