American Public Education Inc (APEI) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the American Public Education, Inc. Third Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Vice President of Investor Relations, Chris Symanoskie. Please go ahead, sir.

Thank you, operator. Good evening, and welcome to American Public Education's discussion of financial and operating results for the third quarter of 2018.

Presentation materials for today's call are available in the Webcasts section of our website and are included as an exhibit to our current report on Form 8-K filed 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; 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 Factors section and elsewhere in the company's most recent annual report on Form 10-K and subsequent 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 I'll turn the call over to Dr. Boston. Dr. Boston?

Thanks, Chris. Good evening, everyone. I will start our call today by discussing our recent operating performance and our third quarter financial results, and also our outlook for the fourth quarter of 2018. Our CFO, Rick Sunderland, is here, but he has laryngitis, but we'll make sure he is available for questions at the end of my presentation.

In the third quarter of 2018, net course registrations by new students, excluding those utilizing FSA, increased 1.4% compared to the prior year period. This increase was driven by a 3.2% year-over-year increase in net course registrations by new students utilizing Military Tuition Assistance, or TA, which was partially offset by a 2.7% decrease in net course registrations by new students utilizing cash and other sources.

Net course registrations by new students utilizing veteran's benefits, or VA, where approximately flat compared to the prior year period.

Net course registrations by new students utilizing Federal Student Aid, or FSA, at APUS declined 10.8% compared to the prior year period. This represents the smallest year-over-year decline in net course registrations by new students utilizing FSA since the first quarter of 2014.

Overall, total net course registrations and net course registrations by returning students were both approximately flat year-over-year, while net course registrations by new students at APUS declined by approximately 3% year-over-year.

In short, net course registrations by new and total students exceeded our third quarter outlook because of better-than-anticipated net course registrations by students utilizing TA.

For the 3 months ended September 30, 2018, or the summer term of 2018, total enrollment at Hondros College of Nursing, or HCN, increased approximately 11% year-over-year and new student enrollment decreased 3% compared to the prior year. The prior year period included a second ADN cohort at our new Toledo campus, which was possible due to the availability of classroom space during its first year ramp-up and student census.

Absent this factor, new student enrollment at Hondros would've increased 5% year-over-year. We're pleased that the Accrediting Bureau for Health Education Schools, or ABHES, is now officially designated by the U.S. Department of Education as HCN's primary institutional creditor for purposes of participation in Title IV programs. At the time of initial accreditation by ABHES, HCN was also accredited by ACICS. On October 1, 2018, HCN voluntarily withdrew from ACICS accreditation. Furthermore, HCN's application for recertification of its Title IV program participation agreement was recently approved by the Department of Education and extends through September 30, 2021.

The management team at HCN is focusing its attention on several growth initiatives, including the launch of its new medical laboratory technology, or MLT program, in early 2019; the creation of a new branding campaign; and preparation for the opening of a new campus, which we expect to open in 2020.

The team is also implementing new academic achievement requirements and course retake policies for the ADN programs to improve the educational experience and NCLEX pass rates. These initiatives involve strengthening certain academic requirements such as the minimum passing score and exit exam score requirements for certain courses, limiting the number of course retakes allowed prior to academic dismissal and other prerequisites. We believe that these important quality initiatives may lead to volatility in new and total student enrollment next year, but they may also put the institution on a much better footing for growth and stability in the years to come.

Moving on to Page 3. We are pleased by the continued improvement and student persistence and recent increases in conversion rates that resulted from upgrading our enrollment management processes and expanding student service hours. Having reached these near-term goals, we can extend our focus to include further strengthening our reputation and solidifying our leadership position among active duty military communities as well as leveraging the AMU brand to serve greater numbers of veterans.

According to the U.S. Department of Veterans Affairs, approximately 755,500 veterans utilized their Post 9/11 GI Bill benefits in 2017. AMU served approximately 18,100 veterans or approximately 2.4% of the Post 9/11 GI Bill enrollments last year. Although the veteran community is more dispersed than the active duty military community, we believe AMU is well positioned to serve a larger portion of the veteran community given AMU's military heritage and leadership position among active duty service members and affiliated communities.

Students who utilize TA and VA benefits persist at a higher rate on average and the marketing cost to attract them is lower than for students who utilize FSA.

APUS also intends to focus on the areas of the civilian market, where student quality and advertising costs are more compatible with APUS' low tuition model. These audiences include certain degree programs, professional fields in metropolitan areas where we have found students are most likely to persist. Students who enroll as a result of our strategic and corporate relationships are prime example of such most-likely-to-persist audiences. Corporate relationships that are in alignment with our brand and academic strengths will continue to be a priority for APUS as well.

In closing, we believe the third quarter of 2018 was a quiet, but largely positive quarter as APEI marches towards its long-term goal of achieving enrollment growth at APUS and top line growth overall. In support of these goals, we intend to further adjust our advertising spend in favor of our most productive channels with an even greater emphasis on veteran and other most-likely-to-persist communities while continuing to pursue both organic and acquired growth in health care education and workforce development.

Moving on to Page 4, the financial results summary, and taking Rick's place. American Public Education's third quarter 2018 consolidated revenue decreased by less than 1% to $73.0 million, compared to $73.3 million in the prior year period. The revenue decrease was due to a $1.1 million or 1.6% revenue decrease in our APEI segment, which was partially offset by a $0.7 million or 8.9% revenue increase in our Hondros segment.

In the first quarter of 2018, APUS implemented new general education requirements for all students designed to further improve their educational experience. These new requirements include a requirement to take a 2-credit course, which has resulted in a decrease in revenue per net course registration.

Revenue per net course registration in the third quarter of 2018 is approximately 1.4% lower than the prior year period as a result.

Cost and expenses for the 3 months ended September 30, 2018, were $66.1 million an increase of $0.4 million or 0.7% compared to $65.7 million for the 3 months ended September 30, 2017. The increase in cost and expenses was primarily due to increases in professional fees, stock-based compensation costs for retirement-eligible employees, and performance stock units in our APEI segment and employee compensation costs in our Hondros segment, partially offset by decreases in instructional material costs and marketing support materials expense in our APEI segment.

Consolidated instructional costs and services expense as a percentage of revenue decreased to 38.6% compared to 39.2% in the prior year period. The decrease in instructional costs and services expenses as a percent of revenue was primarily driven by decreases in instructional materials costs in our APEI segment, partially offset by increases in employee compensation costs in our Hondros segment.

Selling and promotional expense as a percentage of revenue decreased to 19.4% of revenue, compared to 20.0% in the prior year period. The decrease in selling and promotional expense was primarily the result of a decrease in employee compensation cost and marketing support materials expense in our APEI segment, partially offset by an increase in advertising cost in our Hondros segment.

General and administrative expenses as a percent of revenue increased to 26.4% from 23.5% in the prior year period. The increase in general and administrative expenses primarily related to increases in professional fees, compensation expense and stock-based compensation costs in our APEI segment and bad debt expense in our Hondros segment, partially offset by a decrease in bad debt expense in our APEI segment. General and administrative expenses include pretax expenses of approximately $0.7 million and professional fees in our APEI segment associated with an acquisition that the company is no longer pursuing.

Consolidated bad debt expense for the quarter was $1.3 million or 1.7% of revenue, compared to $1.2 million or 1.6% of revenue in the prior period.

Depreciation and amortization expenses as a percentage of revenue decreased to 5.9% from 6.4% in the prior year period.

Our effective tax rate during the third quarter of 2018 was approximately 25.2% compared to 43.0% in the prior year period. The decrease in our effective tax rate is primarily due to the reduction in the federal corporate tax rate.

Our net income for the quarter was $5.5 million or $0.33 per diluted share compared to net income of $4.4 million or $0.27 per diluted share in the prior year period.

Total cash and cash equivalents at September 30, 2018, were approximately $197.6 million compared to $179.2 million as of December 31, 2017.

Net cash provided by operating activities was $25.6 million and $29.3 million for the 9 months ended September 30, 2018, and 2017, respectively.

Cash provided by operating activities during the period was negatively impacted by a $6.1 million increase in accounts receivable due to delays in payment processing by DoD tuition assistance and VA education benefits.

Capital expenditures were approximately $4.7 million for the 9 months ended September 30, 2018, compared to $6.5 million in the prior year period. The decline was primarily related to lower investments in computer hardware and software.

Depreciation and amortization was $13.2 million for the 9 months ended September 30, 2018, compared to $14.2 million in the prior year period.

Moving on to Page 5, our fourth quarter outlook. Our outlook for the fourth quarter of 2018 is as follows: at APUS, the change in net course registrations by new students is expected to be between a decrease of negative 5% and flat year-over-year. The change in total net course registrations is expected to be between a decline of 4% and a 1% increase year-over-year. For the small term, which is the 3 months ending December 31, 2018, total student enrollment in Hondros was approximately flat to last year, while new student enrollment decreased by 4% year-over-year.

As previously announced, Hondros discontinued new enrollments in its RN to BSN program starting with the October 2018 term. New student enrollment would've declined by an estimated 1.8% year-over-year absent this factor.

In the fourth quarter of 2018, we expect consolidated revenues to decrease between 4% and 0 year-over-year. Net income for the [third quarter] (Sic-see press release "fourth quarter") of 2018 is expected to be in the range of $0.48 to $0.53 per fully diluted share.

In closing, we're pleased with the third quarter results, and we also believe that focusing on our core strengths of serving the military, veteran and corporate markets as well as investing in organic and acquired growth in health care and workforce education will serve us well in the coming months and years.

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 Jeff Silber with BMO Capital.

If I could first focus on APUS. If I remember correctly, last quarter you talked about some potential processing delays, I think it was in the Air Force if I remember correctly. Can you just remind us what happened there? And it looks like you did better than expected on TA, so may not have been as bad as you'd thought?

Yes. So we had approximately a 3-week period when the Air Force registration system was down and we couldn't take any registrations from Air Force students. And then when they finally fixed the system, it was very -- it was so close to the September period and we were in August when we announced our earnings that we really couldn't predict whether or not those registrations that we lost during the 3-week period would come back. Well, as it turns out, they pretty much came back since we exceeded our forecast, particularly, in TA for the third quarter.

So that's what really drove the difference, it wasn't in any of the service branches. It was mostly in the Air Force?

Mostly in the Air Force, yes.

Okay. Great. And Wally, in your prepared remarks, you talked about some expected volatility in Hondros, you went through that pretty quickly. Can you just kind of step back and give us a little bit more color on exactly what's going on?

Sure. Sure. So Hondros primarily has 2 programs. They provide a certificate program in practical nursing, which is a licensure program. That program can step into an ADN program, which is a degree program for registered nurses. And so the PN program has very good NCLEX pass rates and the ADN program is below the Ohio standard in NCLEX pass rates. And so what happened when a number of the nursing schools owned by other companies went out of business and they had very low performing rates, the NCLEX pass rates, both nationally and in Ohio, went up and we found ourselves at a gap between where we were closer to the NCLEX pass rates and where we needed to be once those schools no longer operated. We looked at what we had to do to get the pass rates up and it was really a lot of factors. We had already put in a new curriculum for the ADN program. So it really wasn't tweaking the curriculum as much as it was looking at some of the policies we had for course retakes, for minimum scores and some of the lab courses, which are heavily tested on the NCLEX pass for the clinical component, and so -- as well as entry test results for [HC] exam, which predicts how well people are going to succeed in the program. So looking at a number of factors, we increased our requirements, and by increasing those requirements, we certainly expect some volatility as we take students through the cycle for the next 18 months or so.

And that was already done prior to this most recent semester?

No. We had done -- we had put in the curriculum changes, we had put in the course retake policy, but we had not put in the new higher standards for admissions.

Right. So the course retake went in July and the admission change goes in, in January of '19.

Okay. Great. That's helpful. And just a few numbers questions, I'm sorry for the model. What are you -- within your guidance, what are you forecasting for revenue per net course registration at APUS and revenue per student in -- at Hondros?

Right. So we don't typically give out those numbers. We've seen declines in revenue per net course registrations at APUS for the reasons Wally said in the script. As it relates to that 2-credit course, I think that's probably normalized into the system at this point. So you're not going to [necessarily] see a large continued declines. In the terms of Hondros, I think that trend has been fairly stable, I guess you can tell me what your model is outputting, but from my seat, that number has been pretty static.

Okay. That's fine. And then on the adjusted -- excuse me, on the EPS line, what tax rate and share counts are you looking for?

I think we just reported 16 point -- tax rate is 26.25% and that share is $16.7 million, I believe.

Yes. I'm looking for -- I'm sorry, for fourth quarter guidance, what's incorporated in your guidance?

We issue incentive shares early in the year. So you're not -- it doesn't move materially when you get into the fourth quarter.

The tax rate you said was 26.5%, that's what you're expecting in the fourth quarter?

26.25%.

And our next question comes from the line of Peter Appert with Piper Jaffray.

So Wally, you talked a bit about evolution in the marketing focus. I'm hoping you might just give us a little more color in terms of what you're thinking about there? You'd experimented with some step up in spending, I guess a year ago; is that still in the cards perhaps to revisit that?

Yes, it is Peter. We have experimented in a number of pilot scenarios, tweaking added expenses in certain geographical markets. I think we referred to that during my script as markets where we think we can make a difference with a student as well as experimenting in spend for specific degree programs where we have higher completion rates, greater enrollment success and -- as well as certain keywords. You may recall that we don't use lead aggregators at all. So we're going our own search engine optimization internally as well as building landing pages and looking for certain combinations there, including even building our own social media content generation blogs that we use to spread the organic hits for APUS. And I think those combinations are still in a pilot mode, but I think one of the things that we can point to is that our retention has improved and part of that retention improvement isn't just paying better attention to the students when they're in the class, but it's actually bringing in better students to the class.

Got it. Any commentary, Wally, on potential new program offerings as a potential driver of enrollments?

Yes. We look at that all the time. I think the one that's currently experiencing some success is the fact that we've had a cybersecurity program for a while, but in June, we received the NSA certification for that and that's a pretty big deal that differentiates your program from a lot of the other ones out there. But we continue to look at STEM because we think we've differentiated our offerings as a university, and between health care and STEM subjects in general, we've been able to build labs and get good academic outcomes from the students. For example, when we set up our Bachelor of Science in Electrical Engineering, which we believe was the first fully online BSEE program, we were able to build a math degree because we had to have 6 calculus courses for BSEE. So we were well on our way to having enough courses for the math without having to add a lot of development time. We also have a very unique program in space studies. So we're keeping an eye on what the Department of Defense is doing for this new space force program and hope to be ready for that should they make a firm announcement on it.

And then, Wally, can you remind me how big the corporate market is for you, maybe it's, I don't know, percent of revenues, percent of enrollments? And do you offer special pricing in the corporate market or any special programmatic offerings?

Well, typically, in the corporate market, we offer a low discount compared to a lot of the nonprofit schools. I would say that 5% is a typical discount because our tuition is already as low as it is. We do have a couple of outliers that have a discount higher than that, but it's usually because we've got a fairly exclusive relationship that brings the marketing cost for that program down. We -- I think, for the quarter, we had roughly 13% of our students paid cash, and we estimate that, in that market, the number of people who're getting reimbursed by their companies for the cash payments can be anywhere between 1/2 of that number to as much as 2/3 of that number.

Okay. And then last thing, Wally, anything to report new on the M&A front. Obviously, you moved away from the transaction you were looking at last quarter. Should we be anticipating something in 2019?

Well, you can never predict. Unfortunately, we had to write that one off. That was one we thought we were close to reaching an agreement on, but we have not been shy about saying that we are looking for the right opportunity should we find one. So we were pleased with our Hondros acquisition. And so we continue to look in the health care arena and we've also said that we're looking in the workforce development area.

I think just one more, sorry. Have you thought about expanding Hondros into the BSN market or would that have to be through an acquisition?

Actually -- so Hondros was approved for BSN. They had an online RN to BSN. But APUS also had an online RN to BSN, and the APUS online RN to BSN was offered with more frequent starts and a slightly lower price because Hondros was on the quarter system and APUS is on the semester-hour system. So I would say that if Hondros offers a BSN, again, we'll probably do it on ground and leave the online to APUS, who operates at a much more efficient cost structure.

And our next question comes from the line of Corey Greendale with First Analysis.

So you talked about the -- or you updated the Air Force issue. On the VA side, I think there were some publicized IT problems they had that were leading to delays in payments. I know you mentioned the impact on cash flow. Was there any impact of the VA's IT issues on enrollment?

We believe the complaints that we got from our students related mainly about payment and not about enrollment.

Yes, Corey, there is a significant backlog delay in processing payments at the VA, which we experienced at the end of September. But to my knowledge, that's not affecting students' abilities to enroll.

And does that -- I hate to make you talk, Rick, but is that -- or whoever wants to answer -- is that still ongoing or have you started to receive those payments?

So at the VA, it's ongoing. We've gotten the payments in from DoD on tuition assistance, but we were careful the way we were at the queue. I don't know that there is not going to be a similar delay at the end of December. So I'd like to think that, that was a temporary delay, but I don't know that it is not going to repeat itself. On the VA side, it's ongoing.

Okay. And on the FSA side, so, Wally, I think you pointed out that the decline in new enrollments was divested spend in a while. Insofar -- so I guess, 2 questions. Insofar, is it still negative? I think we know overall the issues, but can you just sort of update us on why do you think it is still in -- slightly in double-digit territory negative? And then, as you look forward, I know you've been very cautious about giving forward-looking statements, but any thoughts on whether there is the potential to see that turn positive -- the FSA new students in 2019?

Well, we're certainly hoping for that inflection point. Predicting it exactly will be tough, but I think that the reason it was still at about a 10% negative number for the third quarter has to do primarily with the last big thing that we put in for requirement was we actually wanted to see driver's licenses and actual proof of high school graduation in the form of a -- either a transcript or real diploma, and that was last August we put that in place for FSA students. So that was in the middle of the third quarter and putting that in place has clearly gotten rid of students who weren't serious students. I think it's impossible necessarily -- it's impossible to tag. I mean, there's potential pelt chasers or fraud chasers, but the bottom line is there were students who were taking advantage of the system. And by putting in these requirements to have authentic identification, we ratcheted it down again, but on the good news side, we have a much more serious pool of good students as reflected by my comment in the script that our pass rate, first time course pass rate for FSA students was up again in the third quarter.

Right. So you can see that, Corey, the relationship between the new and the total, right. And what that means is the success persistence is much better and we've been reporting that for numerous quarters now. But what that really means is the lifetime value of that student's a lot higher and that's important.

Yes. And actually on that point, can you -- I saw in the queue you gave and -- this was probably public before, but you gave the update or the new CDR number, just can you help us put in perspective why the CDR isn't lower in light of, and I know there's a lag, but it isn't lower in light of things you've been doing on quality and persistence?

Well, it's a 4-year lag, unfortunately, Corey. So it's a CDR rate that takes into -- goes back to 2014, '15.

It's �15. With students entering repayment in '15, which was, Corey, the tail end of that. So without making any predictions, we do have some visibility going forward, and you know the reason why that's high, right? We've talked about the calculations, the numerator and the denominator. Now a significant portion of the students in that numerator, which is driving that 23%, were our stipend chasers. So my view on that is we're likely going to start seeing the downside, but I'm not -- Corey, I'm not prediction what the number is going to be next year.

And our next question comes from the line of Greg Pendy with Sidoti.

I just wonder a real quick one. I think on the last call, you gave us the percentage of the impact for the Air Force, can you remind us what that was?

Well, Greg, we're all shaking our head, and none of us recall that. We think we�re going to have to pull up the transcripts on that one.

I think, Greg, we might have given you the percentage of -- so registration in the Air Force is 43% of our total TA registrations and [on that]. So it's clearly our largest branch. And so that roughly 3-week disruption in enrollments had a fairly sizable impact. As it turned out on our guidance, and as Wally said earlier, the good news is we have monthly starts. So we were able to recover some portion of that and end up leaving our registration guidance.

(Operator Instructions) And I'm showing no further questions at this time. I would like to turn the call back over to Chris Symanoskie for closing remarks.

Great. 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 on today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.