American Public Education Inc (APEI) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the American Public Education Inc. third quarter 2015 results conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder this conference is being recorded.

I would now like to turn the conference over to your host, Chris Symanoskie, Vice President of Investor Relations. Sir, you may begin.

Thank you, operator. Good evening, and welcome to the American Public Education conference call to discuss financial and operating results for the third 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 in 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, amounts in nature of anticipated charges, 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.

On the call today we will also discuss certain non-GAAP measures and our outlook for the fourth quarter of 2015. Although these non-GAAP measures are not intended to be a substitute for GAAP results, we believe they will allow investors to better compare results to prior year periods.

This evening its 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.

Thanks, Chris. Good evening, everyone. In today's call I will provide a summary of our recent results and commentary on our strategic priorities. Then our CFO, Rick Sunderland, will discuss our financial results and provide perspective on the Company's outlook for the fourth quarter of 2015.

Before we begin I want to take a moment to thank Harry Wilkins for his service to our company. Harry recently informed us that he will retire in December from his current roles as Chief Executive Officer of Hondros College of Nursing and Chief Development Officer of American Public Education. Harry's involvement with APUS and APEI goes back to 2001 when he was hired as a consultant.

Harry was instrumental in helping the company receive private equity funding in 2001 and 2002, helped us obtain approval for participation in the Federal Student Aid Program and he served as a board member through 2006. Harry became our CFO in 2007 and ably guide us to an IPO later that year through SarbOx compliance and two secondary offerings in 2008.

He led the team that identified and acquired Hondros College of Nursing and has led Hondros as its CEO since November of 2013. More importantly, to me, Harry introduced and recommended me to APUS in September of 2002 and the two of us have worked together since that time. I want to thank Harry for his service to our companies, I wish him well in his retirement and I appreciate his willingness to work with us as we transition to new leadership at Hondros. Its been a wonderful experience working with you, Harry.

In the third quarter of 2015 overall net course registrations at APUS decreased 6% and net course registrations by new students declined 19% year-over-year. The overall decline was primarily driven by a 35% decrease in net course registrations by new students using federal student aid. We believe that efforts to improve our quality mix of students through new admissions processes, more targeted advertising, and increased competition for civilian students contributed to the decline in net course registrations in the third quarter of 2015.

It is also important to note that overall net course registrations by returning students declined only 3% year-over-year, indicating that our goal of attracting better students is working.

Net course registrations by new and total students using military tuition assistance, or TA, decreased year-over-year by 7% and 3% respectively. We believe the decline is primarily the result of decreased utilization of military tuition assistance benefits by active duty military professionals. That said, in the third quarter the year-over-year decline represents a sequential improvement over the year-over-year (inaudible) decline we experienced in the second quarter of 2015.

Furthermore we believe that the perceived risk of a government shutdown has lessened with the bipartisan budget agreement recently passed by Congress. Although we expect continued volatility in TA course registrations we are pleased at the volume of net course registrations by students using TA has turned positive, thus far, with December advanced registrations.

Although net course registrations by new students using veterans benefits were approximately flat year-over-year total net course registrations by veterans increase nearly 10% in the third quarter of 2015. We attribute this increase to AMUs strong reputation among military affiliated communities and increased retention of students using GI Bill benefits.

While net course registrations by students using cash and other sources were approximately flat year-over-year net course registrations by new students using cash and other sources increased by approximately 5% compared to the prior year period. We believe that this increase was aided by our ongoing efforts to pursue corporate and strategic partnerships.

We launched new academic programs at APUS during the quarter including an MS in Nursing as well as MS and BS in Health Information Systems to expand our presence in the growing health care field. We continue to focus on several key initiatives to increase student persistence and to attract students with academic intent and greater college readiness. It appears that these initiatives are positively influencing our quality mix of students as evidenced by a 19% year-over-year increase in the first course pass and completion rates of undergraduate students at APUS and the continued reduction of bad debt expense.

In September of this year we changed the method by which we disperse federal student aid from a single disbursement method to a multiple disbursement method for first time APUS undergraduate students.

In the fourth quarter of 2015 Hondros College of Nursing increased student enrollment by 3% year-over-year while new student enrollment declined by 11% year-over-year. ADN program enrollments at Hondros declined as a result of strengthened completion requirements in the Practical Nursing program, which is the primary source of new ADN students in the Practical Nursing program and the addition of night and weekend courses which has resulted in students taking fewer total courses each academic term as some students that would otherwise have studied on a full-time basis are now pursuing courses on a part-time basis.

We believe that the negative revenue impact could continue in future periods. Additionally, Hondros has transitioned its LMS and IT systems to those also currently used APUS and the new evening programs, which were launched last fall, continue to be very popular with new and current students.

Moving on to slide number four, recently we've increased our focus on four important areas of our strategic plan and increased our emphasis on managing costs.

Although our lead flow has increased year-over-year we believe that, among other cost control efforts, its prudent to continue to selectively target our advertising spend while we work to improve the application assessment processes and/or until our conversion rates improve. With several initiatives already underway we hope to realize improvements in our conversion rates next year.

In addition to cost management we are seizing the opportunity to further increase our focus on four strategic priorities, number one, optimizing targeted outreach, number two, refining the assessment and application process, number three, improving student engagement, number four, enhancing the university experience.

We've made good initial progress on these priorities. In the third quarter of 2015 we were, again, able to generate a year-over-year increase in leads. That said, we continue to adjust our marketing outreach by reallocating marketing dollars to more cost effective channels and utilizing an enhanced geographic targeting and analytical capabilities and outreach the perspective students who have a greater potential to succeed.

In addition, we believe we are seeing signs of improvement in persistence related in part to the changing quality mix of students and the use of ClearPath, Civitas and other initiatives aimed at increasing engagement and interactivity.

We continue to be challenged by low conversion rates and competitive market conditions for civilian students. Thus, we are allocating additional resources to the early stage of the lead to enrollment lifecycle. Specifically we are working to optimize and improve the effectiveness of our online application process and our new admissions course.

We plan to launch a new version of the admissions assessment and release updates to our application form by the end of the year, which we hope will result in an increase in conversion rates in 2016. Once these tasks are completed and our conversion rates increase we may then increase our outreach efforts to yield a better return on our investment in marketing and attract more qualified students to our institutions.

As you know, we are laser focused on creating a best in class student experience, an experience that is affordable and differentiated from our competition. Our Native Classroom App, APUS Mobile, is just one example of our efforts. I'm pleased with the increase in the adoption rate of APUS Mobile, which is now installed on over 20,000 Apple and 14,000 Android devices.

In October there were more than 1.2 million average weekly page views within the application. In addition, I'm pleased that we have opened our Learning Relationship Management System, ClearPath, to our of our undergraduate students. As of October 30th there were more than 21,000 undergraduate students using the platform and well soon be inviting alumni to join the network.

Our focus and success is also reflected in the growing recognition that we receive each year, from the rankings in US News & World Report to the awards from the online learning consortium, I'm very proud that AMU, APU and Hondros regularly earn the recognition of our students, alumni and the various communities we serve.

Given our focus on key priorities we plan to suspend the majority of our international development efforts until we see greater enrollment stability at APUS. While certain international relationships will continue to move forward we plan to reduce our international outreach thereby allowing us to focus more on key initiatives.

In closing, we believe the pieces of the puzzle for our future stability are starting as an academic institution with a higher purpose we just make sure that we manage the institution with a long-term perspective, build it to overcome big challenges and ensure that we continue to server our deserving students and other audiences with distinction.

At this time I will turn the call over to our CFO, Rick Sunderland. Rick?

Thank you, Wally. On to slide five.

American Public Educations third quarter 2015 consolidated financial results include a 9.9% decline in revenue to $76.3 million compared to $84.7 million in the prior year period. Both our API segment and our HCON segment reported revenues, declines in revenue when compared to the prior year period.

In the third quarter our API segment revenue decreased 10.4% to $69.2 million compared to $77.2 million in the prior year period. The decline in API segment revenue is due to the decline in net course registration.

HCON segment revenues decreased 5.3% to $7.1 million in the third quarter of 2015 compared to $7.5 million in the same period of 2014. The decline in HCON segment revenue is primarily due to decreased enrollment in HCONs ABM program and the addition of evening and weekend classes which has resulted in students taking fewer total courses each academic term as they pursue their studies on a part-time basis.

On a consolidated basis cost and expenses decreased 6.1% to $65.8 million compared to $70.1 million in the prior year period. The decrease was primarily due to a decrease in selling and promotional expense in our API segment. On a consolidated basis operating margins decrease to 13.9% in the third quarter of 2015 as compared to 17.2% in the prior year period.

The year-over-year decline in operating margins is due to our revenue decreasing at a rate greater than the decrease in cost and expense. For the third quarter consolidated instructional costs and services expense, or ICS, as a percent of revenue, increased to 38.2% compared to 36.2% in the prior year period. The increase is due to our API segments ICS expenses declining at a rate less than the decline in revenue.

At APUS the cost of course materials continued to decline year-over-year to approximately $22.00 per net course registration in the third quarter of 2015, compared to approximately $28.00 per net course registration in the third quarter of 2014.

Selling and promotional expense, or S&P, as a percent of revenue, decreased to 18.4% of revenue compared to 21.2% in the prior year period. Year-over-year S&P cost decrease 21.2% to $14.1 million compared to $17.9 million in the prior year period. Accordingly the year-over-year decrease, as a percent of revenue, is due to S&P costs declining at a rate greater than the decline in revenue.

General and administrative expense, or G&A, as a percent of revenue, increased to 23.1% from 20.6% in the prior year period. Our G&A expenses increased 1.7% to $17.7 million compared to $17.4 million in the prior year period. The increase in G&A expense was the result of an increase in G&A expense in our HCON segment.

For the three months ended September 30, 2015, bad debt expense decreased to $2.6 million or 3.4% of revenue compared to $4.3 million or 5% of revenue in the prior year period. We believe the improvement in bad debt expense is the result of a change in our mix of net course registrations away from students using federal student aid, as well as our ongoing efforts to attract students with greater academic intent and college readiness.

During the three months ended September 30, 2015 31% of net course registrations were by students using primarily federal student aid compared to 36% in the prior year period. Income from operations, before interest income and income taxes, decreased to $10.5 million compared to $14.6 million in the prior year period.

In the third quarter of 2015 net income was $6.8 million or $0.45 per diluted share compared to $8.8 million or $0.51 per diluted share in the prior year period. Total cash and cash equivalents, as of September 30, 2015, were approximately $113.8 million with no long-term debt. For the nine months ended September 30, 2015 capital expenditures were approximately $19.6 million compared to $15.3 million in the prior year period.

The largest increases were related to our new IT Center located in Charles Town, West Virginia, an increased investment in software development and academic program development. The new IT Center is now occupied and we do not anticipate any major new building projects in the near term.

Depreciation and amortization was $14.2 million for the nine months ended September 30, 2015, compared to $11.9 million for the same period of 2014, an increase of 19.3%. During the third quarter of 2015 we repurchased 129,849 shares of our common stock under existing repurchase authorizations. As of September 30, 2015 we had approximately $12.1 million available for stock repurchases.

On to slide six. Our outlook for the fourth quarter of 2015 is as follow, APUS net course registrations by new students in the fourth quarter of 2015 are expected to decrease between 22% and 19% year-over-year. Total net course registrations are expected to decrease between 10% and 8% year-over-year, compared to the prior year period.

We believe these declines are primarily a result of increased competition for students and the various measures we have put in place to improve our quality mix of students as well as our targeted approach in advertising spend as we work to improve our student conversion rates.

In the fourth quarter of 2015 total student enrollment at Hondros is forecast to increase by approximately 2% year-over-year. However, new student enrollment is expected to decrease by approximately 11% year-over-year.

In the fourth quarter of 2015 we anticipate consolidated revenue to decrease between 10% and 6% year-over-year compared to the prior year period. In the quarter ending December 31, 2015 we anticipate that we will incur a charge of approximately $1.8 million in connection with a workforce realignment, which we anticipate will result in approximately $3 million in savings in the year ending December 31, 2016.

We also anticipate that we will write off approximately $1.4 million in information technology assets in our API segment during the three months ending December 31, 2015.

EPS for the quarter is expected to be in the range of $0.40 to $0.45 per fully diluted share, which includes the impact of anticipated charges that are estimated to be approximately $0.11 per diluted share. Excluding the impact of the anticipated charges non-GAAP adjusted EPS is expected to be $0.51 to $0.56 per fully diluted share.

Management believes that the adjusted EPS guidance for the quarter ending December 31, 2015, which excludes charges for employee realignment and the write down of information technology assets. Its useful because it will allow investors to better compare results to prior year periods.

On to slide seven. At the start of 2015 we outlined several key initiatives for the year. I am pleased that we have completed most of these initiatives including the initial rollout at Elis ClearPath, Civitas and other student retention pilots. The launch of APUS Mobile, the introduction of a new student assessment course, the launch of multiple disbursements for undergraduates, first time APUS students using federal student aid and the previously announced tuition increase.

Recently decided to suspend our investment in international outreach to manage costs and we made improving conversion rates by optimizing our application and assessment processes, one of our current priorities.

API continues to be challenged, including the challenges associated with increasing competition, a difficult regulatory and unfavorable full profit environment in matters relating to attracting students with academic intent and college readiness.

However our initiatives to improve our quality mix of students and student persistence appear to be gaining traction. We believe APEIs in a position to stabilize enrollment in the future and execute our strategic plan. For the balance of this year and into next we will continue to explore ways to optimize our operations in manage costs. At the same time we plan to refocus our efforts on four key areas to aid in stabilizing our enrollment and help emerge as a more competitive and efficient organization in the long run.

Our management team remains committed to our mission, in particular the success of our students, the quality and uniqueness of our academic programs and creating effective and engaging learning experiences that will set us apart from the competition. We believe these are central to creating long-term value for all stake holders, including more than 57,000 alumni working around the world to improve their lives and the lives of others.

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

Thank you. (Operator Instructions). Our first question comes from Corey Greendale of First Analysis. Your line is open.

Hi. Yes, thank you. This is [Ken Wang] on for Corey. So it sounds like the international enrollment initiatives are, kind of, being sunseted at this point. Do you think you could comment a bit more on that and what's kind of driving this decision?

Well I don't, we still are leaving our enrollments open and what were really not doing is opening new countries. We found when we went to utilize agents that by utilizing agents we needed to be compliant in every country where there was an agent and so the country by country compliance, given that our tuition is so low, while that would seem to be attractive the cost of doing it didn't appear to provide us with a return.

So, while on the good news side is we have some partnerships in place and we have legal agreements, you know, indicating that we will be in compliance with the regulations of those countries, we decided at this time not to add any new countries.

Okay. And, lets see, another question I had, do you feel that your tuition increase in July has had any effect on your enrollment so far?

We don't know of any negative impact on enrollment. We did note in our Q that with the July increase that only 20% of our students actually received the increase because we grandfathered our tuition rates for both students using tuition assistance as well as military spouses and veterans.

I would also point out that, that was effective for registrations after July one and so it really didn't affect the entirety of the third quarter.

Sure. Okay. That's helpful. Maybe just one last one for me. Just any color that you could give us just on changes in the competitive environment that you've observed might be helpful.

Well, I think the, you know, I guess there's a couple of big things. First of all the cost of buying leads related to online education has gone up, these are leads through Google and Yahoo and other sources, has gone up 20% a year for the last two years indicating more people bidding on them and bidding on those terms.

And, at the same time, we have see a decline in our conversion rates so, you know, to me I think that, you know, we have the same group of internal people buying those leads that have bought them in the past, we've, you know, judiciously thrown away leads that don't work for us, either they cost too much on a net student basis or they're just ineffective.

And we've managed to get our leads up but our applications are down because the conversions are down. That indicates to me there's just much more, many more options, as well as something we didn't mention but I've seen mentioned several times is that when the economy starts to improve working adults tend to not go back to school.

Thank you.

(Operator Instructions). Our next question comes from Jeff Silber of BMO Capital Markets. Your line is open.

Thanks so much. You addressed the competitive landscape a little bit earlier but I just wanted to drill down specific area. I think it was about a month or so ago the military put one of the larger companies, one of the larger core profit schools, I guess, on probation because of some issues in terms of their recruiting.

I know its still early but have you seen any impact of that move on your leads or potential enrollment? Thanks.

Jeff, not anything that we, you know, have seen and could attribute to that. We've seen a pick up in our TA registrations but we believe that's attributable to the start of a new fiscal year. So, you know, our returning TA students only declined by 2% this quarter which was basically a 7% improvement over the quarter before but I think that a lot of that was our retention initiatives and then what were seeing so far, particularly in November and December for TA students, is good registration rates but we think that's because there's no potential, knock on wood, of a budget problem, at least through this presidency.

Okay. And a quick question on Hondros. You're guidance for new student enrollment to be down about 11% in the fourth quarter is a substantial deceleration from you've been trending. Is there anything specific? Is it just tough comps or is there something else going on?

H Yes, this is Harry. We actually, were up a little bit with our LPN students, the LPN program, which is, kind of, the way were building Hondros is that the LPN program leads to progression to the AND program, leads to the BSN program. What we've seen is a large decline in BSN students, new BSN students.

And I think, it seems like we had a big backlog of alumni that were interested in the BSN program and we, I believe, we've gone through that now and we haven't, we still, we haven't had enough ADN graduates yet go on to the BSN program.

So we had a rather large, almost a 30% decline in BSN enrollment for new students in the fall. We don't know yet whether that's a long-term trend or just a blip. That really contributed to it. We also increased the requirements needed to graduate from the LPN program to matriculate into the ADN program and we think that's caused a little bit of a delay in some students who would like to matriculate into the ADN, being able to do that.

We thought we needed to make the changes in the program to improve the quality of the program so the decline was really in ADN and BSN students, LPN program, which is our real key to us going forward actually increased a bit.

So, that's what caused that and, you know, hopefully, that'll work its way through the process and those increased LPN students will go on and get additional degrees.

All right. Thanks for that. And just some numbers questions really quick. You're selling and promotional expenses declined pretty dramatically, I think you said its because of a decrease in advertising expenses. Is this, kind of, the new normal rate we should be looking for going forward or were there some timing issues?

No, I think we tried to explain, Jeff, that, you know, while were targeting advertising specifically, so talking about radio and TV advertising, were also looking at whether or not, in the markets where were doing that advertising, were getting acceptable conversion rates.

I think once we can pick up the conversion rates in those markets we would actually spend more so its just a matter of tinkering with our targeting and where its beginning to work well spend more and if its not working were just going to hold back.

Okay. And then you mentioned the savings because of the employee realignment, which line item should we expect to see that in next year?

It crosses all lines.

Okay. And then, just one more and then Ill jump back in the queue. Your EPS guidance for the current quarter, what tax rate and share count are you anticipating? Thanks.

Tax rates about 38%, share counts probably 16, yes, I was gonna say its about flat with where it is, it'll be down slightly, were still repurchasing shares.

Okay, great. Thank you so much.

Thank you. I am showing no further questions. I would like to turn the call back to Chris Symanoskie for closing remarks.

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, thank you for participating in today's conference. This does conclude today's program. You may all disconnect, everyone have a great day.