American Public Education Inc (APEI) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2015 American Public Education, Inc. earnings conference call. My name is Joyce 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, Chris Symanoskie, Vice President of Investor Relations. Please proceed.

Thank you, operator. Good evening, and welcome to the American Public Education conference call to discuss financial and operating results for the second quarter of 2015. 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 upon 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 results or events 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 enrollment, expected revenues and expected earnings, and plans with respect to recent and future investments and partnerships. Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors including the risk factors described in the risk factor section and elsewhere in the Company's annual report on Form 10-K filed with the SEC 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's my pleasure to introduce Dr. Wallace Boston, our President and CEO; and Rick Sunderland, our Executive Vice President and Chief Financial Officer. Also available for questions today, is Harry Wilkins, Executive Vice President, Chief Development Officer, and CEO of Hondros College of Nursing. Now at this time, I'll turn the call over to Dr. Boston.

Thank you, Chris. Good evening, everyone. I will begin today's call with a summary of our recent operational results and provide a brief commentary on the progress we are making with respect to our strategic priorities. Then our CFO, Rick Sunderland, will discuss our financial results and provide perspective on the Company's outlook for the third quarter of 2015.

Starting off with slide number 3. As expected, overall net course registrations at APUS decreased 7% year over year and net course registrations by new students declined 19% year over year in the second quarter of 2015. These results were mainly due to the decline in net course registrations by students using federal student aid and students using military tuition assistance. Net course registrations by new and total students using military tuition assistance decreased year over year by 13% and 10%, respectively. We believe the decline is primarily a result of the decline in the utilization of military tuition assistance benefits by active-duty military professionals. Net course registrations by new and total students, using federal student aid decreased year over year by 32% and 16%, respectively. We believe this decline is a result of our various efforts to influence our quality mix of students and implement new admissions processes, as well as a result of increased competition in the marketplace.

Although APUS continued to experience year-over-year declines in net course registrations by students using federal student aid and tuition assistance, net course registrations by new and total students using veterans benefits, increased year over year by 2% and 7%, respectively. We attribute this increase to AMU's strong reputation among military-affiliated communities and increased retention of students using G.I. Bill benefits. Net course registrations by students using cash and other sources, were approximately flat year over year. However, net course registrations by new students using cash and other sources increased by approximately 5% compared to the prior-year period.

I am pleased that our efforts to pursue corporate and strategic partnerships continued to advance with the addition of several new partnerships in the second quarter of 2015. For example, we recently became a strategic level partner of the Defense Acquisition University, an organization that trains more than 150,000 military and civilian professionals within the defense industry. And, we became the first school to form an educational partnership with the Federal Managers Association, the oldest and largest association representing the interests of over 200,000 federal government employees.

In the second quarter, we continued to focus on key initiatives that we believe will improve the college readiness of our incoming students. Further improve persistence. And, advance the online learning experience. It appears that these initiatives are positively influencing our quality mix of students and increasing persistence as indicated by continued improvement in the first course pass and completion rates of undergraduate students and the decline in bad debt expense at APUS.

Finally, I am pleased to report that Hondros College of Nursing increased student enrollment by 9% year over year, with a 5% increase in new student enrollment during the second quarter of 2015. We continue to be pleased with our investment in Hondros, as we work hard to improve outcomes, strengthen the brand positioning of the institution, and provide students with greater flexibility through programs offered during evenings and weekends.

Moving on to slide number 4. While we continue to face headwinds from competition in our efforts to positively influence our quality mix of students, we feel that it's important to emphasize that the foundations of our success continue to provide us with a competitive advantage, namely, our value proposition and reputation for quality. Based on the data reported by the Department of Education's online College Affordability and Transparency Center, APUS continues to hold a significant tuition and net price advantage over the average four-year public and private institutions. Furthermore, AMU continues be recognized as the leading provider of higher learning to the active-duty military community. Recently, AMU was again ranked by Military Times magazine as the number one school serving active-duty military. We estimate that AMU maintained its 17% market share in 2014, despite the tremendous amount of change and volatility in the military's tuition assistance program.

AMU also advanced within the veteran community. Moving forward two spots to be the number six provider of higher education to veterans, according to Military Times. Or leadership is best demonstrated by the success of our students and alumni. Last month, two AMU alumni were recognized with the prestigious Military Times Service Member of The Year award. We are truly honored to have students and alumni that are frequently recognized for their incredible contributions, dedication, and service to our country.

Moving on to slide number 5. Over the last several quarters, we have invested considerable resources in initiatives designed to better attract students with academic intent, improve the average college readiness of incoming students, and increase overall student success. We believe that these efforts are beginning to yield positive results as indicated by the increase in our first course pass and completion rates and by the increase in the average GPA of new APU students.

For example, we are excited to see that the first course completion and pass rate for undergraduate students using federal student aid, increased approximately 19% in the second quarter of 2015 compared to the same period of 2014. Since August of 2014, we have continued to refine our targeted advertising and expand our pilot programs to improve persistence. In August of 2015, we launched our first courses redesigned with rich media, simulations and other improvements to increase student engagement and increase the appeal of our courses. We continued with the rollout of our new learning relationship management, or LRM system, called ClearPath, to all undergraduates and we recently piloted several Civitas Learning applications that we expect will increase our predictive analytics and early warning capabilities for at risk students. As well as further increase student engagement and teaching excellence.

Moving on to slide number 6. While we continued to be confronted with many challenges, stabilizing enrollment and improving persistence are among our top strategic priorities. As a result of our focus on an investment in quality initiatives, we now have many more tools and strategies at our disposal to address the major challenges and reach our objectives.

We are pleased that the third quarter outlook for net course registrations at APUS indicates that student persistence is improving. As we discussed last quarter, we continue to adjust our marketing outreach by reallocating marketing dollars to more cost-effective channels and utilizing enhanced geographic targeting and analytical capabilities in outreach to prospective students who have a greater potential to succeed. During the first six months of 2015, the number of civilian student leads or inquiries received by APUS increased by approximately 38% compared to the prior-year period. We believe this is due, in part, to our attractive value proposition, high referral rates, and the effectiveness of our outreach campaigns.

Although the average college readiness and academic intent of these prospective students requires further evaluation, we believe the increase in inquiries is a positive result of our outreach efforts. At the same time, we need to put additional human and technological resources in place to improve the conversion of inquiries to applications because applications were down by 16% over the same timeframe. Historically, our application process has been largely automated with prospective students working independently to complete the application. However, civilian students in particular, may require a higher level of assistance at this point in the student lifecycle.

In closing, we believe the highlights of the second quarter of 2015 are the continued improvement in student persistence, lower bad debt expense, enrollment growth in Hondros College of Nursing, and year-over-year growth in our lead flow. Moreover, we believe that our primary strategic competitive advantages continue to be our reputation as a respected leader within military communities and leadership on matters related to affordability and value. Our long-term strategy is to create a diversified learning enterprise that delivers respected, affordable higher education programs through a best-in-class university experience.

We have outlined several key initiatives to support our strategic priorities and our long-term goals. I believe we are making good progress. At this time, I will turn the call over to our CFO, Rick Sunderland, to discuss our recent financial results and second-quarter outlook in greater detail. Rick.

Thank you, Wally. Going on to slide 7. American Public Education's second-quarter 2015 consolidated financial results include a 6.1% decline in revenue to $80.3 million. Compared to $85.5 million in the prior-year period. The decrease in revenue was a result of a year-over-year decrease in net course registrations at APUS, which is partially offset by higher enrollment and tuition at Hondros College of Nursing. In the second quarter, our APEI segment revenue decreased 7.3% to $72.6 million compared to $78.3 million in the prior-year period.

Hondros segment revenue increased 6.9% to $7.7 million in the second quarter of 2015 compared to $7.2 million in the same period of 2014. On a consolidated basis, costs and expenses decreased 1.3% to $68.7 million compared to $69.6 million in the prior-year period. The decrease was primarily due to lower instructional costs in our APEI segment resulting from lower net course registrations, lower advertising costs, and lower bad debt expense. On a consolidated basis, operating margins decreased to 14.4% in the second quarter of 2015 as compared to 18.6% in the prior-year period. The year-over-year decline in APEI segment revenue is the primary cause of the decline in consolidated operating margins.

For the second quarter, consolidated instructional costs and services expense, or ICS, as a percent of revenue, increased to 37.0% compared to 35.3% in the prior-year period. The increase is due to our APEI segment -- segment's ICS expenses declining at a rate less than the decline in revenue. At APUS, the cost-to-course materials continued to decline year over year to approximately $25 per net course registration in the second quarter of 2015 compared to approximately $28 per net course registration in the second quarter of 2014.

Selling and promotional expense, or S&P, as a percent of revenue increased to 20.1% of revenue compared to 19.9% in the prior-year period. Year over year, S&P costs decreased 4.7% to $16.2 million compared to $17 million in the prior-year period. Accordingly, the year-over-year increase as a percent of revenue, is due to S&P costs declining at a rate less than the decline in revenue.

General and administrative expense, or G&A, as a percent of revenue increased to 22.6% from 21.6% in the prior-year period. Our G&A expenses decreased 2.2% to $18.1 million compared to $18.5 million in the prior-year period. The decrease in G&A expense was the result of a decrease in bad debt expense, which was partially offset by increased expenses related to financial aid processing in our APEI segment. Which is largely attributable to the transition of APUS' financial aid processing to a third-party vendor and an increase in G&A expenses at Hondros.

For the three months ended June 30, 2015, bad debt expense decreased to $3.9 million or 4.9% of revenue compared to $4.9 million or 5.7% of revenue in the prior-year period. We believe the improvement in bad debt expense is a result of a change in our mix of net course registrations away from students using federal student aid, as well as by our ongoing efforts to attract students with greater academic and college readiness on average. During the three months ended June 30, 2015, 32% of net course registrations were by students using primarily federal student aid compared to 35% in the prior-year period. For additional information about our operating expense ratios by segment, please see the appendix to the PowerPoint presentation that was made available on our website and in an 8-K filed earlier today.

Income from operations before interest income and income taxes, decreased to $11.6 million compared to $15.8 million in the prior-year period. In the second quarter of 2015, net income was $7.1 million or $0.42 per diluted share compared to $9.8 million or $0.56 per diluted share in the prior-year period. Total cash and cash equivalents as of June 30, 2015, were approximately $103.7 million, with no long-term debt.

For the six months ended June 30, 2015, capital expenditures were approximately $12.8 million compared to $9.2 million in the prior-year period. Approximately $2.1 million of the increase is related to additional investments in software development and approximately $1.1 million is related to our new IT Center in Charles Town, West Virginia. After the completion of our new IT center, which is almost ready for occupancy, we do not anticipate any major new building projects in the near term.

Depreciation and amortization was $9.3 million for the six months ended June 30, 2015 compared to $17 -- $7 -- excuse me, compared to $7.8 million in the same period of 2014, an increase of 19.2%

During the second quarter of 2015, we repurchased 563,820 shares of our common stock under existing repurchase authorizations. On June 12, 2015 the Board of Directors authorized an additional repurchase amount of $15 million. As of June 30, 2015, we had approximately $15.1 million available for stock repurchases.

Going on to slide 8. Our outlook for the third quarter of 2015 is as follows. APUS net course registrations by new students in the third quarter of 2015 are expected to decrease between 23% and 19% year over year. Total net course registrations are expected to decrease between 8% and 4% year over year, compared to the prior-year period. We believe these declines are a result of increased competition for students and to challenges in the military market, as well as the implementation of a new admissions process and a more targeted and narrow geographical approach to marketing that is intended to attract students with greater college readiness. The change in our geographical approach to marketing was initiated in August of 2014. Thus, September -- thus, in September, we are beginning to see the first full month where this more targeted approach was in place in both the current and prior-year period.

In the third quarter of 2015, total student enrollment at Hondros is forecast to increase by approximately 5% year over year. However, new student enrollment is expected to decrease by approximately 6% year over year. For the third quarter of 2015, we anticipate consolidated revenue to decrease between 11% and 7% year over year, compared to the prior-year period.

In the third quarter of 2015, we anticipate total consolidated earnings per share to be between $0.36 and $0.41 per diluted share. As a reminder, courses at APUS start on the first Monday of each month. Since courses starting this September will begin on 7 September compared to September 1 in 2014, there will be six fewer days over which revenue will be recognized in September 2015, as compared to September 2014. We estimate the impact on revenue of this day's differential will be approximately $2.7 million in the quarter.

As previously announced, effective July 1, we increased undergraduate and graduate tuition approximately 8% for non-military students. At the undergraduate level, this is our first tuition increase since 2000. The tuition increase is applied to all non-TA and non-VA registrations completed after July 1. And therefore, the full effect of the increase will not be realized until subsequent quarters as some registrations represent courses for which students registered prior to the tuition increase.

As Wally noted earlier, we've experienced a year-over-year increase in leads by civilian students. However, we must work to increase the number of interested students who complete applications for enrollment and ultimately compete courses. Moreover, while we believe the new admissions process may have adversely impacted our enrollment, it is still too early to fully assess the magnitude of the impact as the new process was recently launched in the month of April. Given what appears to be improvement in persistence, and the new admissions process recently put in place, we plan to continue adjusting our marketing outreach by reallocating marketing dollars to more cost-effective channels and by utilizing our enhanced targeting and analytical capabilities to reach potential students.

In closing, we continue to explore optimize our operations and adjust costs. At the same time, we continue to believe that investing in new programs, our information technology infrastructure, and our student services during a time of lower revenue makes long-term strategic sense. While this may adversely impact our margins and results of operations in the near term, we believe the continued investment will help us emerge as a more competitive and efficient organization in the long term. Our focus remains on the success of our students, the quality and uniqueness of our academic programs, and on creating effective and engaging learning experiences that will set us apart from the competition. Now, we would like to take questions from the audience. Operator, please open the line for questions.

(Operator Instructions)

Corey Greendale, First Analysis.

Hi. Good afternoon. Thanks for taking my question.

Sure.

First of all, I apologize. I missed the change in new student registrations in the TA market. Could you give me that again?

New students in TA were down 13%.

Okay. Thank you. And then, the next question is talking about the FSA market. So, if you look broadly across, at least, the public companies, which is what we can see pretty well, obviously, times are tough. But, I would say that, for the schools -- that -- I'm trying to think about a nice way to put this. For the schools that have a clear, lower cost value proposition, those are doing relatively well. It seems like, in some sense, you're an outlier in terms of the negative 32% on FSA. Can you address a little bit more what you think is driving that, specifically for you? And, as you start to lap the change in the geographically targeted marketing, do think that gets closer to flat?

Yes, I think we do, Corey. But, we've talked about this for several quarters. That, approximately last August, we began targeting, using demographic and geographical analytics, a better student. We looked at the students that -- the profile of the students that we had who were successful in passing their first courses and continuing on to graduate. And, decided that we would rather spend money, both through our Internet marketing as well as through radio and TV, specifically in markets that had a profile of a student that matched that. And not market at all in markets where the results had not been good for us. So, it was not a black-and-white overnight process. We continued to tune that process through the end of 2014. But, nonetheless, we've been working on that process since August a year ago. And, I think that's driving most of it. There may be some competition in there. And, there also maybe some -- the fact that there were some good students, but a small percentage of good students, who were in markets that we just see ceased marketing in.

Yes. So, it sounds like -- I know you're not going to give us guidance beyond Q2. But, it sounds like, as this anniversary's declined, it should start to get better Q4, and maybe, more meaningfully into 2016, as that anniversaries. Is that fair?

That's what we're hoping. I mean, we believe that September will be the first full month that we'll have month-over-month comparatives. And, obviously, we didn't give guidance, specifically, for September. But, with that -- that's our first month. And, we think we'll see positive year-over-year comparisons.

Okay. And, then one of your competitors, in talking about the TA market, said that they were seeing, specifically, in the Navy and Coast Guard, funds running out and that affecting enrollment in those branches. Is that something you're seeing? And, do you expect that TA gets better as the federal fiscal year begins in Q4?

I would tell you that as long as the sequester is in place, which it still is, that I think were going to see turmoil in Department of Defense budgets overall and TA is a component in that. The Coast Guard explanation, really, the dip there, they changed their reimbursement from 100% at rates to 75% of rates. And that obviously impacted some people who didn't want to pay the out-of-pocket amount. And, as far as the Navy goes, I would say that the Navy has issued several public statements saying that they had money for all their funding. At the same time, they don't tell anyone what their money is. But, we haven't seen any noticeable hiccups with the Navy.

Okay. And then, one question on the cost side. It sounds like you expect trends to improve beyond this quarter. But I'm not -- I don't think you -- at least you haven't announced any larger cost efficiency initiatives. Are you looking at doing anything to reduce the cost base given the recent enrollment trends?

I think we -- we've always -- are mindful of that and have a pretty good process for managing our cost. At the same time, we did talk in this call about the fact that we're looking at the fact that we may have to do more hand-holding and more personal intervention with civilian students then we're used to with our much more automated registrations for military -- active duty military students. So, we will continue to be mindful of it. But, if we see a return -- a positive return, by perhaps, some more personal intervention, then, we will do that.

Okay. And, just one last quick one for me. And then, I'll turn it over. With the price increase going into effect in July. Any initial returns on student or prospective student reaction to that?

None.

None?

I probably can't say that it's zero, but, very negligible. I think, I only heard of one or two. When we announced that we basically gave everyone information on all the technology expenditures we had done over the past three years and that we anticipate to do for the next two years. And, they're seeing some of the benefits of that, particularly with our native app that we've implemented this past year. Just this past week, we were apprised that we hit a record number of page views in a day, I think 200,000, so --

In one week it was over million page views.

Yes, so, we're pleased that's being positively received. And, I think when you haven't increased your tuition at the undergrad level for 14 years, and people are seeing a positive turnaround with technology investments, it went over okay

Great. Thanks for taking my question.

Jeff Silber, BMO.

Hello. Good afternoon. It's Henry Chan for Jeff. I just had a question around some of the comments you had around -- you mentioned you had an increase in inquiries. Is -- I'm just wondering what is driving, or, what is some of the issues that are -- is leading to some of these inquiries not being converted into starts? And, are you planning to change your admissions process or increase your number of admissions personnel or anything of that sort? Thanks.

Right now we don't believe that the conversion is a people problem. We talked about the fact that beginning last August, we really tried to take our data and go -- deliberately go after a much higher student success profile. And, I think that much higher student success profile is a profile that's very attractive to the nonprofit public and private institutions. So, we -- at the same time we just believe that, over time, a better student profile will give us better retention as well as better outcomes and, ultimately, better graduation rates. So, we will continue to look at our data, try to improve the ratio of applications from leads generated. But, while we've increased the number of 38% -- I think we said our app volume was down 16%. And so, it just -- you have -- we look at this data daily. And, you just have to, sort of refine where you're targeting and what your message is to the group that you're trying to attract.

Yes. Got it. And, can you talk a little bit about -- are you seeing any traction in -- on the corporate partnership front?

I think it's up slightly in the quarter, maybe 5%. And so, the messages we've been giving on corporations, is we can work the partnerships and we can become a partner. But, generally, it's very rare if you get an exclusive and you're the only partner. And so then you're competing with, hopefully, just a handful of other educational partners. And, different corporations have different messages and different needs for institutions to match up with their employees. So, the good news is, it's up. And, we continue to pursue it. The -- it -- helped. Our cash is flat. And, most of our corporate revenue's in the cash category. I think it's up a percent year over year from 12% to 13%. And we announced a couple new partnerships. But, they take time to implement and take time to expand the number of students.

Yes. Got it. Okay. All right. Thanks so much.

Yes.

(Operator Instructions)

Adrienne Colby, Deutsche Bank.

Hi. Thanks for taking my question.

Sure.

Second-quarter results and third-quarter guidance seem to apply some slower growth at Hondros. I was wondering if you could talk a little bit about what's selling down there?

Yes. Well, we -- again, it's more seasonal than APUS business because it's more traditional, the students registering the fall and January being our best terms. But, the spring and summer did slow somewhat year over year. We still had positive growth. Most of the slowness is really in our RN program; our Associates degree in Nursing. Our -- we actually had fairly good growth in our Licensed Practical Nurse program which is the first program that the nurses take. And, BSN program was a little less than we anticipated. But still, overall, our BSN program total enrollment's growing fine. I can't explain, it's a little too soon to explain the change in the RN registrations, it's a combination of things, I'm sure.

Part of it is we don't have evening classes yet for the RN program. The evening prep classes are proving to be very popular for the LPN program. Part of it is, I think, the economies students are entering into the workforce. They can get a job as a Licensed Practical Nurse. Perhaps, more students are opting to enter the workforce more quickly. And, part of it is that we've gotten a little tougher on our admissions for our ADN program. Because, we want to make sure we have -- we meet our pass rate results that we need to make for our -- the NCLEX exam for our graduates to get licensed. So, the combination of those things, I think, is affecting the ADN program a little more than it had last year. And, that's where the majority of the weakness is. But overall, we're pleased with the way our enrollment's growing.

And, as a follow up to that. Have you any more details about when the final approval from the department will be coming through?

I would love to give you an update on that if -- but, unfortunately, the department has still not responded to our application for change of ownership. We're still awaiting their approval. It's been since November 1, 2013. We should get it any day. We've contacted them. They're working on it and that's all we know right now.

Thank you.

At this time there are no further questions in queue.

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

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.