American Public Education Inc (APEI) 2017 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Q2 2017 American Public Education Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Chris Symanoskie, Vice President of Investor Relations. You may begin.

Thank you, operator. Good evening, and welcome to American Public Education's Earnings Conference Call for the Second Quarter of 2017.

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 registrations and enrollments, expected revenues, expected earnings and plans with respect to recent and future initiatives, 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, quarterly report on Form 10-Q filed with the SEC and the company's other SEC filings.

The company undertakes no obligation to update publicly any forward-looking statements for any reason, unless required by law, 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.

Now at this time, I'll turn the call over to Dr. Boston.

Thanks, Chris, and good evening, everyone. Starting with Slide 2. Although we continue to experience year-over-year declines in net course registrations at APUS, we are pleased that the rate of decline lessened in the second quarter of 2017 compared to the first quarter and prior year period.

In the second quarter, total net course registrations at APUS declined 6% compared to the prior year period. Although net course registrations by new students declined 9% year-over-year, net course registrations by returning students decreased 6% compared to the prior year period.

We believe that the difference in the rate of decline in registrations by new students and that of returning students relates at least in part to improvements in persistence and the quality mix of students.

The decline in net course registrations by new students at APUS was largely driven by a 29% year-over-year decline in net course registrations by new students utilizing Federal Student Aid, or FSA. This decline was partially offset by a 2% year-over-year increase in net course registrations by new students utilizing cash and other sources.

We believe that this change was a result of increased activity by students from our strategic and corporate partners.

In addition, net course registrations by new students utilizing military Tuition Assistance, or TA, and veterans benefits, or VA, were approximately flat year-over-year.

Our focus on academic quality and our progress in attracting students with greater college readiness is evidenced by the continued improvement in persistence at APUS.

For the 3 months ending May 31, 2017, the most recent available information, the first course pass and completion rate of undergraduate students using Federal Student Aid, or FSA, at APUS increased approximately 19% compared to the same period last year. We are pleased that many of the course and retention initiatives we have launched over the last few years appear to be improving student success and the overall quality of our offerings.

For the 3 months ended June 30, 2017, or the spring term of 2017, total enrollment at Hondros School of Nursing, or HCN, declined approximately 3% year-over-year. However, new student enrollment increased approximately 31% compared to the prior year period.

On a same campus basis, excluding Toledo, new student enrollment increased 6% year-over-year in the spring term and 17% year-over-year in the summer term of 2017. Although HCN continues to be confronted with certain regulatory and compliance risk, which are more fully described in APEI's 10-Q filed earlier today, we are pleased by the turnaround in student enrollment at HCN.

Moving on to Slide 3. As we discussed last quarter, APUS is expanding certain initiatives and deploying new strategies as part of our overall approach to improving conversion rates and increasing enrollment of new college-ready students. In addition to launching new lead scoring and predictive modeling capabilities, we further adjusted our marketing expenditures in favor of the channel partners we believe are becoming more productive and more efficient at reaching our optimal online target audiences.

As a result of our recent experience, we authorized $1.0 million in additional marketing spend to further test our more promising channels during the third quarter of 2017.

While assessing this pilot, we will continue to develop a more robust and personalized engagement model for incoming students and reengineer our enrollment management processes to better integrate front-end systems and adjust processes to facilitate more efficient student onboarding and customer service.

This, of course, is in addition to expanding our academic quality credentials, the success of which is evidenced by the recognition of key stakeholders and regulatory bodies. For example, in July of 2017, the Council on Education for Public Health, or CEPH, notified APUS that its board of councilors acted to accredit our Masters of Public Health program for a 5-year term. APUS is the first fully-online institution to achieve this grant of accreditation.

Our commitment to those who serve has resulted in AMU retaining its position as the #1 provider of higher education to active duty military in fiscal year 2016, according to Military Times.

In fact, we believe AMU maintained an approximate 17% market share in the year 2016, despite fewer students utilizing TA overall.

Our commitment also translated to AMU moving up in ranking to become the #4 provider of higher education to veterans.

AMU is the only fully-online institution in the top 20 schools serving veterans, according to Military Times. This market positioning also speaks volumes about student satisfaction and our strong reputation within military and military affiliate communities.

In closing, the team at Hondros College of Nursing has made great strides with respect to improving the institution's curriculum, opening the new Toledo campus and increasing student enrollment. Among their goals going forward is to continue improving student success, whereby building an even stronger reputation within the nursing and health care communities of Ohio.

While the path to enrollment stabilization at APUS may be uneven at times, we believe our initiatives continue to increase student persistence, lower bad debt expense and improve the quality of our courses.

At the same time, we have invested in new degree programs, including most recently applied doctoral programs, to meet the need for higher-level research in critical and growing professions. We believe doctoral programs will enhance the institution's reputation and further differentiate APUS as an institution of higher learning.

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

Thank you, Wally. Going on to Slide 4. American Public Education's second quarter 2017 consolidated financial results include a 5.9% decline in revenue to $72.2 million compared to $76.7 million in the prior year period.

The decrease during the period is attributable to a 7.5% decrease in revenue in our APEI segment, partially offset by a 9.4% increase in revenue in our Hondros segment when compared to the prior year.

In the second quarter, our APEI segment revenue decreased to $64.3 million compared to $69.5 million in the prior year period. The decline in APEI segment revenue is primarily attributable to a decrease in net course registrations.

Hondros segment revenue increased to $7.9 million in the second quarter compared to $7.2 million in the same period of 2016. The increase in Hondros segment revenue was primarily due to an increase in revenue per student that resulted from a change in program mix and the impact of the Toledo campus opening, where new students are primarily first-time students who are not eligible for the alumni achievement grant which is the equivalent of up to 6% of total tuition in the ADN program.

On a consolidated basis, cost and expenses decreased 0.3% to $65.9 million compared to $66.1 million in the prior year period.

For the second quarter, consolidated instructional cost and services expense, or ICS, as a percentage of revenue increased to 41.3% compared to 37.7% in the prior year.

Our ICS expenses for the 3 months ended June 30, 2017, were $29.8 million, representing an increase of 3.2% from $28.9 million for the 3 months ended June 30, 2016.

The increase is primarily the result of increases in employee compensation expenses and classroom subscription services expense, partially offset by decreases in instructional materials expense in our APEI segment as well as increases in employee compensation costs due to staffing of Hondros' new Toledo campus.

The increase as a percentage of revenue is due to ICS expenses increasing during a period of decreasing consolidated revenue.

Selling and promotional expense, or S&P, as a percentage of revenue decreased to 19.4% of revenue compared to 19.5% in the prior year period.

Year-over-year, S&P costs decreased 6.5% to $14.0 million compared to $15.0 million in the prior year. The decrease as a percentage of revenue was due to our selling and promotional expenses decreasing at a rate greater than the decrease in consolidated revenue.

General and administrative expense, or G&A, as a percentage of revenue increased to 21 -- 23.1% from 22.0% in the prior year period.

Our G&A expenses decreased 1.6% to $16.6 million compared to $16.9 million in the prior year. The increase as a percentage of revenue was due to our consolidated revenue decreasing at a rate greater than the decrease in our general and administrative expenses.

Bad debt expense for the 3 months ended June 30, 2017, was $900,000 or 1.3% of revenue compared to $1.8 million or 2.3% of revenue in the prior year period. The decrease in bad debt expense was primarily due to changes in student mix, changes in admissions and verification and other processes.

In the second quarter of 2017, we reported income from operations before interest income and income taxes of $6.3 million compared to $10.7 million in the prior year period.

Our effective tax rate during the quarter was 39.9%. In the second quarter, we reported net income of $3.8 million or $0.23 per diluted share compared to net income of $6.6 million or $0.41 per diluted share in the prior year period.

Total cash and cash equivalents as of June 30, 2017, was approximately $157.1 million compared to $124.1 million as of June 30, 2016, with no long-term debt.

Capital expenditures were approximately $3.8 million for the 6 months ended June 30, 2017, compared to $6.9 million in the prior year period.

Capitalized program development costs were approximately $1.9 million for the 6 months ended June 30, 2017, compared to $800,000 in the prior year period.

Depreciation and amortization was $9.5 million for the 6 months ended June 30, 2017, compared to $9.7 million for the same period of 2016.

Going on to Slide 5. Our outlook for the third quarter of 2017 is as follows: APUS net course registrations by new students are expected to decrease between minus 18% and minus 14% year-over-year; total net course registrations are expected to decrease between minus 11% and minus 8% year-over-year.

We would like to point out that these expected declines are in part due to the fact that there is one less week of open registration in the third quarter of 2017 as compared to the third quarter of 2016, and that week falls in the seasonally important month of September. We estimate this adversely impacts new student registrations by as much as 4% year-over-year.

Furthermore, for September, after 3 consecutive months of year-over-year increases, we are forecasting a decrease in net course registrations by new students utilizing TA.

Given that the DoD's fiscal year ends on September 30, we believe there is a greater possibility of volatility in TA registrations in the months of September and October, as TA administrators and service members adjust the TA availability under various budgetary conditions.

For its summer term, which is the 3 months ended September 30, 2017, new student enrollment at Hondros increased 58%, and total student enrollment increased by 11% year-over-year. Excluding the Toledo campus, which opened in January 2017, on a same campus basis, new student enrollment increased approximately 17% year-over-year. As Wally indicated, we are pleased to see strong growth in new and total student enrollment at Hondros College of Nursing.

For the third quarter of 2017, we anticipate consolidated revenue to decrease between minus 5% and minus 2% year-over-year.

Net income for the third quarter of 2017 is expected to be in the range of $0.18 to $0.23 per fully diluted share.

APUS began accepting applications for applied doctoral programs in Strategic Intelligence and Global Security, with the first cohorts beginning in January of 2018. We expect to incur related start-up costs ranging from approximately $800,000 to $1.1 million during the second half of 2017.

In our last earnings call, we outlined the ongoing steps we are taking to improve enrollment at APUS. As a result, in the third quarter, we made the decision to allocate an additional $1.0 million of marketing spend to pilot initiatives with certain channel partners. At the same time, we continue to be encouraged by increases in student persistence at APUS, and we are optimistic about the turnaround in new and total student enrollment at Hondros College of Nursing.

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

(Operator Instructions) Your first question comes from the line of Corey Greendale from First Analysis.

First question, just that last comment, Rick, about the $1 million in marketing expense, just can you help us -- the implications for that for modeling. Does that suggest like you don't see a traditional seasonal pattern, so the dollars -- marketing dollars are more like Q2 in Q3? Or help us there.

Yes, so Corey, the way I would look at that is, we typically report in a fairly tight corner related to S&P as a percent of revenue. So I don't know what you're modeling currently, but what we're saying is add, essentially, $1 million to that. We've decided to up the spend because we see some traction in certain channels, and so we're going to pressure test those to see what kind of results we get.

Okay. And then, just looking at kind of the different factors here, particularly on the TA side. Does the reset of fiscal year, that -- the government fiscal year, does that help or hurt or remains to be seen? So like -- is there reason to think things could start getting better in Q4?

Corey, this is Wally. I think it just depends on how they allocate their budgets. We've had years where by August, certain bases have run out of their allocation of TA funds, and so it increases the demand in October. We have had years where there have been plenty of funds and they make an announcement, people register through September, and then they delay the allocation of funds in October. So it delays our starts in October. So typically, September and October are 2 most volatile and unpredictable months for TA, but not so much for the other payer categories.

Okay. And I had one another modeling question, which is given the enrollment guidance you provided, to get to the revenue guidance, you need to assume pretty significant -- either a -- even a more significant increase in revenue per student at Hondros then we've been seeing or higher revenue per student at APUS. Can you just help with assumptions on that variable?

Right. So Corey, that's going to come back to us reporting registrations versus normalized registrations, which is how we recognize revenue. And so you see some variability when you're looking at the registration numbers versus the revenue. So for example, going from 1Q to 2Q and you just do the division on registrations, the revenue per registration went from $785 to $836. But on a normalized basis, it went from $817 to $830. So I haven't extended that math out to the third quarter, but likely, what you're seeing is simply the impact of the -- when I say the relationship between those 2 or the lack of relationship between those 2. I wouldn't -- my point is, I wouldn't intuit anything from it in terms of a significant movement in revenue per registration at APUS. We're not seeing that.

You will see that in the first quarter of '18, because of the doctoral programs, where we charge a higher amount per credit hour. But you're not going to see it, that we know of, unless there's just some add -- change in mix that we're not aware of.

Well, so the mix change does affect it, because there is the military grant back to those military students. So the nonmilitary rate is 6% higher or 8% higher than the military rate. So as you've been studying our mix change over time, the mix change away from FSA to TA and VA would have the effect of reducing our revenue per registration over time on a normalized basis.

And I am showing no further questions at this time. I would now like to turn the conference back to Mr. Chris Symanoskie for closing comments.

Great. Thank you. That will conclude our call for today. We wish to thank you for listening and for your interest in American Public Education. Have a great evening.

Well, ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all now disconnect.