American Public Education Inc (APEI) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the quarter one 2012 American Public Education earnings conference call. My name is Ian and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question and answer session toward the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would now like to call turn the call over to Chris Symanoskie.

Thank you operator. Good evening and welcome to American Public Education's first quarter 2012 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. Please note that statements made in this conference call regarding American Public Education or its subsidiary 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 second quarter 2012 and full year 2012 as well as other statements regarding expected future 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. Wally Boston, our President and CEO, and Harry Wilkins, our Executive Vice President and Chief Financial Officer. Now at this time I'll turn the call over to Dr. Boston.

Thank you, Chris. Good evening everyone. In today's conference call I will review the results of our first quarter operations, highlight recent academic successes, and discuss our current business strategy. Then Harry Wilkins our Chief Financial Officer will discuss our financial results in more detail, and provide additional perspective on our outlook for the second quarter of 2012.

Moving to slide number three, in the first quarter of 2012, net course registrations by students using Federal student aide, otherwise known as Title IV, increased approximately 42% year-over-year. Net course registrations by students using Title IV now represent approximately 34% of total net course registrations, compared to 30% in the prior year period. We are pleased by the continued growth of our civilian student population. Moreover we believe that our initial efforts to reduce financial aid abuse and fraud have been effective overall. Net course registrations by students using Department of Defense Tuition Assistance, or TA, increased 7% year-over-year, and net course registrations by students using veterans benefits, or VA, increased 83% year-over-year.

AMU's continued success at expanding its presence among active duty and veteran communities is significant in light of the already sizable military population at AMU, and the potential future budgetary constraints facing the US military. That being said, based on current information, we believe TA will likely be funded by all of the services for the remainder of this government fiscal year ending September 30.

These are challenging economic times for everyone and especially so for those in the military and veteran communities. I believe our results demonstrate AMU's excellent reputation, leadership, and ability to serve the unique needs of military and veteran communities. Net course registrations by students using cash and other sources increased 8% year-over-year. Generally we see higher percentages of students paying cash when they are referred to APUS through a corporate or non-profit partnership, especially when there is a tuition benefit for employees.

In the first quarter of 2012 we established several new relationships with corporations and non-profit associations, including the National Environmental Health Association, NEHA, the Hispanic Information and Telecommunications Network, HITN, and EdAssist, which is a service of Bright Horizons, to name a few. We also continue to expand our presence among community colleges. We now have relationships, or MOUs with 82 community colleges in 19 states.

Moving on to slide number four, a strong foundation in academic quality, teaching excellence and measuring student learning is the essential foundation for sustainable growth, and addressing new opportunities. This is why we have invested heavily in hiring new faculty that have made teaching excellence one of our priorities. At the start of this year, we hired an additional 114 full-time faculty members bringing the total number of full-time faculty to 450. Our newly hired full-time faculty members are now fully scheduled and engaged in teaching their assigned courses as well as providing academic leadership in their respective disciplines. Our academic and teaching focus has helped us gain stature within the broader academic community. For example, APUS was selected to participate in the Association of American Colleges and Universities, AAC&U's, Summer Institute for General Education and Assessment in June.

We believe we are the only online college or university invited to the workshop this year to discuss our general education program, to examine its impact on our students and to ensure we create a meaningful general education experience. We are also working with other organizations and programs, such as the National Institute for Learning Outcomes Assessment, John Gardner's Foundations of Excellence Program, and the Lumina Foundations to great qualifications profile. Our collaborative work and initiatives with these groups contribute to our efforts in insuring a quality curriculum and teaching excellence.

Our engagement with the academic community has again led to growing recognition. For example, APUS's Vice President of Research & Development, Dr. Phil Ice, was recently honored by the United States Distance Learning Association for outstanding leadership in distance learning. Disaster Recovery Journal presented their 2011 Annual Best Practices Award to Anthony Mangeri. Anthony is the manager of our Fire/Emergency Management Outreach at APUS, and AMU was the recipient of the Council of College to Military Educators, CCME, 2012 Institutional Award at their Annual Symposium. The award is presented to an organization annually in recognition of its significant contributions to the cause of military education. These are all great examples highlighting the importance of investing in strong academic foundations.

They illustrate our growing reputation among various audiences. This solid academic footing serves as the underpinning of our future growth and prepares us to tackle current and future challenges. Moving over to slide number five, on this foundation, we must invest in systems and processes to drive greater efficiency and to support future growth in new and existing markets. Our ePress initiative to combat inflation in the prices of textbooks for example, is an important part of making online higher education affordable for students in the US and abroad.

Moreover it should create efficiencies to help offset a portion of the cost associated the with Title IV processing as we continue to expand to civilian markets. We are also making investments to automate Title IV processes in order to drive down related costs and insure affordability for future students. At the same time we are taking steps to reduce financial aid fraud and abuse. This benefits the taxpayer, improves the APUS student experience, and further strengthens our institution of students who are engaged in learning, determined to graduate, and more likely to refer others.

For more than a decade APUS has expanded the number of degrees offered, diversified its student population, and continually increased academic quality without undergraduate tuition increases, despite inflationary pressure from the broader economy and new costly government regulations. As we continue to expand access and effectively serve an increasingly diverse student population, APUS must continue to invest in instructional and administrative technology, as well as student services. As a result, our Board of Trustees and Board of Directors have authorized a $50 per course technology fee for undergraduate courses with start dates of September 1, 2012 or later.

Tuition course materials and fees at AMU and APU will still remain approximately 20% below the average public four-year institution in-state rates, when comparing our tuition books and fees to the average published by the College Board. We intend to provide a waiver this fee for service members using tuition assistance. APUS remains fully committed to affordability and to further enhance the student experience by investing in technology to create efficiency, to further enhance the student experience, and to expand access to higher education at home and abroad. Today API released its outlook for the second quarter of 2012.

This outlook shows that the Company expects growth rate of net course registrations from new students to be between 2% and 4% year-over-year. The Company believes that the prior year comparison may have included a growing number of course takers, individuals and groups attempting to abuse the Title IV, system or some students who might not otherwise pursue a degree or certificate who enroll because of the availability of Title IV funds and economic hardships resulting from the economic climate. There is no way to accurately determine the number of course takers in attendance last year.

However we believe net course registrations by new students in the prior year period would have been lower absent this factor. Having identified this matter, the Company took several proactive steps to address this issue last year and this year, such as requiring academic assessment exams, additional course work, and launching more robust identity verification processes among other initiatives. One particular fraud prevention measure implemented in late March may have deterred certain eligible prospective students from enrolling, especially during the month of June. This item was recently modified and we began to see some positive trends in the month of July. The other prevention measures remain in place.

While the new measures appear to be generally effective at reducing enrollment students abusing Federal student aid, it is possible that certain prospective students may have been discouraged by some of the new processes. We will continue to monitor the situation and adjust as necessary. Please note that net course registration growth may be impacted by changes to FSA processing and verification requirements implemented by APUS, as well as by competition market conditions and various other factors. Moreover, this situation is a reminder that we are managing several challenges in real time, as we continue to diversify our student population, manage the regulatory change, and expand in a challenging economic environment.

More importantly, APUS has always strived to stay ahead on the curve on matters of academic quality and student readiness, including teaching excellence, learning outcomes, and the student experience. In this period of global economic uncertainty and change, we are reminded of how important it is to manage the institution with a long-term perspective. As such we have made it a goal to further diversify our student population by expanding with civilian communities, broadening our partnerships, and entering new domestic and international markets with affordable high-quality online degree programs.

Now I will turn the call over to Harry Wilkins for a more detailed discussion of our financial results. Harry?

Thanks, Wally. If you will turn your attention to slide six which goes over our first quarter 2012 results, American Public Education's first quarter results included 29% increase in revenues to $75.8 million compared to the first quarter of 2011. The revenue out performance was primarily driven by growth in net course registrations from civilian, military, and veteran students.

Operating income for the first quarter of 2012 increased 14% year-over-year to approximately $14.9 million. General and administrative expenses increased as a percentage of revenue to 21.2% from 17.9% in the prior period. The increase is largely due to investments in Title IV processing automation, ePress development costs, higher bad debt expense, and an increasing cost associated with regulatory changes. Selling and promotional expense as a percentage of revenue was slightly higher in the first quarter increasing to 19% of revenue, compared to 18.6% in the prior year period.

We believe this result illustrates our continued ability to attract civilian students through a relationship oriented approach at a reasonable cost. Instructional costs and services decreased to 36.7% of revenue in the first quarter of 2012, compared to 37.7% during the first quarter of 2011. This decrease was primarily related to the number of full-time academic support staff increasing at a slower rate than revenue, and new full-time faculty engaging in student teaching. In the first quarter of 2012, net income increased 15% to approximately $9.1 million, or $0.50 per diluted share, slightly ahead of our guidance.

Our cash balance as of March 31 2012 was approximately $125.8 million, or $6.91 per diluted share. And no long term debt. Cash from operations for the three months ended March 31 2012 was approximately $14.8 million compared to $19.9 million in the same period of 2011. The decline is largely related to timing associated with the payment of Accounts Payable, and when tuition is remitted to APUS by various tuition funding sources. Capital expenditures were approximately $6.6 million for the three months ended March 31 2012, compared to $3.6 million in the prior period. Depreciation and amortization was $2.7 million for the three months ending March 31 2012, and $2.1 million for the same period of 2011.

On an administrative note, APUS recently completed a Department of Veterans Affairs Financial Aid Compliance Audit with no material findings. Although APUS has not received a formal report and auto letter we believe we had an extremely exemplary audit with only one small fining for an error, which was particularly noteworthy given the high growth rate in VA students at APUS, and the implementation of VA living's stipends for online schools creating additional processing steps.

If you turn your attention to slide seven, we will talk about the second quarter outlook for 2012. American Public Education expects net course registrations by new students in the second quarter of 2012 to be approximately between 2% and 4% year-over-year, and net course registrations to increase approximately between 12% and 18% compared to the prior period. The Company anticipates the second quarter 2012 revenue growth of between approximately 14% and 22% compared to the prior period. Earnings per share for the first quarter, or for the second quarter of 2012 are expected to be between $0.41 and $0.47 per diluted share.

If you turn to slide eight, we will talk about net course registrations by new students. As Wally indicated earlier, our outlook reflects the Company's belief that a growing number of course takers impacted the prior period net course registration growth making for a difficult year-over-year comparison. These course takers are individuals and groups attempting to abuse the Title IV system where they are students who might not otherwise pursue a degree or certificate, and enroll because of the availability of Title IV funds and the economic hardships resulting from our current economic climate. The Company is unable to accurately determine the number of course takers in attendance last year.

However we believe that net course registration by new students in the prior period would have been lower absent this factor. Steps to reduce Title IV fraud and abuse, in particular a measure implemented in late March, have deterred certain prospective students from enrolling in the second quarter of 2012, particular during the month of June. As you can see from the chart on page eight, we have grown consistently in the mid-teens through the first quarter and through April and May of 2012. The decline in net course registrations of new students in June appears partly correlated to the new step in our FSA processing.

Once that step was modified, we began to see more positive trends in the month of July. Please note that net course registrations for May, June and July are not final, and they are subject to change, and even decline as the enrollment and drop periods for these months are still going on. Net course registration growth may be impacted by changes to FSA processing and verification requirements implemented by APUS, as well as competition market conditions and other factors.

If you turn back to slide nine, as Wally talked about, we are assembling the pillars for long term growth. Our mix changes to include more civilian students as our mix changes, we are not only taking steps to eliminate FSA abuse but we are making investments to automate certain processes that may create greater efficiencies in the future, and we are developing our technology infrastructure to support a larger more diverse student population.

This effort combined with the development of ePress initiatives, and the new $50 per course technology fee bodes well for future operational performance, and sets the stage for additional new and existing opportunities. APEI enjoys a growing cash balance supported by positive cash flows, and significant opportunities for future growth and increased efficiency. We believe there is a strong demand for affordable high quality online degree programs.

There is a substantial opportunity to expand our corporate non-profit associations and community college relationships. Our relatively low cost and high quality continues to be a strategic and financial advantage, and the availability of domestic and international opportunities bode well for our future. Operator, at this time we would be happy to answer questions from the audience.

Certainly. (Operator Instructions). Please stand by for your first question. Our first question comes from the name of James Samford of Citigroup.

Thank you. Just wanted to dig a little bit into the fraud prevention efforts that you are taking. I am just wondering how confident you are that some of the changes you are making are not excluding too many of the good students out there, and any kind of sense of, I know you can't provide an organic growth rate, but how should we think about sort of the long-term organic growth rate of AP from a new student perspective?

I think if you look the first quarter of 2012 and then the April/May numbers that we gave you, we felt that we were proceeding with a decent new student growth rate. In late March, we added one more feature which had been recommended to us by a number of non-profit online programs, and it is automated software that is used in the commercial credit card industry. And we implemented it without much of a pile. It was just implemented across the board, and we believe it impacted our June registrations since our FSA students actually have to register about 37 days in advance. We have since modified that particular software, but just to give you an example.

We have some military students, we don't give out that percentage but a percentage of them use FSA in addition to the TA benefits. And one of the indicators we got was when three of them informed us that evidently they were put into a special holding pattern, because they did not identify an address that they had previously lived at, which as you might imagine students move around all the time in the military. So we have made some adjustments to that software and we are hopeful that we can look at our rates, bounding back really to where they were for the first three months of the year. But it is too difficult in some ways to give greater guidance on it only because we now have, for example half of the military branches are approving TA registrations, only 30 days in advance because of the budgetary uncertainty, and we don't have the 60-day foresight into the future like we used to.

Just a quick follow-up. On the tech fee that you are instituting, I think you said September and it is $50 for non-military-related students? Is that what I heard? And is that effectively a 5% to 6% tuition increase, or we should see some kind of increase in revenue per student from that?

That is correct. It would impact our undergraduate civilian students, non-TA students, non-tuition assistant students and it is $50 per course. So yes, that is revenue.

Great, thank you.

Thank you for the question. Our next question comes from the line of Suzi Stein of Morgan Stanley. Please proceed.

Hi, can you give us an update on Wal-Mart, and how that is proceeding?

Sure. Wal-Mart is a relationship that has gone slower I think than anyone, us or them anticipated. But primarily because of the slow rollout of their reimbursement program. We are holding steady in the first quarter about the same number of registrations as the year before, and I think we are going to hold steady until they begin either promoting the program again or perhaps roll out their reimbursement program, which is really not within our control. I think that on a good news perspective, there was a very favorable article in this year's Higher Ed, which talked about the relationship, and I think that we continue to have good dialogue, so I think it is just a matter of time where we have been invited to go down to Beckenville for their Annual Meeting which includes an annual employees meeting and present diplomas on the first graduates, so I think there will be another promotion of the program after that graduation which takes place on May 29 and 30.

Then I think it was last quarter that you said by Q2 you thought you would be kind of 98% through dealing with this fraud issue, and rectifying that. Do you still think you're on track for that?

Yes.

I believe that the number of steps we have taken have really curbed the potential financial aid abusers and discouraged them. Unfortunately we may have also discouraged and we believe we have discouraged some potential good students. This is not an exact science. We are changing our intake process, and adding a lot of hurdles to get through, to make sure that only valid students get through, and there are some ramifications to that. We may have overdone it a little bit with that software we implemented in March, but we are adjusting. I believe in the long run we certainly are going to fix the problem of financial aid abuse to the extent we can, but hopefully we can do that without impacting the enrollment of good students.

Okay. Thank you.

Thank you for the question. Our next question comes from the line of Bob Craig of Stifel Nicolaus. Please proceed.

Good evening guys. Wally, I was wondering if you could embellish a little by on that software package. What was the designed measure? How did it screen out unwanted students?

It is a software package that is used the by many of the commercial credit card companies, and it is really identity verification, Bob, so what it does is it takes public information that all of us use when we apply for credit and other things, and during the FSA application process, and this by the way this only impacted students who indicated they were applying for Federal student aid, it would randomly ask you questions such as, are you the Wally Boston who once lived at 111 Pine Street? And actually it gives you four addresses and asks you to pick the correct one. Three of them being wrong, and if you don't do that, then it puts you in a holding pattern basically, where in order to get out of that holding pattern, you have to deal one-on-one with one of our financial aid representatives. So it was another way to, we had received the recommendation from Rio Salado, and a couple of other schools that this was really helpful software to implement, as well as some of our dealings with the Department of Education. And it is very accurate software except we probably had too many switches that were turned on, and so we have now removed some of those questions, and are going to be much more deliberate in tweaking that software. We haven't thrown it out, but we are just not going to use it at full strength, because an example that I gave earlier with the three military students who called us, who got put into the holding pattern because they didn't match up the address correctly. It asks a number of questions and I guess some of our students found to be fairly intrusive, and didn't like it.

Are the other filters specifically those designed to be more academically oriented, are those working well?

They are working great.

Okay. And how many students did you filter out this quarter? Do you have any idea?

We are still going through that but it was a good number.

Okay.

It was reduced from the numbers that we had in the third and fourth quarters.

Okay. One more quick one. Your comparisons in the second half of the year would appear to be even more difficult than the first half. Do you feel comfortable in your ability to grow new students in the second half?

Well, I think, we can increase the number of new students that we are bringing in month-by-month, Bob, but comparing them to numbers that I think the one quarter last year where we only had one measure in place where we were actually able to approximate how many course takers we had, I think we had, that was the third quarter and we had 52 and we estimated that number might have been 37% or 38% growth. So we have put so many measures in that we are pretty comfortable that if people are getting through, it is a very small percentage. But if you look at the data for the first five months of this year where we put all of these processes in place, we can track in numbers month-by-month but I am not sure from a comparative perspective since some of those months in the summer and the first part of the fourth quarter were so high, in terms of new students, it is tough to make that a meaningful comparison.

Bob, I would say that I think we're growing our good students compared to last year. If you could separate the good students from the course takers last year, I think we are growing our population of good students this year.

Okay, great. Thanks, guys.

Thank you for the question. Our next question comes from the line of Jeff Volshteyn of JPMorgan. You are live on the call. Please proceed.

Thank you. If you would look at student persistence in the quarter and what you see for the second quarter, what do you see there? Do you have your activities for fraud activities helps in persistence?

Student persistence measuring it quarter-by-quarter is actually not a good indicator for us because of the way our students enroll, particularly those in the military. So we typically, I can just tell you that even our internal measurements on that aren't accurate. We look at a cohort of new students in a year that it starts, and then look at them a year later after we subtract out the military students who ask for deployment deferrals. So we believe that with our good students, our retention continues to improve. But we certainly will have some of the new students from the second half of last year who are not going to persist because they really had no intent to matriculate to earn a degree. Quantifying them is fairly difficult. And we have looked at ways to quantify them, and come up with the exact numbers is not a meaningful calculation.

Okay. And as a follow-up, when I look at the second quarter guidance for revenues, it seems to be much wider than in the past. Can you give us the thought process as to what goes into the wider range?

Well, yes, I mean we are in a period where the enrollment is a little bit more volatile than in the past, so that is really what went into the thought process. We still are several weeks out for June enrollments. We have taken steps to try to correct what we think was maybe an overreach of trying to weed out bad students, so in May we haven't even had a drop here for May. May, our classes start the first Monday of the month. That was May 7. That was just this past Monday, so they have a week to drop or add classes, and we don't even know what May's enrollment number is going to be until next Tuesday morning. Without knowing exactly what May's enrollment is, and with June being a lot more volatile, or a lot more volatile than normal, we just thought it was prudent to give a wider range.

Okay, thank you very much.

Thank you for your question. Our next question comes from the line of Adrienne Colby of Deutsche Bank. Please proceed.

Thanks for taking my question. Last quarter you had talked about pulling out of the markets in the Southeast, where I think you had seen a higher prevalence of fraudulent enrollment, in some subsequent presentations you talked about moving back into a few of those. Can you just update us as to where you are at in terms of that marketing?

Sure. We are pretty much marketing in all of the markets in the Southeast, except for the state of Mississippi. Where it is not just us, but many of the other schools that have been willing to talk about the problem have had extreme problems with organized rings there. We do have though, some phone blocks on certain area codes in some of the Southeast where we believe there are rings of these types of students. Those blocks actually go into a voicemail box, so that they don't interfere with our day-to-day processing. But we do follow up on every one of them. And the ones that are legitimate, we call back and the ones that aren't legitimate, we just don't call back. But we are, all of our advertising switch is on everywhere in the Southeast with the exception of Mississippi.

Great. Have you had to increase the number of folks internally that are working in these administrative roles to help handle this?

What we did, I don't know I don't have an exact number unless Harry does, but we haven't decreased them. We hope that all of our steps that we have taken to block them once the attempts die down, that we can actually move them over to normal roles, either in admissions or financial aid processing, and obviously they have been well trained.

Thank you.

Thank you for the question. Our next question comes from the line of Jeff Silber of BMO Capital Markets. Jeff, you are live on the call. Please proceed.

Thanks so much. Just wanted to circle back to the issue on the new step in the FSA processing. Can you tell us roughly when that software was implemented with the full filters, and when you turned the more egregious filters off? I am trying to get an indication of what the impact might be on the next quarter?

We turned it on on March 22 and I turned it off a week ago Tuesday.

Okay. Alright. Thank you for being so specific. I appreciate it. In moving back to the course technology fee, just to double check, this would apply to those students that get funded through the Veterans Administration, correct?

Correct.

Okay. And how are you going to be recognizing the revenues on this?

Harry, we will recognize it according to GAAP.

The tuition, the technology fee?Yes, it will be recognized over the course, the same way we do with tuition.

Okay, great. And have you done any studies on the potential elasticity of demand by implementing this?

Because we are only doing it for undergraduate civilian students, most of whom, the vast majority of whom use Title IV funds, almost all Title IV recipients borrow excess funds, and it will really reduce the refunds we give the financial aid students. We don't anticipate it will have much of a impact on demand.

But we did a competitive matrix, and many of the schools that are direct competitors of ours have technology fees and those technology fees range from $100 to $150 a year, to as high as $1,400 a year.

You have to realize even with the technology fee we are still about 20% less than in-state tuition at public universities. And this is the first increase of any kind we have had at the undergraduate level in 11 years, and it is about 6%. So while we think it is definitely needed to help offset the cost of increasing technology, and some of these regulatory costs we are incurring, we think our student will understand that, and there is still no place else they can go and get a more affordable education.

We will be outlining in a letter to them the existing student what we are doing, and also the improvements that we have made in technology.

If I could just sneak in a numbers question if I turn off my phone, sorry about that. Just for the rest of this year, what should we be modeling for capital spending and depreciation and amortization?

We haven't given guidance on that, but I think our cap, we are building, our big CapEx spend has been our building, our new Finance Center in Charles Town, which was about an $18.5 million project, of which we still have about $5 million to go and we plan to be in that building in September. After that, we really don't have plans for a lot of building CapEx. Our IT spend, we have announced previously our ongoing IT CapEx spend is about $6 million of maintenance a year, but then depending on what new technology we need, we add on to that. But we really do anticipate if we don't do any near-term construction, that our CapEx spend should come down next year. So we should have pretty good cash flow certainly next year, and then we have good cash flow right now.

Alright, great. Thank you so much.

Thank you for the question. Our next question comes from the line of Corey Greendale. You are live in the call. Please proceed.

Thanks, good afternoon. A few questions on different topics. First of all I was hoping, it sounds like that fraud prevention measure, the software that you talked about that was folks is discussed on the FSA students. I was wondering if you might give some color on what happened with the TA students who weren't using Title IV through the three months of the quarter?

Of the first quarter?

No, the April, May, June?

I don't know if we gave that number or not, Corey, but the first quarter we had single-digit growth and we are still continuing to see growth with the TA students. I imagine unless someone here has the exact number, that we will see similar growth in the second quarter with the TAs.

We haven't given that out with our guidance. Before we give it out historically once we know what the numbers are. We still have quite a ways to go for the quarter.

I have been trying to get a qualitative sense. You didn't the same kind of precipitous drop-off in June?

No, not at all. We only asked those questions when someone indicated they were applying for Federal student aid. Some military students do use both programs, TA and FSA, and that was where we realized that perhaps some of the screens were a little too harsh, when we had some military students who were in both programs, who emailed us to indicate they had problems.

Okay, good. Second question is, bad debt which I think was up to 4.5% of revenue. You talked Harry on the last call you mentioned I think 3% to 4%. So I think it is a little bit above what you were expecting. Can you just give us a sense with the measures you have in place, do you expect that to fall off pretty soon pretty dramatically, or what should we expect on bad debt?

I don't know how dramatically. We said from the very beginning that if we had 90% of our students were civilian students, we would have about 5% bad debt. Now using that kind of ramp-up, we should be about 3% right now. I would say if it hadn't been for these course takers who sometimes drop out, and we end up having to refund money, and trying to collect from the student, our bad debt would be about 3% right now. It was 4.5% for the quarter. I would expect it to come down once we get the pig through the pipe bomb with these course taking students, which should be in the next quarter, quarter and a half. I would expect to see some bad debt improvement. This time last year it was 1.1% of revenue. We are not going to get back to there again because we have twice as many civilian students that we are had this time last year. I would expect it to get closer to 3% in the second half of the year rather than closer to 5%.

Just to be clear, and to kind of orient this discussion, even though the filtering out the stipend chasers, and you had the growth last year from the stipend chasers, so maybe it hits the new student number, but filtering these people out, you actually lose money on these people, because of the return of Title IV funds?

Yes, it depends on if they have an earned F or not, believe it or not. It really gets technical but yes, generally you do lose money on those students, because you actually have to return the money.

So it might affect the student number but bottom line investors should not be upset about filtering these folks out?

No, that is a very good point. That is exactly right. They hurt the quality of the classroom, and they don't help the financial statements.

I just one quick one, it is a little bit of a hypothetical question, but since you mentioned it in the Q, the Department of Defense doing this report about what would happen if service members have to pay 25% of their expenses. Could you just maybe talk a little about if they end up going a route how you might respond, and just some historical perspective on, how the Company back in the days when the TA didn't cover the entire amount of your tuition, what that did to demand and what we should expect if that were to happen?

I don't think anyone knows. And by the way, we haven't seen that report yet. Because I think it was actually delayed. It was originally supposed to be done in February. And they have pushed the date back. But at the CCME conference, they spoke about the fact that there was another study going on that was examining the tuition assistance program in light of all benefit programs, and that they weren't going to pick on it individually, and refer indirectly to this particular study. But we knew that was initially a potential situation or risk, and I think we have got a whole bunch of stuff in our Risk Factor section on that. We talked about our goal would be to try to refer people to the GI Bill which they can use when they are on active duty. We are going to continue to track it. We don't believe that it will happen before the end of this fiscal year based on verbal assurances that we have received. Of course, it is an election year so anything could happen causing it to change. But we have as you might imagine, we have done a lot of snare planning and we have analyzed the different ways and I just think that rather than play what-if analysis on this call, we will just tell you that we have done that internally and we will continue to ensure that we stay very competitive within reason, to our market to serve our service members like we have for the last 20 years.

Alright. Thanks very much.

Thank you for the question. Our next question comes from the line of Gary Bisbee of Barclays. Please proceed. You are live on the call.

Hi, guys, good afternoon. I guess the first question, after you have made the adjustments to that software package and you said that the leading indicators were applications, or whatever it is, for July were looking better, can you give us a sense of what the growth rate year-over-year was, or is at this point for July?

No. It is way too early to give July numbers out.

Let me take another crack at it then. I think you said in another comment that the first five months growth was sort of a reasonable range that mid-teens. If we looked for the back half of the year, the 38% you said in the third quarter was you thought is a better estimate of what the real students were, it looks like there were 2,400 there that were not good. Would it be a reasonable way to think about the comparison in the back half of 2012 being, pulling out that 2,400 students, and then growing it at a mid-teens rate off of what you would be left with that? Is that a reasonable way to that I about it right now? I think what that would imply is low single-digit growth in line with what you have guided for Q2?

Right now there are just too many factors that impact those numbers for the third and fourth quarter for us to speculate at this time. What we can say at this point is that we have seen some improvement from July over June, and as soon as we started listing that procedure that we put in place in March. So to say whether July is going to get closer to the first quarter or just a slight improvement over January, it is too soon. And I am not going to speculate on our third and fourth quarter registrations at this time.

Could the improvement in July be down but down less than June?

I am not going to speculate. We have 20% of our registrations in for July. It is really too soon to speculate where July is going to end up.

Okay. Then I guess can you give us an update on the ePress initiative, and I guess what I am most spoke focused is are you on track with what you laid out a quarter ago that you would likely be able to see somewhere in the ballpark of $4 million savings in the second half of 2012 from that initiative?

Yes. As you might imagine when we had gave out that number, we held our academics to a pretty tight budget. We just looked at that last Friday and still think we are on track and if they do a good job, we would like to get them better than that track. But for right now, we are still on the number we gave out last quarter.

And then just last question for me. Any comment on the proposed bills that we are looking at recruitment of military students that are going on in Congress? Any thoughts on that?

I think the bills really don't have a chance given the partisan nature of Congress currently. But I think the Executive Order was something that everyone, the President showed his true colors, and issued the Executive Order for what he thought he could issue it for, so we are awaiting to see the details of the Executive Order. I mean a lot of the things that he cites as good practices are things that we do already. At the same time, there are hints that there could be further regulatory hassles, steps we have to take, web pages we have to update, even if you are as transparent as we are. Until we get the final details of those along with, I mean he said the regs have to be out in 90 days so we will see. Right now, we believe on the surface that this was just designed to get rid of the bad players. At the same time we haven't seen all of the details of things we have to comply with.

Okay. Thank you.

Thank you for the question. Our next question comes from the line of Jeff Meuler with Baird.

I just wanted to be clear that the new student number for June, the -25%, I wanted to make sure, that includes the TA and VA students and the new student number, correct? So the FSA students new students are probably down something like 40% in June, is that directionally correct?

That is directionally correct.

And I guess what, did it kind of fall off as soon as you turned on this new measure? And what I guess took so long, I know a month is not that long but if went from +17 to -40, what took as long as it did to kind of make the revision?

Again you have to remember that the June comp, June last year is when we started to see these stipends. A 25% decline year-over-year is against a tough comp. That is a number looks a little worse than it might have with the actual numbers. We felt we would give it a month and see how it went. And we left it on a month, and maybe we should have turned it off sooner. But one thing that is also a little bit different, is that we did have I think it was four days less registration this June than last June, if you look at when the first Monday of the month is. So when we are registering 400 or 500 students a day, there is a little bit of that in there too. And then the other thing we don't know is we have almost twice as many civilians as we had last year, and we may start to see a little more seasonality in June and July. Because, the civilians want to go back into the population and in my formal life when I was in straighter education, we had quite a bit of civilian students, had quite a bit of seasonality and June and July were not historically good months. We had a lot of factors playing into it, and it is we are trying to prevent fraud students, but at the same time we don't want to make it too difficult for our students to get in. We tried the software package. It seemed to be a little invasive. It took about a month to realize that, and then we set it back. We are still going to use it, but try to make it a little less difficult and invasive on our good students. It is not an exact science. We are a managing the Company in a difficult environment. We are trying to do the right thing the protect Federal money and we also need to grow the business. I think we are doing as good a job as we can right now.

I am not trying to grill you too much on that. I was just trying to figure out, you know, the magnitude of the swings. Is there anything else other than the day's impact, and some difficulty of trying to figure it out because of potential seasonality, but did you see anything that indicated other signs of incremental weakening, or as far as you can tell, was it kind of isolated to this measure that you put in, and then just some of the other factors that you had already mentioned?

I mean no, overall, I will say look, just to give you an idea, in April of last year, our new students were up 19% year-over-year. In June they were up 62% year-over-year. So June is when we really started to see a big influx of these last year, and we are comping against that number. We are down 25% against that number, and we also think we kind of overdid it with the gate keeping function. So at this point, this is all happening within the last three weeks and we are taking the appropriate measures to make sure that we get good students and good growth going forward, and this is what we have to give a call today with guidance, and this is the best we can do right now.

Okay. That is very helpful color. And then just finally on G&A expense, obviously you had quite a bit of build over the last three quarters. Anything you can say on the futures trajectory, kind of the rate of growth from here?

We ramped up in FSA staff because of the huge increase in FSA. We also ramped up in VA. We had a significant increase in bad debt year-over-year, and we have also ramped up in IT, and we had a little bit of color on last quarter's call when we talked about in the first part of year with the IT, you aren't allowed to capitalize any of those costs on projects until the projects are speced out, and then you are actually mandated to capitalize the costs that relate to the programming once the project engages. So the first quarter, first couple of months of this quarter were mainly project planning, and so we expect to see some shift related to that as well.

But again we are only giving guidance for the second quarter but it is not difficult to model if you just take some of the information we are giving that $50 per course for about half of our student population, revenue increase with the new technology fees starting in September, about $4 million in the second half of the year, or $8 million in annualized savings from the ePress initiative, and then we should start seeing some operational improvements next year from less bad debt expense as we get rid of the course taking students, and also some operational improvements in processing financial aid, as we implement some of these new technologies. So I think we are setting a stage for good potential for margin improvement going forward. Right now we are not realizing it.

Okay. Thank you, very helpful.

Thank you for the question. Our next question comes from the line of Kelly Flynn of Credit Suisse.

Thanks. A couple of questions. Just back to the topic of the Executive Order issued a couple weeks back. Can you speak specifically to the part of the Order relating to changing refund policies so that your own refund policies need to be more in line with the Title IV return of funds policies? Have you looked that in detail, and do you have any views on whether or not that is significant for cash flow or revenue recognition?

We read the Executive Order. That was the only thing we saw in there that could cause us to change that we are aware of that could cause us to change potentially some of our business practices. However until the specific regulations come out we are not going to know what the impact might be. But generally those refunds impact students who aren't doing well in their first course or two, so the impact in the long term is overall is fairly minimal.

But I mean the way it reads, it looks like it could cause you to have to change your revenue recognition because you won't be able to collect that money anymore?

It has nothing to do with revenue recognition. It might increase bad debt expense. It would have nothing to do with how we recognize revenue.

Okay. But your basically just waiting until the final language comes out to figure it out?

Yes.

Alright. That is fair. And then I want to go back to Gary's question related to the new registrations in the back half of the year. I respect that you don't want to give guidance, but I am kind of concerned that you are going to have trouble managing expectations, because you did say in your remarks you thought mid-teens rates from early in the year were reasonable, and that you were optimistic that you could return to prior growth rates. I feel like you kind of implied mid-teens growth but--?

Actually we said growth in numbers. We did say that the growth rates for the first five months, but then those were the five months where we didn't have these course takers flooding in, and so I think it was Bob Craig who asked me the question that I said I think we can grow in numbers but the percentages are going to be really, really tough beginning in June, because of the course takers last year.

It is growing the good students is what we need to concentrate on and I think that is where we are focused right now. How that plays out and contrasts with last year for the next two quarters is going to be interesting and difficult to quantify.

Okay. That is fair. And could I just end with one final one related to cash flow. You talked about I think the payables timing changing, but then also mentioned changes in when tuition is remitted from various funding sources. Can you elaborate on that?

I can. It is much more are simple, people read a lot into these quarterly cash flow fluctuations, but the simple fact is we pay our Accounts Payable for our vendors every other Friday, and it is about $4 million to $5 million usually. Last year, for instance, April 1 in 2011 was a Friday. So on March 31 we hadn't paid that $5 million. This year, March 27 was a Friday, we paid $5 million. So you could have a $4 million or $5 million swing in your Accounts Payable at the end of every month. It works on the other end, too. We collect about $4 million or $5 million a month from Air Force Tuition Assistance. We bill them, after the add/drop date, which is the second Monday of the month. They pay sometimes within 14 days, sometimes within 28 days, so if we get the check for $5 million on the 30th of the month, we will have $5 million more in cash. If we get it on the second of the following month we will have $5 million less. Really it is that kind of simple just timing differences that can make numbers look strange, but really has no impact on the business overall.

Okay. That is fair. Thank you very much.

Thank you for your question. The next question comes from the line of Brandon of William Blair. Brandon, you are live. Please proceed.

I want to hit on the student registration issue for a second. I recognize that the June new number was down as big as it was and I am guessing obviously there was an impact on the total student number, but it seems like an awfully big deceleration in the total student number, unless there are people who were there a couple of courses ago that this software is now somehow catching. I am trying to disaggregate the impact of the software on all the changes you put in place on the new versus the total population, and if we should see the same kind of trajectory in the total student recovery once this impact is comped, or if there is something else going on?

It could have impacted returning, if they are in a new award year, if they had to do a new SOI, a new statement of intent, it would have impacted returning financial aid students also. But only ones who were trying to process a new financial aid application between March 22 and the first week of May, but it would have had some impact.

Alright, fair enough. Any thoughts on the upcoming gainful employment data release kind of timing or content, or what you guys expect to see from all that stuff?

I mean in the preliminary numbers we were fine on all accounts. I think the interesting thing that we can only speculate on is that now they are going to issue Social Security earnings data by degree program graduate, and while our overall debt numbers for our graduates are still pretty low, the one concern I have and I think it applies to anybody, not just us, is if you have a particular program where you have graduates who may set up their own businesses, and a perfect example I have is we have a degree in child and family development, where we believe that a number of the students in that program actually set up daycare centers either in their home or somewhere else and they are self-employed, so they may not have as low as our tuition is, and as low as our debt is, they may not have significant Social Security income. We have never seen that data before so we will have to look at it and see what we think. Other than that as the one example, I think until we see the data we don't expect any surprises, other than something with an entrepreneurial spin.

And then from a cost point of view a couple of times on the call you talked about different ways or different areas of investment, including financial aid processing, I would imagine there are still some lingering investments with the Wal-Mart contract, and those kinds of things. Out of the ordinary course of investments, how should we think about the incremental investment here in 2012 versus 2011? Obviously not including ePress in this, but are you guys going to continue to make out of the ordinary course of investments in financial aid processing and marketing technology, those kind of things in the back half of the year, or do you think you have kind of hit a peak and we shouldn't see a whole lot of incremental spend?

I think our capital expenditures for software development is going to be pretty steady consistent through 2012. But we are really trying to catch up on being much more efficient at processing financial aid and some other financial functions. Assuming that we are able to get our projects done, I think it will provide us benefits in 2013.

And then final question for me in terms of faculty where do we stand now part-time, full-time, are you guys happy with where that mix stands? And I don't think you guys have made any changes to faculty compensation levels recently, I just want to make sure?

We have not changed the faculty compensation on the adjunct side. We are now up to 450 full-time faculty who are salaried and get increases. But we actually think with our ongoing enrollment and the number of programs we have, that is designed to improve quality, and if we improve quality we believe we will improve student persistence. So we 450 full time and we have approximately 1,400 part-time faculty members as of the end of the quarter.

Okay. Thanks a lot.

Sure.

Thank you for the question. As we have no further questions in the queue at present. (Operator Instructions). As no further questions have come through, I would now like to turn the call over to Chris Symanoskie for closing remarks. Please proceed.

Thank you, Operator. That will conclude our call for today. 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, ladies and gentlemen. That concludes the presentation for today. You may now disconnect. Good day.