American Public Education Inc (APEI) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2013 American Public Education, Inc. earnings conference call. (Operator Instructions). I would now like to hand the call over to Chris Symanoskie, Vice President of Investor Relations. Please proceed.

Thank you, operator. Good evening, and welcome to American Public Education conference call to discuss financial and operating results for the quarter and year ended December 31, 2013. Presentation materials for today's call are available in the webcast section of our Investor Relation 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 subsidiaries that are not historical facts are forward-looking statements based on current expectations, assumptions, estimates and projections about American Public Education and the industry. These forward-looking statements are subject to risks and uncertainties that could cause actual future events or results to differ materially from such statements.

Forward-looking statements can be identified by words such as anticipate, believe, could, estimate, expect, intend, may, should, will and would. These forward-looking statements include, without limitation, statements about the first quarter of 2014, 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 risk factors, including the risk factors described in the Risk Factors section and elsewhere in the Company's annual report on Form 10-K filed with the SEC 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 Rick Sunderland, our Executive Vice President and Chief Financial Officer . Also in attendance and available for questions today is Harry Wilkins, our Executive Vice President, Chief Development Officer and CEO of Hondros College Nursing Programs

Now I will turn the call over to Dr. Boston.

Thanks, Chris. Good evening everyone. I will begin our call this evening with an overview of our fourth quarter results and provide a brief update on our long-term strategy. Then Rick Sunderland, our Chief Financial Officer, will discuss our financial results in more detail and provide perspective on our outlook for the first quarter of 2014. The higher education environment remains challenging with uncertainty surrounding student financing, possible regulatory changes and consumer cautiousness as a result of economic uncertainty. As previously announced, APUS net course registrations in the fourth quarter 2013 were adversely impacted by the partial government shut down which resulted in a suspension of Tuition Assistance programs administered by the Department of Defense. At the same time we have made good progress with respect to growth of civil or non military students and our long-term strategic plan.

For the three months ended December 31, 2013, our overall net course registrations decreased 9%, and net course registrations by new students decreased by 10% year-over-year. The decline was driven by a 39% decrease in net course registrations by new students using DoD Tuition Assistance or TA, and a 35% decline in overall net course registrations by students using TA compared to the same period of 2013. However excluding active duty military students using TA, net course registrations and net course registration by new students increased 6% and 3% respectively.

We are generally pleased by the enrollment rates of our civilian students. Net course registrations and net course registrations by new student in all civilian pay type categories exhibited positive year-over-year growth in the fourth quarter of 2013. Net course registrationsby new students using Title IV VA education benefits and cash or other sources increased approximately 1%, 24%, and 6% respectively over the prior year period. Total net course registrations by students using Title IV increased slightly less than 1%, and net course registrations by students using VA education benefits and cash or other sources increased by 28% and 2% respectively over the prior year period. Compared to the third quarter 2013, we also realized an improvement in the growth rate of net course registrations by new students and all civilian pay type categories. Year-over-year growth in net course registrations by new students using cash turned positive in the fourth quarter 2013 after five consecutive quarters of declines an early sign of improved traction with strategic relationships. For the full year 2013, 66% of our overall total net course registrations were by civilian students.

I would like to take a moment to discuss what we understand to be the most recent modifications of the Tuition Assistance program by specific branches of the military. Prior to these changes the TA program generally covered 100% of tuition costs for higher education up to $250 per credit hour and up to a maximum of $4,500 per year. The branch specific modifications include but are not limited to the following one, the Army has reduced its annual TA limit from $4,500 to $4,000 and limited the maximum number of courses funded to an equivalent of 16 semester hours per year. Two, the Air Force added a stipulation that it will no longer authorize TA for an associates degree if the service member already has a Community College of the Air Force degree.

Three, the Coast Guard has modified its TA policy to cover 75% of tuition cost up to $187.50 per credit hour and to cap the maximum Tuition Assistance benefit at $2,250 per year. In addition active duty or extended active duty members will be eligible to use TA only for courses that lead to an initial associates, bachelors or master's degree. Four, the Marines must have a minimum time in service of 24 months before being eligible for TA and the program will now only be funded on a quarterly basis. Number five, we are not aware of any recently announced changes by the Navy, although sailors can only use Tuition Assistance after 12 months of service at their first duty station. Additional details about these modifications have also been provided in our 10-K.

As a reminder the typical military students at APUS takes approximately three class or nearly nine semester hours per year on average and is generally an older student who is not a new recruit to the military. We are not able to estimate the effect of these changes to DoD Tuition Assistance programs or whether the services would impose other criteria in addition to the level of reimbursement that would impact enrollments from service members. Moreover, we believe the continued softness in the active duty military segment is related to at least in part to confusion about eligibility and general uncertainty regarding the Tuition Assistance program funding. Despite this uncertainty we believe a measure of stability may return to the TA program, and we remain committed to serving the military community through our military outreach team composed of 22 professionals who are dedicated to helping service members evaluate their educational goals and the ability of AMU to meet those goals.

Since the beginning of 2014 APUS has received approval to offer several important degree programs; a master of public policy, bachelor of science and master of science and cyber security studies bachelor of science and natural sciences and associate of applied science and health sciences. These programs most of which will be open to enrollment this summer, further diversify our program offerings and expand our emphasis on high growth fields including STEM programs. Further more, the new programs represent areas of strategic importance to our military and public service communities.

Our recent hiring of Dr. Clay Wilson to serve has program director of cyber security programs at APUS underscores our focus on and success at expanding our brand and leadership position in several key growth areas. Dr. Wilson is the leading national cyber security expert and former program director of the cyber security policy graduate program in the University of Maryland University College. As a former researcher at the Congressional Research Service, Dr. Wilson analyzed cyber intelligence reports for Congress and NATO committees on technology and policy for net-centric warfare, cyber security, nanotechnology and vulnerabilities of high technology military systems and critical infrastructures.

In addition we have recently hired Mike Netzer as Senior Vice President of Academic Program and Outreach. Mr. Netzer previously served as the academic dean for the school of Applied and Information Technology at the Community College of Baltimore County. He taught engineering and entrepreneurship as an (Inaudible) professor and holds several Board positions including the UMBC College of Engineering and Information Technology Board. He also previously served on the APUS Information Technology Industry Advisory Board. His talents will focus on expanding our community college outreach efforts and developing our University's professional development initiatives.

Corporate and other strategic relationships remain a key focus of our unique approach to attracting students with greater college readiness. In the fourth quarter our strategic relationship outreach team established corporate partnerships with InTec, LLC, a company focused on training and analysis of intelligence and surveillance systems and the National Interscholastic Athletic Administrators Association a national professional association for interscholastic athletics. In addition our team established a partnership with the FBI Intelligence and Law Enforcement Training Seminars, INLETS, program to provide in service training to FBI special agents. APUS became one of only three strategic partners of the California Chiefs Police Associations and built partnerships with several Chiefs Police and Law Enforcement Associations in eight states.

Our plan to expand access to international students has made a strong step forward with the hiring of Paul Humphrey as our International Education Business Development Executive. Having workedon several projects with the senior leadership team of New Horizons, Mr. Humphrey will lead our relationship with New Horizons as well as work to pursue other International partnerships. Mr. Humphrey is a highly respected senior management professional with 25 years of experience securing, establishing and managing education projects in companies in the Middle East, Canada, Southeast Asia, Africa and the United Kingdom.

I am pleased that we have made significant progress towards regulatory approvals our acquisition of Hondros College Nursing Programs which for now we will be referring to as Hondros Nursing for short. The Accrediting Council for Independent Colleges and Schools, ACICS, will conduct a site visit within six months after the change in ownership. We also obtained approvals for the change in ownership from the Ohio State Board of Career Colleges and Schools and the Ohio Board of Regents and we satisfied the requirements of the Ohio Board of Nursing. We timely filed a change in ownership and control application with the U.S. Department of Education, and received a temporary provisional program participation agreement which allows Hondros Nursing to continue to participate in the Title IV programs pending the Departments' action on the change in ownership application.

We continue to be impressed by the capable leadership team, knowledgeable faculty and ambitious students we have encountered. I am also excited our former CFO, Harry Wilkins has taken on the role of Chief Executive Officer of Hondros Nursing and Chief Development Officer for APEI. In these roles he is leading our campus based nursing school and he is working to guide our efforts to consider and pursue strategic investment partnerships and acquisitions.

Moving on to slide number four, APEI's core strength. While the education industry undergoes rapid change, the key components of our strength remain unaltered; our affordability, unique degree offerings, innovative culture and focus on academic quality. We believe these attributes will continue to be the bedrock for our future success in this challenging landscape. As we seek to expand and diversify our revenue sources our continued attention to academic quality will be paramount.

In the fourth quarter 2013 we continued to focus on quality with progress on projects ranging from those designed to improve student persistence to development of innovative resources for increasing student interactions and experience as well as research on innovation and best practices in online learning. In 2013 APUS earned the Sloan Consortium Effective Practice Award for creating an adaptive Online Learning Contact Hour Calculator. This is the third time we have received an Effective Practice Award from the Sloan Consortium the most any institution has received. The Online Learning Contact Hour Calculator is a tool created for faculty and administrators to determine the expected time students contribute to their online course work including both in class equivalent time and homework time. The instrument is used as part of our overall effort to ensure academic quality and comply with the Department of Education (Inaudible) earning regulations.

APUS continues to engage the broader academic community in meaningful and mutually beneficial ways. We joined the first cohort of HLC Persistence Academy and launched a retention task force to further improve student outcomes. In addition APUS is a member of the Inaugural Program of the Gateways to Completion, G2C, sponsored by the John Gardner Institute and work began on the G2C in late Q4 2013. Together with these inaugural groups we will use the research findings to improve the quality and completion rates of some high volume courses that have historically exhibited high instances of either dropouts, withdrawals, incompletes or low grades.

Our innovative culture in academics is leading APUS to develop a new competency based program appropriate to specifics disciplines and professional practices. The competency base model allows for students to reduce time to degree complete by demonstrating competencies already achieved through life and professional experience and learning. In 2013 we applied for several additional patents related to our automated practices. We also launched the pilot program with Fidelis Education to provide a more social on boarding and student support experience. Later this year we plan to launch the next phase of our automated transfer credit evaluation system to further reduce the time and workload requirements of this process. We continue to invest to advance our educational technology through the creation of interactive learning activities and simulation resources that are being added to high volume courses. Our instructional design and academic media team are developing these resources internally and in partnership with other third parties including other academic institutions. We have plans to add these resources to at least 100 courses in 2014 as well to further develop the capabilities of faculty for continued innovation in their classrooms.

Our continued focus on teaching excellence also remains a top priority. Our goal is to continue providing our faculty with development courses and tools needed to be highly effective. In 2013 our faculty published more than 400 books and papers and earned nearly 400 awards for their professional practice, research or community service. Faculty at AMU and APU presented at more than 1,700 conferences, work shops and panels throughout the year. Thanks to the hard work of 430 full time and 1820 (Inaudible) faculty members at APUS approximately 9,700 students graduate with a degree from either AMU or APU in 2013. We now have more than 37,000 alumni that are making a difference in their communities and in their professions.

Moving onto the slide number five, advancing strategic goals. In summary in the fourth quarter of 2013 we were adversely impacted by the temporary suspension of TA and the uncertainty regarding Department of Defense funding of Tuition Assistance programs. We also showed positive signs of improvement with year-over-year growth in net course registrations by civilian students using Title IV VA education benefits and cash or other sources. To further expand APUS we must continue to expand our strategic relationships and prove persistence and continue to innovate. We are very pleased with our new subsidiary, Hondros Nursing.

We believe the institution is positioned to serve a greater number of perspective nurses as well as serve as a platform for future healthcare program expansion. I am also pleased with the progress we have made with regards to our program diversification as well as advancing our relationship with New Horizons. In short, I believe we are well positioned to leverage our core strengths to expand access to educational opportunities by further diversifying our student population, expanding in the high demand fields and branching out in to new segments through strategic partnerships, investments and acquisitions.

I am pleased by the smooth of transition of Rick Sunderland to serve as APEI CFO and Harry Wilkins as our Chief Development Officer and CEO of Hondros Nursing. As you may know, Rick worked with us as a consultant and SVP of Finance prior to taking on the role of SVP and CFO. I also worked with Rick before in the healthcare industry and have the highest confidence and respect for his abilities. I am happy to welcome him now to our call. Rick?

Thanks, Wally. I appreciate that introduction. I want to thank you for your support and thank Harry for the strong foundation he put in place, which has served to support an efficient transition for me to CFO. I am looking forward to meeting many of our investors and analysts by phone, at conference and in person in the coming weeks and months.

Let's go to slide six, financial results summary. American Public Education's fourth quarter 2013 financial results include a 4% decrease in revenues to $82.9 million compared to $86.0 million in the prior year period. Revenue decrease was primarily driven by a decrease in net course registration by students using DoD Tuition Assistance or TA benefits. As you heard earlier net course registrations by TA students decreased 35% year-over-year. As discussed in the 8-K filed on October 15, 2013, we believe approximately 13,100 net course registration were dropped as a result of the temporary suspension of TA. This represents approximately $10 million in lost revenue for classes starting in October 2013. Operating income for the fourth quarter 2013 was approximately $14.5 million compared to $21.4 million in the same period 2012.

Looking at costs and expenses, instructional costs and services as a percent of revenue increased to 35.0% of revenue in the fourth quarter 2013 compared to 34.5% in the prior year period. This increase was primarily related to lower revenues resulting from the temporary suspension of TA. We did however continue to benefit from lower textbook costs. In the fourth quarter 2013 our average textbook cost with was $36 per net course registration compared to $42 in the prior year period. Selling and promotional expense as a percent of revenue increased to 20.6% of revenue compared to 19.2% in the prior year period. This increase was primarily related to lower revenues as well as to higher cost associated with online advertising and increase staff focused on strategic relationships .

General and administrative expenses increased as a percentage of revenue to 22.5% of revenue from 17.9% in the prior year period. This increase was again due to the lower revenues and increase in bad debt expense as percent of revenue. Bad debt expense as a percent of revenue was approximately 4.6% during the fourth quarter 2013 compared to 3.6% of revenue in the fourth quarter 2012. The increase is primarily due to the change in mix of students through a greater percentage of civilian students. Military students on average have lower bad debt expense than civilian students.

In the fourth quarter of 2013 net income was approximately $9.0 million or $0.51 per diluted share this compared to $13.2 million in the prior year period. For the full year 2013 revenues benefited slightly from a technology fee implemented by APUS in September 2012 and therefore included for four months in 2012 as compared to 12 months in 2013. This technology fee represented approximately $7.3 million or approximately 2.2% of the full year 2013 revenue.

Effective November 1, 2013, we began consolidating the financial results of Hondros Nursing. We recorded approximately $3.8 million in revenue, $276,000 in operating income and $266,000 in net income for the quarter. Please note these results reflect only two months of consolidated results and are not representative of a typical quarter due primarily to the timing of certain revenue and expenses with in a quarter.

At December 31, 2013, our cash balance was approximately $94.8 million and we have no long-term debt. We completed the acquisition of Hondros Nursing on November 1 for an adjusted aggregate purchase price of approximately $46.3 million. When including cash acquired this lowered our cash balance by approximately $44.4 million. In October of 2013 we repurchased 167,675 shares of our common stock at an average price of $36.86. At December 31, 2013, their remains approximately $9.4 million of availability under the authorized stock repurchase programs. Finally capital expenditures for the year 2013 were $20.6 million compared with $35.0 million in 2012. This declined is primarily the result of a decrease in our investment in administrative facilities.

Moving on to slide seven, first quarter 2014 outlook. Looking ahead we believe APUS net course registrations by students using TA in the first quarter of 2014 will be adversely impacted by ongoing budgetary constraints and uncertainty. At the same time we believe that net course registrations by non military students will increase year-over-year. As a result APUS net course registrations by new students in the first quarter of 2014 are expected to decline between 9% and 7% year-over-year and total net course registrations are expected to decline between 7% and 5% year-over-year compared to the prior year period. Our outlook reflects an expected year-over-year declined net course registrations by new students using TA. So far in the first quarter of 2014 we have seen a mid teen percentage decline in net course registrations by new students using TA. Thus far in the first quarter of 2014 we have seen a single digital percentage increase in net course registration by new students using FSA .

At Hondros Nursing first quarter new student enrollment increased by 45% year-over-year to 405 students in the first quarter of 2014 as a result of enhanced outreach and awareness efforts. We anticipate consolidated revenues for the first quarter of 2014 to increase between 0% and 3% compared to the prior year period. First quarter 2014 total consolidated earnings per share are expected to be between $0.43 and $0.48 per diluted share. In the military markets we expect the continued volatility and softness to adversely effect net course registrations by students using TA . However if funds available under DoD Tuition Assistance programs are further reduced or eliminated, we do believe most service members would still be eligible and able to finance out of pocket tuition cost resulting from any short fall using various VA Tuition benefits through a program called Top-up.

Thus it is important that we maintain our strong relationships with education service officers and the broader military community in part so that we may assist them in promoting awareness of Top-up and other sources of tuition financing within the military community. These relationships are also important so we can continue to differentiates AMU from other for profit and not for profit competitors. As it relates to new programs, we believe that our new cyber and nursing degree programs will serve to strengthen our position in the military community. At the same time we will continue to expand our presence in and focus on civilian communities.

In summary, while the fourth quarter 2013 was adversely impacted by the temporary suspension of TA in October, we were pleased by the growth of net course registrations across all civilian pay types of APUS an accomplishment that still eludes many of our peers. Further more, we believe that year-over-year growth in net course registrations by civilian students will continue into the first quarter of 2014. We are confident that our emphasis on three value themes; academic quality, affordability and innovation is a winning formula that will create value for all stakeholders.

We will continue to concentrate on improving student persistence as well as on advancing education technology and processes to improve learning outcomes, enhance the learning experience, attract new students and further improve operational efficiency. Going forward we will build our brand awareness at APUS and Hondros Nursing primarily by building strategic relationships to attract serious minded students who are prepared for the rigors of higher education as well as by internally directed Internet marketing. At the same time we will continue to move forward with our plans to further diversify and grow our business by launching new programs especially in high growth fields and entering new markets and market segments.

Now at this time we would like to take questions from the audience. Operator, please open the line for questions.

(Operator Instructions). Your first question comes from the line of Adrienne Colby with Deutsche Bank. Please go ahead.

Thanks for taking my question. I was hoping you could frame your enrollment outlook in terms of the changes in Tuition Assistance eligibility requirements. It seems like the changes at the Air Force and Army which I think are over 75% of our military students, doesn't seem like it would really impact your active duty populations. So just hoping you could help us to reconcile those two.

We didn't try to put that together, but I can give you some perspectives. For example the Marines really did not have funding at most of their bases and just announced this month that they found another $25 million in funding for the rest of the year. At the same time they are only committing to funding quarter-by-quarter in the event that they run out. We typically have had approximately 20% of the overall Marines as our students. We also had when we had our call back in October we said the October period was typically a popular period for TA students to registration. It was the beginning of the fiscal year. It was also early enough that if you took an eight week course you wouldn't be taking the course of over the holidays.

And that we couldn't guarantee that the students would re-register in that quarter and sure enough that happened. And then once again you get into the new year and without communication of what the budgets are at different basis as well as more selectively we think there is genera uncertainty. So trying to frame within these changes I think until everybody gets used to the systems and the ESOs get comfortable with their budgets I think it is going to be difficult for any one including us to be able to predict the stream or flow of registrations from the bases.

Okay. Thanks. I was wondering if you could talk about the seasonality in terms of enrollment at Hondros if we should be extrapolating the guidance you gave for the first quarter for the rest of the year.

I think I will ask Harry to answer that question. Harry?

We're going to give quarter to quarter guidance. We're not going to go beyond the first quarter, but we're very pleased with the growth potential at Hondros, and it's something we really think there's a need for nursing programs. It's growing nationwide, and we think there's a lot of opportunity to grow out that campus-based programs at Hondros, as well as their online programs. And the BSN program there, so we expect to continue to have success at Hondros.

Okay. If I could sneak in one more could you just update us on the New Horizons partnership, I know you've implemented some dedicated salespeople. Just wondering if you're seeing some changes there, maybe what percent of your enrollment is international now?

Sure. I'll ask Harry to talk about the New Horizons partnership.

Yes. We have hired a full-time person now, Paul Humphreys. We need to have a presence outside the U.S. to grow the International business, and it took us a while to get somebody in place. Now we have that, we're very happy to have Paul on board with us, he's working with Chris Eden, who about a year ago, was hired as the Head of International Operations at New Horizons to develop their international franchise operations, and also promote our programs to their international franchises.

We think we finally have all the pieces in place now to do that. And New Horizons had a really good fourth quarter, their international operations and their presence are growing. They're in over 100 countries. So we really think that'll kick off more in the second half of this year. You're not seeing the results yet, but we've gotten the pieces in place now, and the people we need to help use New Horizons' professional sales force, at their franchisees to help market our programs, we're very optimistic about the future success of that. It's just not really showing up in the numbers right now.

So you still have about 2% international enrollment?

I think the last time we had numbers, it was between 2% and 3%. Yes.

Thank you.

Thank you for your questions. Your next question comes from the line of Corey Greendale for First Analysis. Please proceed.

This is David Warner for Corey. I was just wondering if some of the sort of the paring back of the benefits at the various military branches has it affected how you think about pricing? And also, maybe where you seek to focus on new program rollouts programatically, either associates or bachelors or masters, where you emphasize going forward, whether that's impacting your plan?

We did announce a few new degrees that we've had approved in 2014 already, and we expect to launch by the 1st of July. Most of those degrees are in the technology area like the cyber degrees and the Science degrees. We're just finding that technology and simulations have improved to the point that we can offer classes that we weren't able to offer years ago. And some of those degrees are oriented towards the military as well, for example the cyber degree. I don't think your question about pricing, I don't think the cutbacks in general or some of the restrictions by branch of service have really changed our perspective on pricing.

I think, obviously, by the way, none of them increased the $250 per credit hour. And one of them, the Coast Guard, went to a $75, $25 reimbursement. But we really haven't seen a kickback from students or a negative push back from them on that. So at the same time, we're kind of proud that serving that market has kept us in that price point. If you look at our scholarships, there's very few scholarships that we offer as a percent of revenues, and we really haven't had to do that. So I think we're in a good point, price wise.

And just one more. Could you give some color on the margin profile of Hondros, looks like you are at mid high single digits operating margins this quarter. I would imagine that you expect some expansion from there. Any guidance or color you can provide on where long-term margins for that business will be?

Yes, we're still in the process of integrating our operations with theirs. We're not seeing all the efficiencies we expect to see down the road. And in the fourth quarter, numbers was really for two months, they had a lot of transaction expenses in those numbers that we know won't be there, going forward. But we're not guiding at this point on our margin percentage for Hondros, until we complete our integration and our review of their staffing, and we're also in the process of going through a period of probably campus expansion which, while it may have a negative short-term impact on margin, is certainly going to set the stage for future growth there.

So we're spending the growth of business in Hondros, and it's going to be more of a revenue growth story this year I think than a margin growth story, but I do think, we have a lot of potential there to help grow their online programs, to move them toward our LNS, which would be a much more affordable product for them, and to help them with their marketing and get some economies of scale there, that they don't currently have as a small company.

Okay, great. And if I could just sneak one more in. The SG&A was a little bit above your long-term target of 20%, and you've mentioned some higher advertising costs in the press release, are you expecting that to come down or are you still targeting 20% for 2014?

Did you say selling promotion or G&A, selling promotion?.

I'm sorry, selling promotion.

Right. So, yes, it did creeped up above the 20% simply because of the decline in revenue. We chose to continue to spend through, because we think the important to the long-term growth of registrations. In terms of where it's going, going forward, I think it's going to be slightly north of 20%, but not much. And we continue to target that 20% range in the long-term, but as we're feeling the effect of the military TA, we're going to continue to spend. And I'd point out, we're seeing non military markets, where were doing that marketing, we are seeing some modest growth year-over-year. So as long as we're feeling like we're getting the traction there, we're going to continue to do it.

Great.

Thank you for your questions. Your next question comes from the line of Peter Appert with Piper Jaffray. Please proceed.

So, Wally, it looks like the military students are not taking advantage of Top-Up to offset these uncertainties and the turmoil in the TA program. What's your thought on that, why aren't they taking advantage of that?

Well right now, the only branch that would probably use Top-Up would be the Coast Guard, because if you look at the cutbacks and the fact that traditionally, with our large volume of students, the average number of courses per year has averaged 3, 3 courses per year at $250 per credit hour, is around $2,150. And plus, we don't charge a tech fee to the guys in the military. So that falls below the caps.

I think that there are some signs that military students who want to take more courses than the overall reimbursement, and this is really prior to the changes, would either pay for cash, use the VA program or even use FSA. We just had the CCME conference down in Savannah, and whenever we have a conference like that, we try to get some of our students together and I had a number of students that told me that with the suspension of the program, they were dipping into their VA or using their FSA.

Okay. So the students have used the alternative funding during these suspension periods, but that triggers, right or does that trigger if they use the VA money, the time-limits, in terms of access to those funds?

Absolutely. Under the current regulations with it, I think a number of institutions have actually asked Congress to consider a change. There's a 10-year limit. So once you start, you trigger a 10-year limit where you have to use all of your benefits.

Did you view that as a significant hindrance in terms willingness of military folks to access it?

I do. And that's why I think particularly the ones at the enlisted level, who may qualify for Pell, which as you know, Pell's not a loan, it's a grant. They'll apply for Pell and if they are granted partial Pell, they'll use some of that, because it means they're not borrowing, they're pretty shrewd consumers, and we see a lot of that activity where they'll fill out the information and if they qualify, they'll use some of the Pell to supplement. And if they don't quality, they won't borrow.

Got it. Thank you. And then a question for Harry, the Hondros new enrollments here in the quarter, you're guiding to a quite robust, and my recollection is that the historic growth hadn't been that high, so are you doing something different in terms of the enrollment programs or something unusual, in terms of timing here or something that's driving this, and this is indicative of a pace of growth you'd think about for the year?

Well, again, we're not give any guidance beyond the first quarter, Peter. But I think that we're just putting some professional marketing in place. We've got a good team in place. They've got good programs, and it's a relatively young school. I mean, it's in there adolescence, it's not a start-up, but they've only been doing the nursing program for five years there.

So it's still in a growth phase, and we expect to continue to carry that out. They're in four cities now, we think there's a lot of opportunity to expand in the state of Ohio, we have a great relationship with the nursing board in Ohio. And there's a real need, and healthcare is a very big industry in Ohio. So we're very excited about that program, and there's a lot of opportunity to put more of their courses online and to the grow some additional programs there. So we're optimistic about it. I'm not going to give any guidance though, about enrollment growth for the rest of year.

Peter, I would also add to Harry's comment. In the first quarter, a year ago, they were still in the process of getting their CCNE accreditation for the online RN to BSN. And after they got that CCNE accreditation, it did perk up the activities which the first quarter year-over-year reflects some of that experience.

Got it. And should we anticipate another transaction in 2014?

Well, if you don't have anything to talk about, you don't have anything to talk about. So I think that we continue, really for the last three or four years, we look at opportunities, we don't have a banker who we have engaged or anything like that. But things come over the transom, and if something would fit into our strategy, which I think we've been pretty good about articulating, it might happen. But right now, there's nothing really to talk about.

Thanks, Wally.

Thank you for your question. Your next question comes from the line of Jerry Herman with Stifel. Please proceed.

Thanks. Good evening everybody. Wally, I was hoping you would add a little bit more color about the military side. You mentioned the government shut down and you mentioned confusion, but I also want to elaborate, or if you could elaborate on the changes of funding, that took effect for fiscal 2014, and if, in fact, you're seeing an impact from those changes, specifically?

I think we are, Jerry. I think the problem is, is that the branches do not share what budget they have, in the continuing resolution or whatever that technical term was, after the shutdown when Congress funded. You may recall, we had a suspension of TA in April of 2013, which was another impact to our overall year numbers, and after that, there was actually a resolution, an amendment, to restore TA to its previously budgeted levels, but they had actually budgeted fairly low, and we're running ahead of schedule. So that only guaranteed that they would spend to the budget. And then with the fiscal year 2014, that started in October, when we had the shutdown, they shut everybody out.

There's been no disclosure of what the budget is, but obviously they had sequester issues that they had to consider. So what we saw was, first of all, when they initially restored after the shutdown, and we called some of this when we had the discussion in October, there was confusion about which bases and which branches had money. And, plus we, once we got to the point where students couldn't register because they couldn't get approval for November classes, generally people don't want to start classes in December, when you've got to do a lot of work over the holidays. So we had that general description for pretty much all of the branches. But then the Marines, for example, issued a statement in November, before the month had ended, that they were out of money for the quarter, and they were going to be allocating money quarter by quarter, and I think within a few days in January, they issued that they were out of money again for the quarter.

And then finally in February they said, oh, we found $25 million more for the rest of the year, but we're still only going to allocate our money quarter by quarter, so we don't know what their overall budget is, all we know right now is they found $25 million worth of money, but for all we know, maybe they didn't budget much money at all, at the start of the year. So I think there is general confusion. There's also a lot of activity going on with withdrawal of troops from of Afghanistan as part of the recommendation of Secretary Hagel is to reduce the manpower. So people are converting from active duty to veterans. If you look at our veterans activity, those revenues are growing nicely. Because of our brand, because of our reputation.

And we think that until this whole thing settles out, with just how much money we have, and whether or not Congress one of the proposals on the table is to do a 2-year budget versus a 1-year budget. Whether some of that can be settled or not, is beyond our control. But we're trying to observe it. And I would just say that it's very difficult for us to predict, and as we stated, our forecast for the first quarter is that we're going to be down in the mid teens for TA, and some of it has to do with funding. And I don't know that much of it has to do with actually the eligibility restrictions that they put in place, I think it's more funding.

Great, that's helpful. And then, a question about the first quarter and the guide there. I know there's some distortions with the inclusion of Hondros for the full quarter, but your revenue growth is 0% to 3%. Hondros is some contributor to that, but what I'm really getting to is that the operating margin would appear to be declining substantially. By our estimates, like 500 basis points to 600 basis points, and I'm wondering if you can help us with what's going on in the cost structure there, or are there timing issues, and should we expect that type of leverage, operating negative leverage for the rest of the year?

Well, we're not giving guidance for the rest of the year. But with the military student decline in the mid teens for the first quarter, we have a much higher referral percentage and a much lower cost per new student in marketing cost for military students than we do for civilian students. So that part of a margin creep, has to settle itself out over time. Obviously we would prefer to get 100% of our students through referrals, and while I wouldn't say that, that would mean that it wouldn't need marketing, I certainly wouldn't need to spend as much money. I think some of the other things, as we mentioned on the call, I think it was on Rick's portion of the call, we're continuing to invest and spend in information technology for some of the innovations that we're doing, so that has some issues.

And clearly, when you're returning students, which you don't have to spend marketing money for, but aren't returning as frequently as in the TA students, that has an impact on margins, too. So I hate to not be able to give you much more color than that, but we're really trying to manage this on a quarter by quarter basis, to see where we're going to level out at, and we'll adapt as we get more information, we'll manage our Company accordingly.

Thanks appreciate it. I will turn it over.

Thank you for your question. Your next question comes from the line of Jeff Silber with BMO Capital MarketsPlease proceed.

Thanks so much. Wally, you just mentioned Secretary Hagel's proposal to continue to shrink, I guess, the manpower. Are you seeing the market for educating military students maybe becoming less competitive? It seems that, that sector's in a secular decline.

No. I haven't seen it become less competitive. There are a couple of universities for profit and nonprofit that seem to be pulling back in their outreach teams. But short of that, we just had the CCME conference, which is, the Military Educators Annual Meeting there were still a substantial number of institutions that were in attendance, and still trying to focus. But I believe that in some ways, with the increasing regulations, for example, the President's executive order, as well as the new DoD MOU, I think it's becoming a much more complex market to be in, unless you can scale to a certain size of students. I think some of the smaller providers are likely to say that it's not worth it to try to comply with all the additional rules and regulations, higher ed is pretty complicated as it is.

Okay, can you just remind us, in terms of your net course registrations on a rough basis, what your exposure is by the different branches in the military?

If you look at the fourth quarter --

It does not have to be exact. Just some rough numbers I'm looking for.

I am giving you some rough numbers so, of our 34% of revenues, which TA represented, the Air Force is about 14% of overall revenues. The Army's at 13%. The Marine Corps' at 3%, the Navy's at 3% and the Coast Guard's at 1%.

Okay, great, that's very helpful. And just a couple of other quick numbers questions. What are you, in your first quarter guidance, I'm just curious what you're using for tax rate in share count and what we should be modeling in for capital spending for the rest of 2014?

Rick, you want to answer the tax rate?

Yes, tax's rate at 38.8%.

And share count for the quarter.

17,900,000 shares.

Okay, great. And then capital spending for 2014.

We are not giving guidance on that.

At least for the quarter then ?

No. We're actually still trying to figure out capital, not because there's going to be -- when we give guidance, it's not because we'll putting it in acquisition. It'll be much more, because we're trying to figure out the scope of IT projects that we can accomplish this year.

Fair enough. Thanks so much for the color.

Thank you. Your next questions question comes from the line of Jeff Goldstein with JPMorgan. Please proceed. (Operator Instructions). I'm not getting any response from that line. Your next question comes from the line of Trace Urdan with Wells Fargo. Please proceed.

Thank you. Could you speak to the sequential increase in the G&A line, and in particular, whether there was anything extraordinary in there that was specific to the fourth quarter?

Rick, do you want to go ahead and do that ?

Sure. So the sequential increase is primarily IT expenditures as we invest in technology. And in terms of our percentage increase quarter-over-quarter, we did have a higher bad debt expense as a percent of revenue, primarily due to the change in mix, the bad debt we experienced on the military population is a lot lower than what we experienced on the non military population.

Okay. So that fourth quarter G&A number, because it relates to IT spending that's ongoing, is more or less representative of what we might expect at a level?

No, not exactly. I mean, it's uncertain, ultimately based on how much our revenues are, but we had about a $10 million dip in revenues due to the shutdown.

I'm just asking about the absolute number of dollars?

The absolute number of dollars. Throw some kind of a factor on it, I don't want to throw out there. But it would probably the difference would be, any changes in bad debt or any increase to expenditures in IT. Those are the two things that will drive it.

Meaning the IT expenses could go up from here ?

They could.

Okay. And in the same vein, I'm wondering if you could -- I understand you're not giving guidance for the year, but could you speak to, at least in the first quarter, the levels of D&A and interest income that you're anticipating?

Our depreciation D&A, $3.4 million. Interest income, about $80,000. I mean, it's not material to the equation.

It is striking that Hondros doesn't impact either those lines, seemingly?

Hondros doesn't really have a lot of capital. They lease their facilities, they don't have a lot of depreciation expense.

Didn't you add any goodwill into your income statement, as a result of the Hondros acquisition?

We did, we did add goodwill trades. But that's based on intangible values, and not amortized the way it used to be. It's amortized for tax, but not for GAAP.

So, if you added the amortization, you to take that number up to $3.7 million.

Okay. That is on me then. So can I take it then, that the guidance that you gave previously about Hondros being accretive still holds, even though that you're contemplating additional expenditures?

Yes, absolutely.

Very good. And then the last question I had. I think I probably know the answer to this, but the pressures on revenue per course registration or revenue per enrollment, is that just primarily a function of the mix shift in the quarter or are there other factors in there, as well?

I think it's predominantly the mix shift, and one of the things that I've talked about before on these calls is that one of the reasons why we try to continue to target our spending at 20% is when we increase that spending at the fringes, we don't often get the same return, because of the higher cost, whether, let's say our average cost to throw out a number, is $1,200 per new student all in, and you spend at the fringe, it may be a $2,000 or $3,000 number, and you're not going to get the same return. So as the mix changes, we'll have to continue to finesse and tweak how we spend our marketing dollars in order to get a quality student.

Okay. And last question, Wally, is there any chance we can get you to give us a sneak peek on your preliminary CDR number?

Do we have it ? Yes, our draft 3-year number is 13.1. So it obviously reflects some of those students that weren't exactly serious students.

Right. That was kind of the point of my question, so. But even still, pretty low.

Yes.

Okay. Thank You.

Thanks, Trace.

Thank you. Your next question comes from the line of Tim Connor for William Blair. Please proceed.

Thanks. Sounds like it's still early days for the international strategy, but as you look out longer-term for international growth, is that going to be degree certificates, partnerships with local providers or your brand or would you consider providing a technology platform for international providers, what is the focus, looking out?

Yes, it's mainly degrees, and I would say that it's predominantly graduate degrees, because most countries heavily subsidize their undergraduate degrees, but don't do that for graduate degrees.

And that would be under the American Public brand?

Yes.

Okay. And then for Hondros, I think you hinted at expanding capacity. What is capacity right now, and how quickly you can you ramp that up and to what level?

Well, it's varies from campus to campus. We have 4 campuses, 1 in Columbus, 1 in Cincinnati, 1 in Dayton, 1 in Cleveland. The Columbus Day programs, is the only one that is anywhere near capacity. They don't even offer evening or weekend classes as we hoped to, down the road and the 3 other campuses, Cincinnati, Dayton and Cleveland are nowhere at capacity. We're actually very excited about the opportunity in Cleveland, where we're getting ready to lease additional, actually a new space there that'll double the size of the campus. So we're going to have plenty of excess capacity to grow those programs.

Okay. And then, in terms of state authorizations, where do you stand outside of Ohio, and what types of milestones or benchmarks are you looking for there, over next couple of quarters, years?

We haven't announced that. Well, actually, it's in the K. If you look in the K, we don't have it memorized, it's kind of complicated. But we do state in the K which states that Hondros is authorized in, and which states APUS is authorized in, and in APUS' case, because we have students in every single state, we have states that we're licensed in, and states that has given us a waiver, based on the access.

And that's for the online program, only. The on-ground programs, right now, we're just sticking to Ohio, and we haven't announced any future plans to expand to a regional-type strategy.

Okay. And RN to BSN, is that going to be under the Hondros brand?

We still have, as I've announced on the call, in the previous quarter, the institutions are separately accredited, and have separate boards. And so they each have an online RN to BSN, and for right now, they'll each continue to have an online RN to BSN.

Right. I think you just said you made some changes to the delivery platform, was that for one brand or both brands.

We hope to make some changes.

Yes, we want to change the Hondros' LMS to our LMS. But we still try and offer distinct programs. There's a lot of loyalty with the Hondros students progressing from LPN program to ABN and RN program to the BSN program. And that we think that they like that consistency of name. The program, the BSN online programs are similar size right now, and I thinks there's a lot of potential to grow Hondros and for the meantime, until we figure that out, we're going to use two different brands.

Okay. Thank you very much.

Thank you for your question. At this time, there are no further questions. I would now like to turn the call back over to Chris Symanoskie.

Thank you, operator. That will conclude our call for today. We wish to thank all of our callers for participating, and for your interest in American Public Education. Thank you, and have a great evening.

Thank you for joining today's conference call. This concludes the presentation. You may now disconnect. Have a good day.