American Public Education Inc (APEI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Q1 2014 American Public Education, Inc. earnings conference call. My name is Jasmine, and I will be your operator for today. (Operator Instructions)

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

I would now like to turn the conference over to your host for today, Mr. Christopher Symanoskie, Vice President, 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 first quarter of 2014. 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 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," "seek," "could," "estimate," "expect," "intend," "may," "should," "will," and "would." These forward-looking statements include, without limitation, statements regarding expected growth, expected registration and enrollments, expected revenues, expected earnings, and plans with respect to our investment in and potential partnership with a game-based learning company.

Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described in the Risk Factors section and elsewhere in the Company's Annual Report on Form 10-K filed with the SEC and the Company's other filings with the SEC. The Company undertakes no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in future.

This evening, it's my pleasure to introduce Dr. Wallace Boston, our President and Chief Executive Officer; and Rick Sunderland, our Executive Vice President and Chief Financial Officer. Also available for questions today is Harry Wilkins, Executive Vice President and Chief Development Officer, and CEO of Hondros College of Nursing.

At this time, I'd like to turn the call over to Dr. Boston.

Thank you, Chris. Good evening, everyone. Thank you for joining us today.

I will start off with an overview of our first quarter results and provide a brief update on the environment and our strategy. Then Rick Sunderland, our CFO, will discuss our financial results and provide perspective on our outlook for the second quarter of 2014.

While the higher education environment remains challenging with continued uncertainties surrounding access, cost, student borrowing, regulatory changes and increasing competition, we continue to move forward with plans to advance our academic quality, utilize education technology to further improve student outcomes and increase and improve our quality mix of students. In addition, we continue to make progress on our plans to establish Hondros College of Nursing as the healthcare platform and offer APUS degree programs to additional international students.

In the first quarter of 2014, APUS net course registrations declined, primarily as a result of continued volatility and softness in enrollment by students using tuition assistance programs administered by the Department of Defense, which we refer to as TA. Net course registrations by new students in the first quarter of 2014 decreased approximately 8% year over year, driven by a 21% decrease in net course registrations by new students using TA. Total net course registrations in the first quarter of 2014 decreased approximately 4% year over year, driven by a 10% decrease in net course registrations by students using TA.

The first quarter decline in net course registrations by students using TA was less than the 39% and 35% decline in new and total net course registrations that occurred in the fourth quarter of 2013 but reflects continued instability in predicting enrollments from active-duty students.

Since our year-end earnings call, there were a few changes to TA eligibility requirements by the services. That said, in late March, the Army launched a course planner that is required to be used by soldiers to document the courses they plan to take. We believe that this new requirement is impacting the timeliness of Army soldiers enrolling in courses in the second quarter and creating some confusion as soldiers, education service officers and voluntary education staff members learn the new processes.

Naturally, we would like to see more stabilization in the TA program. But there are no assurances that the program will return to the stability it had prior to 2013, or that future net course registrations will not be adversely impacted by continued changes to TA funding and administration. However, we believe that AMU continues to enjoy a strong reputation for serving the military despite the challenges we continue to experience with regards to TA funding.

For the quarter ended March 31st, 2014, net course registrations by nonmilitary students increased by approximately 3% and 1% in new and total respectively. More specifically, net course registrations by new students using Title IV and VA education benefits increased year over year by 3% and 9% respectively. Net course registrations by new students using cash and other sources decreased 2%.

Total net course registrations by students using VA education benefits increased 14% year over year, while net course registrations by students using Title IV and cash and other sources decreased by 4% and 3% respectively.

The 4% year-over-year decrease in total net course registrations by students using Title IV indicates that persistence for students utilizing FSA as a primary payment source declined at APUS during the past year. The dropout rates of some of the students also triggered an increase in bad debt expense. This underscores the importance of the various methods we currently employ to validate the qualifications and intent of new students.

Improving student retention is important on many fronts. Increasing the number of newly enrolled, academically prepared students not only improves the student persistence rates, but it enhances the student classroom experience as well. It's also important from a business model perspective, as it enables us to continue our affordable pricing structure, as greater numbers of students [re-enroll].

At the same time, our efforts to improve retention by seeking students with greater academic content and college readiness can temporarily impact new student enrollment growth. We believe our plans to develop and deploy new learning technologies and measures to further increase academic engagement in the classroom will also help in this effort.

In the first quarter of 2014, we outperformed our guidance due in part to the timing of marketing expenses, but also as a result of obtaining cost savings and efficiencies. We have always strived to create both cost efficiencies and improved services through automation and process improvement. For example, our electronic books and course materials initiative, transfer credit evaluation system, and other processes continue to be effective at improving services to our students while reducing overall costs.

That said, the recent decline in net course registrations at APUS has caused us to look more critically at all of our spending including payroll costs. In the first quarter of 2014, we reduced some nonessential spending and better aligned our workforce needs with our strategic plan. We expect to continue evaluating ways to optimize our spending and better align our costs with our strategic direction and overall enrollments.

Recently, our community college and military outreach teams were merged to better leverage overlapping responsibilities, creating greater operating efficiency. For example, the integration of these teams should help us to more effectively focus on meeting the continuing education needs of veterans and active-duty military students after they graduate from community colleges. As of March 31st, 2014, we have nearly 330 relationships with community colleges across the country. Going forward, we will focus more on serving and expanding the value of existing military and community college partnerships.

Corporate and other strategic relationships are also a key focus of our approach to attracting new students with greater college readiness. In the first quarter of 2014, our strategic outreach team developed partnerships with The Hartford, a property and casualty insurance company; Waste Management Corporation, a leading environmental services company; VTEC, a computer software solutions company; and the Arizona Association of Chiefs of Police. Over time, we believe corporate and other strategic relationships may grow to a scale that could be a meaningful contributor to our overall growth.

During the first quarter of 2014, we launched several initiatives to update more than 250 courses with new rich media, simulations, blending learning models, and MOOCs. For example, in June, we will offer an eight-week MOOC in international relations that was developed in partnership with the Policy Studies Organization, a publisher of academic journals for those making and evaluating public and private policy.

In addition, we plan to offer a MOOC in American government that starts in September. Following each eight-week course, MOOC participants will have the option to earn academic credit equivalent to three semester hours through an examination for which we will charge a fee. Through these courses, we hope to continue learning about MOOC delivery, as well as to make more prospective students and key influencers aware of APUS. We believe MOOCs have the potential to expand access, drive greater brand awareness and create competitive and cost advantages for APUS.

We continue to make substantial investments in technology, internally and externally, including in the development of interactive learning activities and simulation resources that are being added to our courses. On April 2nd, 2014, APEI invested $1.5 million to acquire approximately 25% of a game-based learning company that develops education software.

Both APUS and Hondros College of Nursing plan to partner with this game-based learning company to jointly develop courses and further enhance existing courses with interactive, personalized and adaptive learning environments. In some cases, we believe that it can be less expensive to invest in technology rather than developing it internally. And investing can potentially reduce the risk of development. Moreover, by investing, our university benefits academically from such technologies. And, at the same time, we may potentially benefit economically from revenues and/or the increase in the value of our investment.

We continue to be pleased by the results of Hondros College of Nursing. In the first quarter of 2014, enrollment at Hondros College of Nursing increased 14% year over year, driven by a 43% increase in new students. In light of strong expected job growth in the healthcare sector, we believe that expanding our healthcare focus and success with Hondros College of Nursing will eventually enable us to create a highly respected healthcare educational enterprise.

We received a temporary provisional program participation agreement from the US Department of Education allowing Hondros College of Nursing to continue to participate in Title IV programs pending the Department's action on the change in ownership application. We hope to receive notice of this action from the Department in the near future.

Our strategy to expand access to international students has recently made another step forward, with the development of a plan to launch a pilot program with a few selected international franchisees of New Horizons in the second half of 2014. APUS expects to offer students and alumni of New Horizons, as well as other international students, access to APUS' academic programs through the relationships cultivated by local franchisees.

In our pilot program, we expect to evaluate how best to support these international students for success and persistence in the online environment. If this plan is successful, we will offer similar programs to other New Horizons franchises in 2015.

Our continuing efforts to enhance academic quality continue with the advancement of two very important collaborative initiatives -- the Foundations of Excellence and the Gateways to Completion programs. As the first fully online institution to participate in the Foundations Of Excellence program of the John N. Gardner Institute, APUS carefully examined the practices that support first-year and transfer students. Throughout 2014, the Retention Committee of APUS will be implementing the recommended initiatives identified in this study to improve retention and student success, with a focus on at-risk students.

In addition, APUS began work on the Gateways to Completion, or G2C, project; a three-year project in which we will partner with 11 other founding institutions to explore ways to improve student learning and success in high-risk, high-enrollment gateway courses with historically high failure, withdrawal and incomplete rates.

The first set of committee reports will be delivered to the G2C Steering Committee in July, and the strategy implementation phase is set to begin in August. Through the Foundations of Excellence and G2C initiatives, we hope to expand and build on our efforts to improve student success and retention.

APUS' academic leadership continues to participate with a degree qualifications profile or DQP initiative, moving from mapping all of our degree programs using the first version of DQP standards to working with the more recently developed DQP2 standards and the identification and evaluation of signature assessments. The DQP initiative, with close to 500 participating colleges and universities, has resulted in substantial review and analysis of the academic rigor of degrees, as well as identifying the critical learning necessary for progress at major milestones of completion at each of our three degree levels -- associate's, bachelor's and master's.

Our academic and assessment teams have produced several helpful tools that are used by the greater higher education community. This work helps to ensure that our students are equipped with the proficiencies needed for success in work, citizenship, global participation and life in general.

Moving to slide number 4, advancing strategic goals -- in short, our key priorities are to retain, engage, innovate and diversify the sources of students that we educate. We believe we can accomplish several significant goals by focusing on retention and pursuing an optimal quality mix of students. These goals include improved student outcomes, enhanced learning experiences and reductions in certain costs associated with students who drop out.

We believe we can more effectively and affordably enhance our reputation, grow brand awareness and expand enrollment by engaging with our corporate partners and by fostering new strategic relationships. In addition, we believe students who enroll as a result of some of our corporate and other partnerships exhibit greater college readiness and academic intent on average than a student who hears about APUS through traditional media sources.

Our efforts to drive innovation and invest in education technology have great potential to improve persistence, enhance the student experience, increase student success and reduce costs. We believe that new interactive learning technologies we deploy may afford our institutions long-term competitive advantages over schools that have failed to invest in advanced classroom technology.

Diversifying the sources of our higher education students through additional degrees, new corporate partners and Hondros is important to our long-term success, as our intention is to stand out in terms of breadth of offerings and quality in an increasingly competitive higher educational market.

In the second quarter of 2014, we continue to implement elements of our plan while taking a more critical look at ways to reduce and better manage our expenses. We're making significant progress to expand our strategic relationships, invest in education technology, and execute our plan to reach international students. Most of all, we're moving forward with the greatest aspects of our mission and strengths fully intact -- our academic quality, unique programs and affordability for students.

In the interest of making sure we are positioned to serve a greater number of students with stronger academic intent and college readiness, we're analyzing our methods of recruiting and enrolling new civilian students. In preparation for late 2014, we will spend the next two quarters further analyzing persistence data and piloting new processes, not only to increase persistence but to make sure we address student needs with an optimized academic and business model.

At this time, I'd like to turn the call over to Rick Sunderland, our CFO, to provide more detail on recent results and outlook for the second quarter of 2014. Rick?

Thank you, Wally.

Going on to slide 5, financial results summary -- American Public Education's first quarter 2014 financial results include a 6% increase in revenue, to $88.6 million; compared to $83.8 million in the prior-year period. The increase in revenue was due to the inclusion of Hondros College of Nursing, or our Hondros segment, which earned revenue of $7.2 million in the first quarter of 2014.

Our APEI segment revenue declined to $81.3 million from $83.8 million, a decrease of 3% compared to the prior-year period. This decline in revenue was primarily the result of a decrease in net course registrations by students using TA benefits.

As discussed last quarter, we believe that the volatility and softness in military enrollment is in part related to marketplace confusion over changes to TA eligibility as well as to administrative changes in the military TA program.

Our costs and expenses increased 9%, to $71.8 million; compared to $65.6 million in the prior-year period. The increase was due to the inclusion of the results of our Hondros segment, which was partially offset by a decrease in expenses in our APEI segment, resulting from lowered net course registrations and lower payroll costs.

Our Hondros segment has a lower operating margin than our APEI segment, largely because Hondros offers the majority of its courses at physical campuses, which have a higher cost structure then courses delivered fully online. However, next year, we expect to realize recurring annual savings by transitioning the current Hondros LMS [to Sakai], plus additional savings from other classroom enhancements and optimization initiatives.

For the quarter, instructional costs and services as a percent of revenue increased to 35.4%, compared to 33.9% in the prior-year period. The increase was primarily the result of the inclusion of the results of Hondros, which was partially offset by a decrease in instructional costs and services expenses in our APEI segment as the result of lower net course registrations and lower course material costs. The cost of course materials per net course registration at APUS declined year over year, from $44 to $31 in the first quarter of 2014.

Selling and promotional expense as a percent of revenue decreased to 19.3% of revenue, compared to 19.7% in the prior-year period. The decrease was due to the inclusion of the results of Hondros, which had substantially lower selling and promotional expenses as a percent of revenue than our APEI segment; and due to the timing of certain expenses in our APEI segment in the quarter.

General and administrative expenses increased as a percentage of revenue to 22.0%, from 20.9% in the prior-year period. The increase was due to an increase in technology-related expenditures and higher bad debt expense in our APEI segment, due to a decrease in student persistence among students participating in Title IV programs. For the three months ended March 31, 2014, consolidated bad debt expense increased to $5.1 million, or 5.7% of revenue; compared to $3.6 million, or 4.3% of revenue in the prior-year period.

We continue to focus on the various matters related to student persistence and academic preparedness, as well as initiatives to improve our collections. We've engaged a second collections agency starting in June, and we plan to implement several new internal collections processes starting in the fourth quarter. These new processes will automate certain administrative steps to enhance the rigor and speed of communications with students, enable us to engage them more frequently about account balances due, and facilitate better coordination of these efforts with our collections agencies.

We've begun to take a more critical look at our costs to make sure we are right-sized, while continuing to allocate sufficient resources to support growth initiatives with fewer redundancies. Going forward, we will continue to evaluate and implement additional cost-savings initiatives as appropriate.

In the first quarter of 2014, net income was approximately $10.4 million, or $0.59 per diluted share; compared to $0.63 per diluted share in the prior-year period. Compared to our previously issued guidance, the earnings outperformance was attributable to a combination of factors, including our ongoing efforts to create efficiencies through innovation, the timing of certain marketing expenses, and our efforts to reduce unnecessary costs through workforce realignment and elimination of redundancies where possible, among other efforts.

For example, selling and promotional expenses at APUS during the first quarter of 2014 benefited from approximately $600,000 in cost-savings initiatives that focused on optimizing our advertising spend and workforce adjustments to eliminate redundancies -- additionally, the timing of approximately $900,000 of previously planned expenses that are now expected to be incurred over the next three quarters.

Total cash and cash equivalents as of March 31st, 2014 were approximately $99.7 million, and we have no long-term debt. Cash from operations for the three months ended March 31, 2014 was approximately $12.4 million, compared to $24.6 million in the same period of 2013. The decrease was the result of the timing of a vendor payment and other payment obligations, an increase in accounts receivable, and lower net income.

Moving on to slide 6, second quarter 2014 outlook -- our outlook for the second quarter of 2014 is as follows. APUS net course registrations by new students in the second quarter of 2014 are expected to decline between 7% and 4% year over year, and total net course registrations are expected to decline between 5% and 2% year over year, compared to the prior-year period.

At Hondros College of Nursing, second quarter new student enrollment is expected to decrease by 10% year over year. The decline is partially the result of adjustments in marketing spend, as we seek to optimize advertising and attempt to better align outreach efforts with the institution's strategic focus. These adjustments included reduced advertising in certain channels resulting in lower new student enrollment.

That said, Hondros' earning enrollment increased by 1% sequentially for April starts, despite graduating a significant number of students during the prior quarter. Earning enrollment includes active returning students, returning dis-enrolled students, and new students.

We anticipate consolidated revenue for the second quarter of 2014 to increase between 3% and 5% compared to the prior-year period. Second quarter 2014 total consolidated earnings per share are expected to be between $0.43 and $0.50 per diluted share.

In closing -- the first quarter of 2014 continued to be impacted by volatility and softness, particularly with respect to military enrollment. While persistence among civilian students using Title IV appears to have declined, we're addressing matters related to retention and college readiness from several perspectives, including marketing, academics and operations.

The highlights for the quarter continued to be growth in net course registrations by veterans at APUS and the enrollment growth of students in Hondros. Our ongoing efforts to create efficiencies through innovation and efforts to manage our costs and better align them with our strategic focus, have produced positive initial results.

Going forward, our goals are to grow our base of college-ready students at APUS and Hondros through a continued focus on relationship marketing and strategic relationships, and to enter new markets by launching new programs such as engineering and cyber security. In addition, our goal is to enter new segments and advance our technology through investments, partnerships and acquisitions, such as the acquisition of Hondros, our investment in relationship with New Horizons, and our most recent investment in the gaming company.

At the same time, we will move forward with our unyielding focus on academic quality, industry-leading affordability, and our passion to advance higher learning through the development and utilization of leading-edge education technology.

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

(Operator Instructions) Adrienne Colby, Deutsche Bank.

I was wondering if you could talk a little bit about the persistence issues. And just wondering why you think that all the sudden you saw such a change in what you're seeing from your Title IV students.

Sure.

I don't know that it's all of a sudden, by the way. We've had some issues with Title IV students really going back for a number of years, and we've talked about it. But for the first time, it became a difference that actually resulted in year-over-year declines in FSA students. And essentially, what we're finding is that most of those students come through traditional media sources instead of referral sources. And the quality of their ability to complete the first few courses is not as good as our referral students or our military students.

We've been working with them, finding ways to remediate them. Some cases, they have no interest in doing that. So we're trying to find ways, as we said, to see if we can better ascertain intent. We're moving some of our assessments from the first course that a student takes, if they have no background in higher ed, to the orientation process. So they actually take the assessment before they go into a course. And hopefully, we'll do a better job of assessing intent as well as people's ability to complete those courses. Because once we get them through the first few courses, we're doing a very good job of retaining them. It's just that initial group of new students and our ability to retain them.

So is that something you've already implemented, then -- this change in the assessment period? Or is that something that's second quarter or third quarter, or --?

I just had a call on that this morning. It's technology-related. So we're going to begin some pilots, only because you don't want to implement a new technology across the board with as many students as we have and disrupt the whole group. So we'll be doing some pilots in the summer with a goal of beginning it in late September according to the latest IT timeframe.

Okay.

And at the beginning, I missed what you said the new course registrations were from Title IV students. Could you repeat that?

Sure. In the quarter, we grew at 3%.

Okay.

And just as a final question, could you just about what the gating factors are on the range of guidance -- what would be the deciding factor between you coming in at the lower end of the range that you've given for EPS versus the higher end? So what are the factors at play in the margin guidance you've given?

Well, I think that the guidance -- we know what our April registrations are as of today. But we don't know what May is. Because even though registrations have closed, students are in a free drop week, and they have the ability to drop those classes. Or we drop them for non-attendance at the end of the week. So that volatility -- it used to be much more predictable [for] month. But unfortunately, with the TA situation, we're dropping them for nonpayment as well.

So we're not exactly correct about -- we're not confident, so we've given ourselves some range for May and June, as we've said on previous calls, ever since the financial issues with the military -- instead of people registering as much as five months out, like we allow, now most branches aren't approving TA more than 30 days out. And some of them aren't approving TA more than 10 days out.

So we've got a lot of volatility on the revenue side. We've got some volatility on the bad debt side. And I'd say those are the two biggest issues.

Yes, I was going to point out the bad debts with the changing persistence. I don't think we know where that's going to land going forward. So that creates some volatility in terms of where we'll land inside the range.

Thank you.

Jason Anderson, Stifel.

I guess, a little more on the persistence -- is there any way you could frame for us maybe how's it come down over the years, and to what degree? And then maybe, how much of an opportunity is there on the upside to improve it? I mean, obviously you're not going to persist 100%, but to a practical level. Is there -- guess I'm just trying to get an idea of how much the fluctuation has been and could be.

Well, it's kind of complicated, Jason. We actually -- in fact, I'm usually a coauthor on these publications. My colleagues, [Phil Eisen] and myself, along with other folks on the academic side, have presented a bunch of research papers on measuring and predicting online student persistence. And the variation can be tremendous because of the risk factors with serving working adult students.

I mean, the big thing -- and the most common way to describe what can happen -- is that life gets in the way. So you have people who drop out simply because something happened to them on their job or with their family. There's married student risk factors, there's risk factors if you have dependents. There's risk factors if the student happens to get in a class and doesn't like the online format. I would say that's actually one of our largest reasons when we survey the students who drop out -- one of the major reasons is -- online format just didn't suit me.

But we also still have issues, not with PEL runners, but we do have issues with students who I believe are moving from online school to online school because they know how to game the system, and they are doing enough work academically to stay in the classroom until they receive their loan refund check.

And then, they're what I call one-and-dones. They've registered for a term with us, they've gotten their loan refund check. And then because they've gotten an F in the course, they're not able to continue to persist with us. So they go to another school and never report that they been at our school and they got crappy grades. So the other school accepts them, and there's a circular group of this. Last time I checked, it's not against the law, unfortunately. And there's no national database. So at times this can cycle in. In periods, we can get a higher percentage of those types of students; other times it lowers, with really no ability to predict it.

So that's a complex way of telling you that it's very difficult to predict that. At the same time, I believe that some of the technology measures and some of the processes that we're putting in place -- for example, moving assessments out of the first class into orientation -- if the student can't get through those assessments and orientation, then we're basically going to recommend that they go into remediation and not allow them into a regular course.

As I mentioned on the call, I can't predict what that might due to overall enrollments. But I can predict that it will leave us with a higher-quality student. At the end of the day, this is a process that's going to take months and years to fine-tune, because we don't want to put a hammer on everything. But we have become, I would say, observant students of the risk factors and practices of working adult students. And we continue to try to find ways to both make our students more successful as well as to provide better outcomes for the institution as a whole.

Thanks for the color on that.

When it comes to the bad debt, how should we think about it, as what could it get to -- I mean, is there a -- I don't know if you guys could even provide a split of the bad debt percentage by the TIV side or the civilian side versus the military, as obviously TIV becomes a heavier and heavier percentage, or civilian in general?

Well, I'll start and let Rick add to my comment.

One of the issues that we have is that while we provide categories, those our primary payer types. So for example, somewhere between 25% and 30% of our tuition assistance students are also using FSA. So we don't track bad debt by payer type. But we believe that most of it is more oriented towards the FSA students. But the FSA students aren't all in the FSA category, either.

I agree. So we don't have a breakout by payer type, so I can't provide a split. We do know that when we see a decline in persistence in an FSA student population, it results in a higher volume of return of funds to Title IV, which results in a balance due from that student. And that's really where we've had to step up our collection efforts. And to the extent that's a difficult population to collect from, that is what is negatively impacting our bad debt expense.

Thank you for that.

Jeff Volshteyn, JP Morgan.

Just following up on the bad debt expense dynamics -- where do you think you are in the process of improving your collection processes? Meaning, in 2014, do we expect bad debt to be up as a percentage of everything?

I don't know where it's going to end up in 2014. I know that we are very focused on how we collect and how we can improve our collections. And I think I alluded to some of those initiatives in my comments. So we are very focused on what the underlying issues are and very focused on implementing solutions that will address those.

And I think the other point to note is that when you look at the average debt balance of our students, they're really small amounts. Because as I mentioned on the persistence side, if we can get our students through the first few courses, we retain a much higher percentage, and our tuition is much lower. So it's really this churn of students who are coming through and dropping out for various reasons where we have the highest exposure and highest risk. But once we keep them, there's really very little risk.

That's helpful.

In your second quarter guidance, could you help us separate Hondros from the core operations as far as revenues? And when I kind of back into the number, it seems that revenue per registration at American Public University System could turn negative. Is that what is implied in the guidance?

Revenue per registration turns negative? (Multiple speakers) --

I don't believe that to be the case.

Yes, I don't think that's the case.

So what is the contribution of Hondros to revenues, approximately?

Well, in the quarter, it was $7.2 million of consolidated revenue.

And in the second quarter?

I don't think we're providing guidance at that level of detail. But it gives you some sense of the mix between the two segments.

Okay.

Last question for me -- would you be able to give us a run rate of expenses, now given the new cost base with Hondros? At least, the one that's implied in your guidance?

The run rate of expenses. We've never given guidance --

Yes. I think you'd have to look at everything relative on what we reported for the first quarter, just because we've never tried to break out our guidance by expenses and revenues.

So would the first quarter expenses be a good guide for the remainder of the year? Or at least for the second quarter?

You mean the relative percentage? (Multiple speakers)

I don't know why it's going to vary materially.

Okay. Thank you.

So we're going to file the 10-Q tomorrow, which will have the segment-level reporting of revenues and operating income. For the first quarter.

Thank you very much. Thank you.

Yes.

Corey Greendale, First Analysis.

By the way, Rick, that information is actually in the press release, the breakout by segment, the revenue in income from operations.

I had a few questions. Coming back to one of Jeff's questions, just a slightly different angle on it -- is the revenue-per-student number for Hondros in Q1 a good run rate to use in Q2?

I think so.

Okay.

And then, within the guidance, the decline in new student registrations -- do you expect the drivers there between TA and civilians will be similar? Or do you think you're going to see a narrowing of a decline in TA, and more of a falloff in civilians?

Let me think about that. I think the TA is still rather in a more unpredictable state. For example, we only have one month down in Q2 with April. And we still haven't gone through our free drop week in May. But I would say that year over year, the TA number should come down. Because a year ago, we had the April situation where they stopped TA. And so, we've really only had two good months to comp on. And the FSA number should be relatively the same. So they'll get closer.

Okay.

And just in the benchmark, what's going on in the underlying market, you mentioned that new Army course planner. Do you expect that -- are you seeing material impact from that? And if you look at the other branches of the military, are you seeing better performance in Q2?

I don't have really good data for Q2, because we've only got one month down. But if we looked at Q1 -- you've got really -- the bulk, or the substantial majority of TA registrations for just about anybody that provides services, are in the Army and the Air Force. And both of those -- and not counting overseas, because overseas is a separate contract.

So there was a substantial decline in overseas versus the first quarter from a year ago. Most of that was because of a new policy change that we talked about, where new students are obligated to register with the schools that have the overseas contract. And then, after that, they can transfer. So that's down in the first quarter about 22%, the overseas contract. And I'm assuming that schools like us that don't have -- that aren't part of the overseas contract have the same issue.

And the Army and the Air Force were down approximately 10% in the first quarter. The Navy was down approximately 19%, which is probably why the Navy came out and said they had funding for the full year. For whatever reason, people in the Navy just aren't registering.

And then, the Marine Corps was down pretty substantially. But part of that -- if you recall, when we talked about it in our last call -- the Marine Corps suspended all registrations for the month of February. So the good news is the Marine Corps is not a big percentage. But nonetheless, if you have a big drop like 40% in the quarter -- which impacted schools other than us as well, with February being shut out with these new quarterly allocations of spending.

So overall, that's the color. Those are our numbers by branch of service. I think this new form is slowing down the Army folks in the second quarter until everyone gets adjusted. We're actually tracking it manually. Because the Army had this great system, GoArmyEd, which was totally automated. And large schools like us spent a lot of money to interface our systems with them. And they've now essentially put in a manual system to authorize people to go into the electronic system.

So if anything, that sounds like a way to slow down registrations to me, even though that's not what they said it was. So we'll see how it goes for the second quarter. But it's just too unpredictable right now.

(Inaudible) [said that].

I had one question on the civilian side, then. It sounds like you're thinking of potentially doing some things differently to target students who are likely to succeed, and maybe changing some of the marketing channels. I had the sense that you, over the past year or some period of time, had already been making a bunch of changes and pulling back on some of the mass media. Can you just give us some historical perspective on what you've already done to try to target students likely to succeed, and what else there is you think you can do to improve that further?

Yes. I mean, we changed our commercials and tried to make them oriented more towards -- this is on the mass media side -- towards students who had either completed some college already or who were potential graduate students. Because we found that most of the students who weren't succeeding were students who were reporting to us that they had never attended college before, whether or not that was true. Because there's not a national database, we couldn't figure that out.

In addition, we were matching up -- we had changed the markets that we were advertising in. And so when we were using traditional media, we were matching that traditional media with very specific -- the search keyword purchases in zip codes that combined the profile of the student we wanted to seek, along with a higher demographic in terms of income, which -- theoretically, hopefully, that helps you find a working adult; as well as increased activity in our social media.

So the reason we continued, although at a lower number, our traditional media and radio and TV, we thought that by being more targeted we could drive the conversion rates of the keywords higher, which we did in certain markets.

But at the same time, sometimes when you do purchases, particularly on cable, you still get spread-over. They use your ads in slots and markets you're not paying for, so you don't get charged for it. But it brings in students who you really didn't want to bring in.

So I think over time, if we can't bear out successful traditional media, we'll get pretty close to, I would say, interactive media with the keyword purchases and the online ads, because we can target that so well, and be very minimal on the traditional media. It's just the fact that we're passionate about our affordability -- well, affordability doesn't play well for an ad in certain areas of the country. And unfortunately, it also leads to the word-of-mouth of people who find out they can get higher refund checks attending institutions with lower tuition.

So it's complicated. We have been working on it for more than a year. But in this first quarter, it just -- the results didn't go the way we wanted them to go in the FSA. And so we're ratcheting up our methods for trying to change that quality mix.

Great. Thank you for answering my questions.

Yes.

Jeff Silber, BMO Capital Markets.

You discussed the retention trends for your students that get kind of [fore-funding]. I'm just wondering, are you seeing different retention trends from students from other payment sources?

No. In fact, it's interesting -- I think this is my 12th year with APUS. I'm looking at Harry, because he was here as a consultant before I started. And our military retention numbers had been spot-on. And to the uninformed, you might say -- well, how can that be? But the military actually has a screening process. So they have an exam -- I think it's called the ASVAB. And they make people take that exam. They have to have a minimum cutoff point, as well as they look for other aspects of high school GPA.

So in effect, they're doing a screening process that really isn't coming into play with our general approach to being an open-enrollment institution for the other students. But the cash-paying students are pretty much coming from corporate contracts and relationships. And there's probably a natural selection process there. So --

Plus they probably have natural support communities --

Correct.

-- in the military and the corporate community that an individual FSA student doesn't have.

Right. And the military students are taking one course at a time.

Right, yes. There is another factor, which is -- and I've talked about this at conferences as ironic -- if you look at the PAR project that we participated in with a number of other institutions funded by Gates -- one of the findings was that students were more successful when they only took one course their first time taking an online course. But the problem with that is that one course at the undergraduate level doesn't qualify you for FSA. So the FSA students take more.

And like I said, if we can get them through their first enrollments, we're actually -- they're persisting pretty well. It's just the high dropout rate in the first enrollments.

Interesting.

And just a couple of numbers questions -- can you tell us what's implied in your guidance for taxes, share count, and depreciation and amortization?

One second. Taxes are about 38%, which is consistent with the first quarter, and shares at 17,800,000.

And depreciation and amortization?

Again, it's going to be consistent quarter over quarter.

Consistent with the quarter. Okay, great.

And then, just one last question, I'm sorry -- your capital expenditure budget for this year?

I don't think we've been giving that number out.

Yes. We haven't given it out. But I'd say most of our projects in the first half of the year our IT-related. And we have a lot of technology projects that we're working on.

Fair enough.

Thanks so much.

Trace Urdan, Wells Fargo Securities.

Wally, given the conversation you've been having about the students that are drawn to the larger refund check -- and I apologize for not even knowing the answer to this, but why isn't borrower-based lending a potential solution for that problem?

It may be. Now that we have Regent, I've been told -- and Rick can add some color -- that the Regent system is much more flexible related to that than our previous systems, Trace. But as you recall, we had some issues with our Regent conversion. So the last thing we wanted to do was to go to borrower-based lending while we were trying to clean up some of that.

That's right.

So I would say that that is under consideration. And we're looking at a number of measures. And so that could theoretically help us address the issue of the people who are looking for a greater refund check.

Okay.

But that's not all of the persistence issues.

No, I understand that. I understand that perfectly. That seems to be a bigger issue for you guys. And certainly, I think when you were going through those Regent issues, one of the things that was instructive was seeing how fixated a lot of your students were on getting their refund check, right? You got the sense of how important that was to them.

Oh, yes. Oh, yes.

The other thing I wanted to ask about was -- you've been talking about the efforts to sort of work on the quality of enrollment and the different things you've been doing in the marketing mix. But I'm not sure that you've really sort of address your view on why, in aggregate, things -- the starts should be down year over year. And I'm wondering, to what extent -- is it fair to attribute some of that to those efforts that you've been making to try to inch quality up? Or is that overstating --

Well now -- first of all --

And I'm speaking just on the FSA side. I understand the --

Right, right.

-- issue with the military.

Right. But Trace, there's a difference between the total FSA enrollments and the new students. The new students for the first quarter were actually up 3%.

Okay.

So while that's not a huge number in this environment, that's not a bad number, considering that's a year-over-year, quarter-to-quarter comparison. It's really -- as I went through a great explanation on the persistence side, it's taking those that come in the door on those starts and making sure they're students who can continue to complete with us beyond the initial registrations.

Okay.

And then, I kind of just missed what Rick said about the Hondros new student enrollment. I know that you gave an explanation for why that was expected to be down in the second quarter. But can you just go through that a little bit more slowly for me?

Yes, I can -- this is Harry.

We'll let Harry, the CEO of Hondros, answer that.

Yes. Fair enough.

Yes.

Prior-year Hondros -- it was a privately owned company. And they weren't really consistent with their marketing practices. Their enrollment was all over the place. I mean, they had 280 new students in the first quarter; they had 424 new students in the second quarter.

We really are trying to make it a little bit more stable. We're changing the marketing mix to rely more on relationship marketing, Internet-based marketing. We're finding new students persist better -- more so than the mass media radio advertising on hip-hop stations, like they had been doing.

So we're really changing the marketing mix. And we're getting more consistent. What's looking like it's volatile is because of the volatility of the previous -- the school under the previous ownership. It's really not so much ours. We've probably owned this school for six months now. So it's going to take awhile for things to level off.

But overall, total enrollments are up for the year, revenue is up for the year. And we're going to have a -- we're setting our pace for a strong second half of the year, we believe. So we're really trying to gear students more toward the BSN degree and attract more bachelors-oriented students from the beginning. Because we think that's where the nursing profession is headed. And Hondros has a CCME-accredited bachelor's program, where most of our for-profit competitors in Ohio do not. So we have a competitive advantage there. And the cost of it is very affordable.

So I just think -- while it looks volatile, it's really -- in comparison with last year, which was volatile, and our enrollments are really not.

Fair enough. So despite our obsession with year-over-year comparisons, we should really be looking at Hondros more on a sequential basis, at least for the first four quarters?

If you could, I'd appreciate it.

(Laughter)

All right, thank you.

Tim Connor, William Blair.

I'll ask one more about Hondros. Were there any weather impacts on the second quarter starts number?

That is a really good question. And I'm certain that there were. Because we had several -- Hondros, the way they do it at the campus-based level -- it's one thing when you're recruiting online; weather's not as much of a factor. When you're recruiting in person, it's a hell of a factor. And how many students didn't show up for their interviews because -- well, Hondros was closed seven days during the winter. So you don't know how much of that -- I don't want to use that as an excuse. But that's a very good point. And I certainly think it has some sort of an impact, although I have no idea what it might be. But you can't recruit students on the days where you're closed. That's for sure.

Okay.

And then, now that you've had a couple quarters to look under the hood at Hondros -- other than optimizing marketing and a few other little things, I guess, is there anything that you've seen that you think would constrain you from broadening the campus network outside of Ohio into other states?

Right now, we're being constrained by the fact that the Department of Education still hasn't formally approved the change of ownership. Until that happens, we're actually prohibited from new programs, new campuses. So we're going to just make sure we get that done first. That should happen any day. It really, we think, is more of the formality than anything else. But we have to wait till the Department approves it. We have given them all the information they need; it's up to them.

And then, I think it's also dependent upon the state. So some states are easier to get approvals. Some states require tremendously complicated needs assessments and only allow schools to apply every so often based on their need calculations. So we do think --

Okay. Let me ask it a different way -- is Hondros a scalable platform from a brand and curriculum standpoint, now that you've had a couple quarters to look at it?

Yes. We think so.

Okay.

And then, just more broadly -- the cost of acquisition [floor] for the civilian channels -- sounds like it's gone up, and it's continuing to go up. How are you thinking about marketing spend as a percentage of revenue longer term? And then, would you consider passing through additional fees, whether it's technology or otherwise, to the civilian channel?

Good question. I would say that where I'm thinking about this big picture, I don't mind spending more for civilians if they're quality civilians. So if I can get through what I find is an unacceptable percentage for an initial FSA students who can't make it through, then it's more than worthwhile spending additional money.

We still have a pretty low spend overall compared to others. But that's because we really work on trying to get those relationships and referrals. Because our data shows that those are generally students who are going to succeed. And we never like to take the foot off the pedal here. We like to continue to put stress that we want to try to keep our marketing costs under 20% of revenues. And I think that's a good rule of thumb to follow. But if we could find a successful channel that we had to spend a little bit more money, but we got a much higher-quality student, it'd be worthwhile.

Okay.

And then, what about (inaudible) reflecting on the tech fee increase and a little bit a divergence in the pricing between military and Title IV? Is that a strategy that you might pursue at some point in the future, again?

Yes. I think we have a lot of flexibility right now. When you take tuition fees and books, we're about 20% less than the national average for in-state tuition at the bachelor's level. We're close to 38% less, I think the number is, on the graduate level.

So we certainly have some flexibility there. Some of it, though, is limited to our current system that was really designed to price one way and not -- I mean, we can put additional fees in things, but it's more complicated than it needs to be. And that's one of our big IT projects this year is to put in flexible pricing.

But I would say that we'll continue to examine that. And we'll look for potential opportunity there.

Okay. Thank you very much, guys.

Peter Appert, Piper Jaffray.

Yes, you've got John Crowther on for Peter here.

A lot of questions already, and I hate to beat a dead horse here. But just on the expense side -- cost savings in the first quarter -- how much was actually reflected in the expenses there, versus what was sort of taken out and will be reflected in subsequent quarters?

And then, if you just look at the guidance, it seem to reflect a modest increase in year-over-year total expenses, in terms of year-over-year growth. Just wondering -- obviously, you've called out a couple of things -- bad debt expense, marketing. If there's anything else that might sort of be behind that modest year-over-year increase?

Well, we also talked about the fact that Hondros has a higher expense ratio than we do. One of the things that we will be doing at the end of this year is replacing the LMS, which will reduce some of the G&A costs for Hondros and improve the margin.

But we're also -- once again, we're paying for increased technology. We talked about some of those enhancements. And you can't capitalize 100% of your programming costs for the systems that you use. So we have increased our IT expenses.

So while we're saving in one area, we think it's pretty important to continue to invest on the technology side. We're not what I would call bleeding-edge. But if you're not leading-edge, you don't really have a product that differentiates yourself from a lot of competitors.

So we periodically assess -- particularly in the summer, we look at what we want to do for capital spending next year. So we'll look at the projects that we've done and make a determination whether we're going to come back a little bit or keep the accelerator going with IT projects for next year.

Okay.

And just kind of going back to the first part of that -- in terms of cost savings, were most of the cost savings reflected in the Q1 expenses? Or is there some incremental that might sort of bleed into Q2?

I think you'll see the plans -- you'll see the larger effect of that in the second half of the year. We mentioned an under-spend in selling and promotions specifically. A portion of that is recurring, and a very large portion of that simply is a timing issue between the various quarters.

So I would say the things we're doing today will have a greater impact later in the year.

And then, we also mentioned that we had some overlapping expenses that we adjusted, both travel expenditures, conference expenditures, some payroll costs. And we mentioned the merger of our two -- with our community college and our military outreach teams to make them more efficient and less overlapping. And so that'll really show up in quarter three and four.

Great. Thank you.

Thank you.

At this time, there are no further questions. I would like to turn the call over to Mr. Chris Symanoskie for closing comments.

Great. Thank you, operator.

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