American Public Education Inc (APEI) 2017 Q4 法說會逐字稿

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

I would now like to introduce your host for today's conference Mr. Chris Symanoskie. You -- sir, you may begin.

Great. Thank you, operator. Good evening, and welcome to American Public Education's discussion of financial and operating results for the fourth quarter and full year 2017. Presentation materials for today's conference call are available in 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 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 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 I'll turn over the call to Dr. Boston.

Thanks, Chris, and good evening, everyone. I'm pleased to report that consolidated revenues and earnings per share for the fourth quarter of 2017 were higher than we anticipated. This outperformance was driven primarily by better-than-expected net course registrations at APUS and a lower statutory corporate tax rate resulting from recent tax reform legislation.

Although APUS experienced a year-over-year decline in net course registrations in the fourth quarter of 2017, the rate of decline is less when compared to the rate of the previous 4 quarters. Net course registrations by new students at APUS declined 4%, and total net course registrations declined 3% compared to the prior period.

In the fourth quarter, net course registrations by returning students also declined by 3% year-over-year. The overall decline in net course registrations by new students at APUS was largely driven by a 21% year-over-year decline in net course registrations by new students using Federal Student Aid. This decline was partially offset by a 12% year-over-year increase in net course registrations by new students utilizing cash and other sources, a 7% year-over-year increase in net course registrations by new students utilizing veterans’ benefits, or VA benefits, and net course registrations by new students using Military Tuition Assistance, or TA, approximately flat year-over-year.

In the fourth quarter of 2017, net course registrations by non-FSA students were better-than-anticipated. Excluding net course registrations by students utilizing FSA as their primary funding source, net course registrations by new students increased approximately 3.5% year-over-year, and total net course registrations were approximately flat compared to the same period of 2016.

For the 3 months ending November 30, 2017, the first course path and completion rate of undergraduate students using Federal Student Aid at APUS improved 16% year-over-year. We believe that the continued increase in this measure of student persistence is an indication 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 December 31, 2017, over the fall term of 2017, total enrollment at Hondros School of Nursing, or HCN, increased approximately 23% year-over-year, driven by a 29% 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 4% year-over-year in the fall term.

Although HCN continues to be confronted with certain regulatory and compliance risk, which are more fully described in APEI's 10-K filed earlier today, we are pleased by the continued growth in student enrollment at HCN.

Moving onto slide number -- Page 3. In the fourth quarter of 2017, the rate of decline in net course registrations at APUS lessened year-over-year compared to the last several quarters. However, we expect that our path to improving net course registrations may be volatile at times. APUS remains focused on reengineering its enrollment management processes and further refining its approach to target marketing while developing workforce-focused programs and expanding strategic relationships with corporate partners. We believe this approach will eventually lead to stable enrollment and further enhance the value proposition of APUS as the leader in affordability, student outcomes and the online learning experience.

Moving on to the slide labeled Page 4. In summary, APEI's primary corporate goals are to stabilize enrollments at APUS, and to continue to grow Hondros College of Nursing in ways that increased value for students. Toward that end, we realized many accomplishments in 2017.

APUS continued to be a leader in college affordability and value. According to the Department of Education's College Affordability and Transparency Center, APUS is ranked 21st lowest in tuition and the 14th lowest in net price for private for-profit 4-year institutions, a net price 47% less than the national average.

In addition, APUS continues to enjoy high student and alumni satisfaction. Furthermore, APU -- AMU continued to be the largest provider of higher education to active duty military, according to the most recently available information, and AMU is ranked #7 in Military Times 2018 Best for best ranking for Online and Nontraditional Schools, up from #11 in 2017.

I'm excited that the first cohort has begun their studies in our new applied doctoral programs in strategic intelligence and global security. We believe our new doctoral programs will further enhance the academic reputation of APUS. Most of all, I'm proud of our hard-working students. In 2017, APUS conferred degrees to approximately 11,300 students who joined the ranks of more than 77,000 AMU and APU alumni worldwide, and Hondros College of Nursing conferred degrees to more than 300 students who are now numbers of the distinguished group of over 6,000 alumni making a difference in their professions and communities.

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

Thank you, Wally. Going on to Slide 5. American Public Education's fourth quarter 2017 consolidated financial results include a 1% decline in revenue to $78.1 million compared to $78.6 million in the prior year period. The decrease during the period is attributable to a 4.4% decrease in revenue in our APEI segment, partially offset by a 34.7% increase in revenue in our Hondros segment when compared to the prior year.

In the fourth quarter, our APEI segment revenue decreased to $67.9 million compared to $71.1 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 $10.2 million in the fourth quarter compared to $7.5 million in the same period of 2016. The increase in Hondros segment revenue was primarily due to increased enrollments resulting from the opening of the Toledo Campus in January 2017 and increased demand for Hondros programs.

On a consolidated basis, cost and expenses decreased 2.8% to $65.5 million compared to $67.4 million in the prior year period. For the fourth quarter, consolidated and structural costs and services expense, or ITS, as a percentage of revenue decreased to 36.7% compared to 38.2% in the prior year period. Our ITS expenses for the 3 months ended December 31, 2017, were $28.6 million representing a decrease of 4.7% from $30 million for the 3 months ended December 31, 2016.

The decrease in ICS expenses is primarily the result of decreased employee compensation and course curriculum expenses in our APEI segment, partially offset by increases in classroom subscription services expense in our APEI segment and increases in employee compensation cost in our Hondros segment.

Selling and promotional expense, or S&P, as a percentage of revenue decreased to 18.3% of revenue compared to 18.4% in the prior year period. Year-over-year, S&P costs decreased 1.4% to $14.3 million compared to $14.5 million in the prior year. This decrease in S&P expense is primarily due to decreases in advertising and promotional expenses and professional fees in our APEI segment.

General and administrative expense, or G&A, as a percentage of revenue decreased to 22.3% from 22.8% in the prior year period. Our G&A expenses decreased 3.3% to $17.4 million compared to $18 million in the prior year. The decrease in general and administrative expenses was primarily related to decreases in bad debt expense and professional fees in our APEI segment, which was partially offset by increases in bad debt expense and employee compensation costs in our Hondros segment.

Bad debt expense for the 3 months ended December 31, 2017, was $1.1 million or 1.4% of revenue compared to $1.2 million or 1.5% of revenue in the prior year period. The decrease in bad debt expense is primarily due to changes in student mix, admissions and identity verification and other processes.

In the fourth quarter of 2017, we reported income from operations before interest income and income taxes of $12.6 million compared to $11.3 million in the prior year period. As a result of the Tax Cuts and Jobs Act of 2017, signed into law on December 22, the company recorded a $3.7 million reduction in income tax expense related to the revaluation of its net deferred tax liabilities.

Going forward, we expect our effective tax rate to range from approximately 27% to 29%, absent discrete items, although the final impact may differ from this estimate. During the quarter, we recorded a noncash investment loss due to other than temporary impairments totaling $2.7 million on certain investments. This investment loss is presented in equity investment loss in the P&L.

The noncash impairment charge and reduction in income tax expense were not contemplated in our fourth quarter 2017 outlook. In the fourth quarter of 2017, we reported net income of $8.4 million or $0.51 per diluted share compared to net income of $6.9 million or $0.42 per diluted share in the prior year period.

As Wally mentioned, we are pleased by the enrollment growth in our Hondros segment, which drove the Hondros segment growth in revenue and earnings. It is noteworthy that for the 3 months ended December 31, 2017, the operating margin in our Hondros segment increased to 22% compared to 7% in the prior year period.

Total cash and cash equivalents as of December 31, 2017, were approximately $179.2 million compared to $146.4 million as of December 31, 2016.

Capital expenditures were approximately $10.9 million for the year ended December 31, 2017, compared to $13.8 million for the year ended December 31, 2016. Depreciation and amortization was $18.8 million in 2017 compared to $19.4 million in 2016.

Going on to Slide 6, first quarter 2018 outlook. Our outlook for the first quarter of 2018 is as follows: APUS net course registrations by new students are expected to decrease between 9% and 12% year-over-year; total net course registrations are expected to decrease between 3% and 5% year-over-year; for its winter term, which is the 3 months ended March 31, 2018, new student enrollment at Hondros increased 11%, and total student enrollment increased 19% year-over-year. Please note that the first quarter of 2017 was the first quarter of operations at the Toledo Campus.

As Wally indicated, we are pleased to see continued growth in new and total student enrollment at Hondros College of Nursing. For the first quarter of 2018, we anticipate the change in consolidated revenue to be in a range of between negative 3% and positive 1% year-over-year.

Net income for the first quarter of 2018 is expected to be in the range of $0.29 to $0.34 per fully diluted share.

In closing, we continue to be pleased by the enrollment growth at Hondros and by the continued improvement in persistence rates and our quality mix of students at APUS, and we remain optimistic about our enrollment stabilization efforts at APUS.

Our goal is to build on our core strengths to stabilize enrollment at APUS 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 Corey Greendale with First Analysis.

First on the enrollment side. Wally, I understand that there'll be volatility but, obviously, it was a nicer quarter, particularly on the non-FSA side, and then it sounds like you're guiding to more weakness. Is there just something you might be able to give some of the underlying kind of causes of those trends?

Sure. I think, typically, the first quarter seasonally for our military population is always down a little bit. At least it was in '17, and we're seeing similar trends in '18. The other thing is that we have some reports from the field that some of the bases were hesitant to approve Tuition Assistance requests for the March start, related to the potential government shut down that, fortunately, was only a few days over the weekend, but nonetheless that delayed some new student registrations. We think that most of our returning students were able to get in. So we're just seeing softness in the month of March, in particular, for the first quarter, and some of that's typical seasonal, but some of it we think related to hiccups in the system just due to our dependency on federal employees.

Do you think -- from what you're saying, I know you're not guiding beyond one quarter out, but it sounds like the chinks here in Q1 are more temporary in nature, which makes it sound like maybe we can read Q4 as the more kind of indicative of the trend? Could you say that's reasonable?

Typically, Q4 is the higher enrollment quarter. So it's tough. And without taking the time to analyze each of the 4 quarters for you, and you know that TA, since that sequester has been on a 30-day program, where they don't allow students to register more than 30 days out. So it's really tough for us to see. But I think that we continue to reinforce the quality of students coming in, in our intake overall, and that particularly influenced our FSA intake. And our TA students, I think -- it's my understanding, for example, Corey, that the federal budget for TA has not been distributed down to the bases yet. So I think once that happens, things will pick up. But until that happens, we're probably going to see some volatility.

Okay. And then I wanted to ask about on the cost side, on the selling and promotion. Historically, I think at least going back a few years, Q4 is a stronger quarter, certainly relative to Q3 for sales and promotional spend. And I know, Rick, you said, that you pulled back there. Is that -- just what was the thinking on pulling back there relative to historical seasonality? And does that suggest, on the flip side, what we're just talking about, that maybe that flows through to softer enrollment, because you did pull back on the selling and promotion?

Yes. Actually, if you remember, Corey, when we were in the third quarter discussion, we talked about our lead scoring. And so we accelerated some expenses in the third quarter using a new method of lead scoring to see if that would have an impact on fourth quarter registrations. And then we did pull back because we wanted to see the impact of that. So I think that without going into a greater discussion on what we're finding from lead scoring that -- you know, we did an experiment. We accelerated the money in Q3 and then held back on some of that just from a budgetary perspective in Q4 until we could get registrations from leads through applications through students in the seat to see how it went.

So it sounds like you're kind of working through that. Should we be thinking, as you go through 2018, that selling and promotional expense would be up relative to '17 for the year or down? Or any help would be appreciated.

I think it's going to be flat. But that said, we constantly say, if we find a formula that works, we'll spend into it.

Okay. And you know there -- it's a little -- I know there's kind of moving pieces here but Rick, could you just speak to within Q4, were there any more kind of permanent-type cost savings? Or anything you're looking to address in 2018?

Nothing specifically, Corey. Just an ongoing vigilance about managing costs relative to our level of registrations. But the idea that we do based upon all the activities expect at some point a turn in the registration. So we're going to continue to invest and manage the business and looking forward to that day.

Our next question comes from Alex Paris with Barrington Research.

This is Chris Howe, sitting in for Alex Paris. My first question was in regard to the new programs. How are enrollments going? How were they going for January? And what are your expectations for enrollments in May? And following up on that too, when would you expect to see a return on these investments?

So I think you're referring to the doctoral programs, Chris? And...

Yes. That's correct.

Yes. So we were pleased with our doctoral programs. I think our net starts for the 2 cohorts were about 25. And Rick, 25? 27? Something like that?

No. I think the two were closer to 30 for the first cohort. So...

Okay. But in -- any way, they met our start requirement, particularly for our first class, and starting at a time of the year when, I think, the more traditional doctoral starts are the fall. We plan for 3 doctoral starts: January, May and September. We only marketed to our alums, because we felt like if we had any bugs that we've needed to get out of a program that we never offered before. We'd rather have people who were very familiar with our systems and how we operate. They started off with the residency. I participated in that residency the first weekend in January. It was very successful, and we have a good flow of volume for the May start, even though May -- you know, the stronger start, we believe, will be in September when we have that start. But I think we're progressing for a start in January. We can give you the exact number on that. And since Rick thinks it was a little higher than I did. And then the May start, which I think will be at least equal to January, if not a little higher. And then, hopefully, September will be in full steam. But so far the students are participating, are enthusiastic, the faculty is enthusiastic, and we look forward to continuing those programs. And by the way the ROI, we haven't disclosed that particularly, but we're making progress towards our original performance.

That's very helpful. I had another question in regard to just the trend that we're seeing, the year-over-year declines sequentially for returning students in total students. Just following along that, what is the internal expectation, perhaps, looking even further out for when enrollments will stabilize? And when should we, I guess, expect this breakeven point?

We don't have a specific time period, but we'd certainly like to crossover that date in the next 12 months, if possible, but barring any unforeseen circumstances. If you notice, our declines in new students are drastically influenced by FSA. We just -- our low price makes us attractive to people who really are much more enthralled with the amount of a refund check they can get from the federal government and not so serious about being student. So we've tried to put all the processes in place to make sure that we get serious students. And once -- if you notice, the decline in returning students is a much lower percentage than the decline in new students, particularly the FSA percentage, which means that our initiatives on both retention, and as far as selecting more quality students and targeting our marketing, that are working.

Okay. And as far as FSA, what should be our expectations for Q1? If you haven't -- if I missed it. I'm not sure if I missed.

I don't think we really -- we haven't really broken down our guidance by pair type, Chris.

Our next question comes from Jeff Silber with BMO.

Henry Chien calling for Jeff. Just I wanted to follow-up on the FSA trends. Is there any color on what's driving some of that weakness if there's been any change from this most recent quarter and the prior quarter? It looks like the trend's relatively stable, but I just wanted to see if you had any color on the trends there?

Well, I think -- and you're talking about FSA specifically, right?

Yes. FSA, yes.

Yes, I think the trend on FSA has been improving. Improving would be less negative. So if you track back over 4 or 5 quarters, you've seen both new and total net course registrations on a year-over-year basis. That decline getting smaller. I'm thinking about how you use a double negative to describe this. So FSA is being tracking consistent with what you're seeing in overall for new and total.

Yes. I think, further adding to what Rick said, if I'm looking at our actual numbers here for 2017 by quarter, the new FSA students went down in the first quarter 26%, 28 in the -- 28.8% in the second quarter, 20% in the third quarter and then 20.5% in the fourth quarter, while the returning student numbers for FSA were down 14.6%, 12.0%, 9.2%, 9.0%. So you can see the difference between the quality of the students. While the new students are declining at a higher rate, the returning students are declining at a lower rate, meaning that our process to find -- in try to finding higher quality FSA students is working.

Got it, okay. That's helpful. And on the -- for tax reform, any thoughts on how you plan to use some of the incremental savings from lower taxes?

We have a Board meeting next week. So we'll discuss those ideas. But at this point in time, we haven't finalized anything.

Okay, got it. And just last one from me. It seems like the outlook for this defense spending is -- it seems to be quite positive. Is there anything that we should be on a lookout for, just from -- on the military side that could help or hurt Tuition Assistance going forward?

Well, I know the outlook. The long-term outlook certainly is positive based on discussions that have been held in Congress and proposals. But at the same time, my sources say that none of the budget for this year has been distributed out to the bases, particularly for Tuition Assistance. So while the signs are good in the short term, we're not seeing that positive benefit.

(Operator Instructions) Our next question comes from Peter Appert with Piper Jaffray.

Kevin Estok in for Peter Appert. My first question was, I guess I was wondering if you guys could talk a little bit about any growth opportunities for Hondros College. It's obviously been performing very well. Maybe additional campuses or programs you guys may be looking into would help.

Sure. We successfully added our Toledo location last year. That location was approved by both Hondros' current accreditor, the ACICS and the Department of Education. But then when ACICS was given its notification by the Department of Education, Hondros and all the other ACICS schools were asked to sign a provisional participation agreement, which means during the time period that Hondros is in a transition stage from ACICS to ABHES, its accrediting agency that's currently in cadency with -- it cannot add new locations. But I think the addition of the Toledo location shows the benefit of Hondros, which when we acquired it, it was a 4-location company and with overhead to run for that could probably easily run more than that. Toledo is proving that, and we do have plans to add other locations, but we're going to have to transition to our new accreditor and then get through what I believe is a 12-month waiting period before we can add a new campus.

But we're seeing growth in the campuses. The -- systemwide for Hondros, there's growth absent Toledo. So there it's showing good results, strong demand -- improved demand for its programs in those other markets. And as far as -- you can correct me, I don't think any of those campuses are at capacity. So I think there's still room to grow enrollment at the campuses other than Toledo.

Right. And we've looked states outside of Ohio as well as Ohio. Ohio is kind of interesting. You can look at some of the other degrees, degrees other than nursing and the state projects a need and the needs there, you're allowed to offer the degree. If the need's not there, you're not allowed to offer the degree. So that's somewhat more regulated than some states, but we're comfortable with the system. But we are looking at adding other locations. We are just going to have to be patient till we get our approvals.

Okay, I appreciate it. And my second question has to do with, I guess, how should we think about near- and long-term pricing outlook? Or I guess, how you guys might be looking at pricing in 2018?

You mean tuition pricing?

Exactly. Yes.

Sure. So it's kind of interesting, because pricing is all over the blackboard for traditional institutions as well as nontraditional institutions. I just got a tuition increase notice from my alma mater, Duke University, that they're raising it next year by 3.9%, and they raised it last year by 3.9%. And I think the total cost of attendance is over $70,000. If you're an elite school, you can do that. But if you're competing for students, you really can't do that. We don't have any intentions currently in raising tuition at APUS. We think we're positioned to compete. We also don't think that we have to discount out tuition either at APUS. We think we're pretty solid where we are, and we think we're pretty solid where we are with Hondros because of the need for nursing. We're in markets that while competitive, aren't saturated with competitors. And in fact in a couple of locations, we've had competitors go out of business due to closure of ITT locations and Corinthian locations for nursing. So we're comfortable with our pricing, but I would say that we're not planning any increases in the short term.

At this time, I'm showing no further questions. I'd like to turn the call back over to Mr. Chris Symanoskie for closing 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 your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.