American Public Education Inc (APEI) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2017 American Public Education Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host Mr. Christopher Symanoskie, Vice President of Investor Relations. Sir, the podium is yours.

Thank you, Brian. Good evening, and welcome to American Public Education's discussion of financial and operating results for the third quarter of 2017. Presentation materials for today's conference call are available via the webcast section of our website and are included as an exhibit to our current report on Form 8-K furnished with the SEC earlier today.

Please note that statements made in this conference call and in the accompanying presentation materials regarding American Public Education or its subsidiaries that are not historical facts may be 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 events and 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, amount and nature of anticipated charges, expected registrations and enrollments, expected revenues, expected earnings and plans with respect to recent, current 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 and quarterly reports on Form 10-Q 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 I'll turn the call over to Dr. Boston.

Thanks, Chris, and good evening, everyone. I'd like to start with Page 2 of our slides. I am pleased to report tonight that consolidated revenues and earnings per share for the third quarter of 2017 were higher than we anticipated. This outperformance was driven primarily by higher-than-expected net course registrations at APUS. Although APUS experienced a year-over-year decline in net course registrations during the third quarter of 2017, the rate of decline lessened compared to the rate of the previous 3 quarters.

Net course registrations by new students at APUS declined 5% and total net course registrations declined 4% compared to the prior year period. In the third quarter, net course registrations by returning students also declined by 4% year-over-year. The overall decline in net course registrations by new students at APUS was largely driven by a 20% year-over-year decline in net course registrations by new students utilizing Federal Student Aid or FSA. In addition, net course registrations by new students utilizing veterans benefits, or VA benefits, declined 6% year-over-year.

These declines were partially offset by a 2% year-over-year increase in net course registrations by new students utilizing Military Tuition Assistance, or TA, and a 10% year-over-year increase in net course registrations by new students utilizing cash and other sources.

In July of 2017, the first course pass and completion rate of undergraduate students using Federal Student Aid at APUS continued to improve and reach this highest level since the year 2011. We believe that the continued increase in this measure of student persistence is an indication that the course enhancement and retention initiatives we have launched over the last few years appear to be improving student success.

For the 3 months ended September 30, 2017, or the summer term of 2017, total enrollment at Hondros School of Nursing, or HCN, increased approximately 11% year-over-year, driven by 58% year-over-year increase in new student enrollment. On a same campus basis, excluding the Toledo campus, which opened in January of 2017, new student enrollment increased 17% year-over-year in the summer term. Although HCN continues to be confronted with certain regulatory and compliance risks, which are more fully described in APEI's 10-Q filed earlier today, we are pleased by the continued turnaround in student enrollment at HCN.

Moving on to Page 3. Although the path to enrollment stabilization may be volatile at times, we are pleased that the rate of decline in net course registrations at APUS lessened in the third quarter compared to the rates of decline in the second quarter and over the last 3 quarters.

Tuition Assistance utilization by military students can be difficult to predict, particularly during the months of September and October when the Department of Defense adjusts the allocation of its TA budget around its fiscal year-end. In the third quarter of 2017, net course registrations by students utilizing TA at APUS were above our expectations.

We believe the year-over-year increase in net course registrations by new and total students utilizing cash and other sources was attributable to increased activity by students from our strategic and corporate partners.

Furthermore, we believe that favorable prior year comparisons and our overall efforts to stabilize enrollment helped to lessen the decline in net course registrations by students utilizing Federal Student Aid.

In summary, 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 the top goals going forward are to continue improving student success, to focus on increasing NCLEX pass rates and to obtain alternative accreditation.

APUS plans to continue deploying strategies and initiatives aimed at increasing enrollment of new college-ready students, while continuing to improve conversion in student persistence rates. At the same time, we will remain focused on affordability and further improving the student experience. We believe these qualities, combined with existing and future workforce-focused initiatives, will enable us to reach our long-term goals.

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

Thank you, Wally. American Public Education third quarter 2017 consolidated financial results include a 0.7% decline in revenue to $73.3 million compared to $73.8 million in the prior year period. The decrease during the period is attributable to a 3.3% decrease in revenue in our APEI segment, partially offset by a 24.6% increase in revenue in our Hondros segment when compared to the prior year.

In the third quarter, our APEI segment revenue decreased to $64.9 million compared to $67.1 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 $8.4 million in the third quarter compared to $6.7 million in the same period of 2016. The increase in Hondros segment revenue was primarily due to an increase in student enrollment and an increase in revenue per student resulting from a change in program mix and other factors.

On a consolidated basis, cost and expenses decreased 10.5% to $65.7 million compared to $73.4 million in the prior year period. Please note that the prior year period included a $4.0 million loss on the abandoned development of a new student registration engine in our APEI segment and a $4.7 million impairment charge resulting from the reduction of the carrying value of goodwill in our Hondros segment.

For the third quarter, consolidated instructional cost and services expense, or ICS, as a percentage of revenue increased to 39.2% compared to 38.4% in the prior year period. Our ICS expenses for the 3 months ended September 30, 2017, were $28.7 million, representing an increase of 3.1% from $28.4 million for the 3 months ended June 30, 2016.

The increase in ICS expenses was primarily the result of increases in employee compensation expenses in our Hondros segment and an increase in classroom subscription services expense in our APEI segment, partially offset by decreases in professional fees and instructional materials expense in our APEI segment.

Selling and promotional expense, or S&P, as a percentage of revenue increased to 20% of revenue compared to 17.8% in the prior year period. Year-over-year, S&P costs increased 11.4% to $14.6 million compared to $13.1 million in the prior year. The increase in S&P expenses was primarily the result of an increase in advertising expenses and marketing support materials expense in our APEI segment.

General and administrative expense, or G&A, as a percentage of revenue increased to 23.5% from 23.2% in the prior year period. Our G&A expenses increased 0.7% to $17.2 million compared to $17.1 million in the prior year. The increase in G&A expenses was primarily related to increases in employee compensation costs, including costs related to the retirement of the APUS president, partially offset by decreases in bad debt expense in our APEI segment.

Bad debt expense for the 3 months ended September 30, 2017, was $1.2 million or 1.6% of revenue compared to $1.6 million or 2.2% 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 third quarter of 2017, we reported income from operations before interest income and income taxes of $7.6 million compared to $0.4 million in the prior year period. Our effective tax rate during the quarter was approximately 43%. The higher effective tax rate is primarily due to changes in the apportionment of state taxes and adjustments related to taxes paid for 2016.

In the third quarter, we reported net income of $4.3 million or $0.27 per diluted share compared to net income of $0.3 million or $0.02 per diluted share in the prior year period.

Total cash and cash equivalents as of September 30, 2017, were approximately $166.3 million compared to $146.4 million as of December 31, 2016.

Capital expenditures were approximately $6.5 million for the 9 months ended September 30, 2017, compared to $9.7 million as of September 30, 2016.

Capitalized program development costs were approximately $3 million for the 9 months ended September 30, 2017, compared to $1.5 million as of September 30, 2016.

Depreciation and amortization was $14.2 million for the 9 months ended September 30, 2017, compared to $14.6 million as of September 30, 2016.

Going on to Slide 5, fourth quarter 2017 outlook. Our outlook for the fourth quarter of 2017 is as follows. APUS net course registrations by new students are expected to decrease between 12% and 8% year-over-year. Total net course registrations are expected to decrease between 8% and 4% year-over-year.

For its fall term, which is the 3 months ended December 31, 2017, new student enrollment at Hondros increased 29% and total student enrollment increased 23% year-over-year. Excluding the new Toledo Campus, on a same campus basis, new student enrollment increased approximately 4% year-over-year. As Wally indicated, we are pleased to see continued growth in new and total student enrollment at Hondros College of Nursing.

For the fourth quarter of 2017, we anticipate consolidated revenue to decrease between 5% and 1% year-over-year. Net income for the fourth quarter of 2017 is expected to be in the range of $0.29 to $0.34 per fully diluted share.

As a reminder, APUS began accepting applications for 2 applied doctoral programs in strategic intelligence and global security with the first cohorts beginning in January 2018. We expect to incur related start-up costs ranging from approximately $0.4 million to $0.6 million during the remainder of 2017.

In conclusion, we are pleased with the enrollment performance of Hondros and the continued improvement in persistence rates at APUS and we remain optimistic about our enrollment stabilization efforts. Our goal is to stabilize enrollment while strengthening student outcomes and preparing them for the changing demands of the workplace.

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

(Operator Instructions) Our first question comes from the line of Peter Appert from Piper Jaffray.

So Wally, given the improving trend in starts, why the -- what seems like might be cautious guidance for the fourth quarter?

I went over this a little bit last quarter, Peter. So since the services have pretty much not moved and held to a 30-day registration process for TA, we don't get the lengthy insight into that. So if we have a quarter where we have to give guidance and only have one month of the actual, you might imagine that without the November drops and then really not having much of a runway into December, we have to be fairly conservative. And so I would tell you that we're trying to work with the current enrollments we have with TA. And they could bounce back or they may not. So we're going with a number that we think we can achieve.

So as the issue -- in terms of how the process works that the services aren't -- don't release funding or they're only releasing funding on a month-by-month basis, is that the case?

I don't know that that's the case. I just know that they are not approving the TA request until it's 30 days before the course starts.

Okay. So the fundamental issue is that the military students don't know if they can go, so it could increase volatility from your perspective. But it seems like the underlying demand is there if the funding is in place, is that fair?

Yes, exactly. I mean, it's just that -- we -- the way the academic year works for Federal Student Aid, those students can register for up to 5 months. And so any of our students can register for up to 5 months out, but we won't see approved TA request for anyone that registers more than 30 days out. And for some of the automated systems, they're actually not even allowed to enter the system until the 30th day before the class starts.

Okay, and Wally or Rick, your thoughts on selling costs. So the selling expense was up fairly meaningfully on a quarter-to-quarter basis. I guess this is still some of the tweaking of the marketing student acquisition programs. Can you just talk a little bit more about that?

Sure. We talked about it on our last call that we were going to do a pilot of about $1 million in extra advertising cost for the third quarter. And we -- preliminarily, we like that outcome. So from a spend perspective, we're going to try to spend it our 20% in the fourth quarter and that's what we have the number at.

And in terms of the incremental spend, I mean, where is it -- where you're directing it? Where does it show up? I mean, is this what's driving the -- well, how does it flow through from an enrollment perspective?

When we make decisions to do incremental spend, the last thing we're going to spend it on is traditional TV and radio advertising. We don't use lead aggregators. We do our own lead generation internally. So we have a pretty sophisticated SEO operation internally. And so we look at word combinations and search terms that we believe if we put extra money in, we won't distort the cost of our normally bid keywords. And we're really focused on student profiles that we think will persist better long term. So that's where we spend our money.

Although it doesn't -- so for the Title IV enrollments, it doesn't really look like there's -- I guess it's getting sequentially less bad, but still down 11%. What's driving the weakness there?

Well, we have been very focused for a number of years now in improving the quality of our FSA students. And in improving the quality, we want to reduce the percentage of students who start with us and fail. So we put in an admission's assessment. We put in -- change the way we disperse our funds because we also wanted to drive down bad debt because we find that the students who fail basically leave early and don't repay their loans. And we've had to do all of this through an academic lens versus anything such as a geo-targeting, which is not allowed. So it's been a very slow and laborious process. But part of it is just exacerbated by the fact that our tuition is so low, students can borrow much more than the tuition and there's very little we can do to stop that. And so what we try to do is to find ways to make sure that we have students whose primary goal is to succeed as a college student.

Okay. Just 2 other things. One, Rick, your assessment of potential changes in the tax code and how it could impact the business?

Well, at 43%, right up there at the top, so we're looking for relief. The 43% is a bit of an outlier and we don't expect it to maintain at that level. But even at 39%, 40%, it would be helpful.

Yes, I think the individual changes related to corporations not being able to deduct the cost and tuition for their employees. I think it's a little too soon. I don't know that that's as big of an impact as if employees have to record that tuition reimbursement as income. So until we get more clarity on that as they go through the negotiating sessions, Peter, I think it's too soon to tell. I mean, the only good news is that -- well, what would be really interesting would be to see if under where the employees might have to declare that as income. Would they include government reimbursement such as tuition assistance in the same category? I think usually they make exceptions for the military since they typically tend to be paid less. So I would hope that would be carve out, but we'll see.

Okay. And then, last thing. Wally, anything new on the alternative accreditation for Hondros?

Yes. I mean, we've -- we submitted our self-studies. We've had our visits and we're in process to come before the -- I think, it's the Board of ABHES for approval in January. And we believe that we're on a path to do that successfully. So we'll see.

(Operator Instructions) Our next question comes from the line of Alex Paris from Barrington Research.

This is Chris Howe sitting in for Alex Paris. I had a question in regard to the new programs that you had mentioned, the strategic intelligence and also the global security. You mentioned some of the remaining costs in 2017. Should we expect more costs to accrue in 2018? And is there an expectation for when you will be breakeven or profitable within these 2 new programs?

Well, we certainly will have ongoing costs because we're going to launch the programs in January. We've got our first cohort. I think the date that will set the enrollment for that first cohort is some time in the middle of this month. So we're certainly not expecting to breakeven in the first quarter, even the first half of next year. And I think where the breakeven point is just depends on the enrollments. We're not doing -- I don't know if we've given clarity on this. We are not going monthly starts in the doctoral program. There's just not going to be as much of a demand. So we're doing 3 starts a year. And like I said, I think the breakeven point will probably be fairly dependent on the enrollments we have in January and May, which are our first 2 starts.

Okay, that's very helpful. And then my next question is just broadly speaking about Hondros and you mentioned the NCLEX pass rates. Can you perhaps provide some more color on the value proposition to students that's leading the growth in enrollments?

Sure. We had always planned on expanding Hondros. We thought that there was an unmet need in the State of Ohio, and Toledo was our first choice for location. We were delayed by a couple of years because of the delay by the Department of Education in approving our change of ownership. But in the -- one of the things that we identified pretty quickly in the Toledo market was that there were 9 schools with PN programs only and no schools with ADN or RN programs. Not no schools, but those 9 schools did not have those programs. There was also an unmet need from the State of Michigan, which is pretty close to Toledo. And so when we opened Toledo, even though our normal plan for a Hondros start-up is to start students in the PN program, graduate them and then start the ADN program. There was so much demand in that marketplace for ADN students that after one quarter, we started an ADN class. So not only is the facility meeting or exceeding our expectations in PN enrollments, it's far exceeding our expectations in ADN enrollments because we really had not planned on ADN enrollments at all for 2018. So really we're responding to the needs of the marketplace and I think we've been very successful so far.

And now I'm showing no further questions. I would like to turn the call back to Chris Symanoskie for any further remarks.

Thank you, operator. 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.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you all may disconnect.