Adtalem Global Education Inc (ATGE) 2021 Q2 法說會逐字稿

Greetings, and welcome to the Adtalem Global Education Second Quarter Fiscal Year 2021 Earnings Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to our host, Maureen Resac, Vice President, Treasury and Investor Relations. Thank you. You may begin.

Thank you. I'd like to remind you that this conference call will contain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 with respect to the future performance and financial condition of Adtalem Global Education that involve risks and uncertainties. Actual results may differ materially from those projected or implied by these forward-looking statements. Potential risks, uncertainties and other factors that could cause results to differ are described more fully in Item 1A, Risk Factors, of our most recent annual report on Form 10-K filed with the SEC on August 18, 2020, and our other filings with the SEC. Any forward-looking statement made by us is based only on the information currently available to us and speaks only as of the date on which it was made. We undertake no obligation to publicly update any forward-looking statement, whether written or verbal, that may be made from time to time, whether as a result of new information, future developments or otherwise, except as required by law.

During today's call, our commentary will refer to non-GAAP financial measures, which are intended to supplement, though not substitute for, our most direct comparable GAAP measures. Our press release, which contains the GAAP financial and other quantitative information to be discussed today as well as reconciliation of GAAP to non-GAAP measures is available on our website. Please note that all financial results and comparisons made during today's call are on a continuing operation basis, excluding special items, and are in comparison to the prior year period, unless otherwise stated.

Telephone and webcast replays of today's call are available for 30 days. To access the replays, please refer to today's press release.

We'll begin today's presentation with prepared remarks from Lisa Wardell, Adtalem's Chairman and Chief Executive Officer; and Mike Randolfi, Senior Vice President and Chief Financial Officer. Following the prepared remarks, Stephen Beard, our Chief Operating Officer, will join us for the question-and-answer session.

And with that, I'll now turn the call over to Lisa.

Good afternoon, and thank you for joining us today. This quarter, we continued to achieve strong operational results with revenue growth of 6.4% and earnings per share growth of 35% in the quarter. This was driven by operational execution and marketing, fueled by prior period marketing spend, efficiency and admissions due to inquiry conversion improvements, new talent contributions and structural changes in several of our institutions and strong demand in the segments where we have strategically focused our businesses.

Our past decisions to invest in marketing and operational improvements are bearing fruit and generating double-digit enrollment growth at Chamberlain, along with double-digit new enrollment growth at AUC and high single-digit new enrollment growth at Ross Med in the first half of fiscal 2021.

During the quarter, we also drove robust revenue growth in both Medical and Healthcare and Financial Services, with each growing revenue about 6%. Our superior student outcomes continue to be a hallmark of our success and the foundation for future enrollment growth. Given the strong first half of our fiscal year, we've raised our full year earnings guidance, which Mike will discuss further in his remarks.

The demand for health care professionals remains extremely strong, and we are continuing to assist our partners in filling their critical workforce gaps. With the COVID-19 vaccine beginning to be distributed on a wide scale, we are pleased to share that many Adtalem institutions, students and graduates will be part of the solution in helping distribute and deliver the vaccine worldwide.

We continued to execute on our enterprise strategy during the quarter. The pandemic has put a great deal of stress on the health care industry and has exacerbated health care workforce shortages that have existed for years. Adtalem seeks to both increase the talent supply to address the rapidly growing and unmet demand for health care professionals and solve complex issues for employers. This strategy continues to be validated and accelerated by the needs of our employer partners during the pandemic.

Our medical schools graduate an average of nearly 1,000 physicians each year. To put that into context, the average number of graduates annually by all U.S. medical schools combined is under 20,000 graduates every year over the past 5 years. Adtalem medical schools graduate more than twice as many physicians than the largest U.S.-based medical school.

Regarding our planned acquisition of Walden University, we remain confident that the transaction is strategically complementary to the legacy Adtalem institutions through providing additional online capabilities, scale and health care offerings, graduate program mix and behavioral science offerings being requested by our employer partners. I want to ensure our investors are aware that 77% of the revenue and 88% of the EBITDA for Walden are in the health care-related program offerings, including nursing and social and behavioral sciences. In December, inquiry volumes industry-wide for behavioral sciences increased 63% year-over-year.

In terms of degree mix, 85% of programs are graduate. And of the 15% of undergraduate programs, approximately 1/3 are degrees in nursing. The U.S. nursing education market is currently at $28 billion and is expected to grow at a 21% CAGR to $60 billion by 2024. These programs allow us to assist providers in addressing the societal determinants of health and their employee shortages, which have increased as a result of the pandemic. Chamberlin University and Walden University combined will have the largest nursing enrollment in the market, which still represents less than 10% of the total market. The collective scale will further enable future growth for both institutions.

Adding Walden increases our scale to fill the needs of qualified health care professionals that is both required by our employer partners and is a national imperative during and post pandemic. Walden significantly increases our capabilities in online and hybrid learning modalities, another secular shift that has been accelerated by the current pandemic, and we see that trend continuing well into the future. Walden is expected to provide incremental unlevered free cash flow of $120 million post close.

In addition, as a reminder, we are targeting $60 million in cost synergies to be fully phased in within 24 months of the transaction close. With tax considerations and the $60 million of cost synergies, the 8.4x multiple decreases to an even more attractive multiple, under 6x EBITDA. We have provided additional information on the Walden transaction in a supplemental slide deck posted on our investor website.

The acquisition of Walden is progressing well, and we remain on track to meet the targeted closing date in mid-calendar year 2021, subject to closing conditions. As it relates to the U.S. Department of Justice's inquiry on the content and cost of Walden's Master of Science in Nursing program and the availability of clinical site placements for this program, I want to reiterate that we take these matters very seriously. We are conducting a thorough independent investigation and have hired independent legal advisers to do so. To date, we have not found evidence that substantiates the allegations.

Turning to highlights by segment. Across our medical and health care institutions, our teams are working diligently to meet the surging demand for health care professionals and continue to leverage the opportunities that our scale provides us. What truly sets our institutions apart from their peers are superior academic outcomes, our focus on student support and success, and our strong relationships with employer partners.

Following the largest enrollment period in Chamberlain's history in September, we are pleased to see continued strong growth in the November session, with new and total student enrollment increasing 8.1% and 10.2%, respectively, representing all-time highs for the period. Enrollment during the quarter was driven by ongoing investments to further strengthen the Chamberlain brand, targeted messaging by program and our focus on operational execution.

We are also seeing substantial growth across the country in our campus programs, which included expansion of our evening and weekend classes now offered at 5 campuses and several campuses with mid-session November starts. Because 16 of our 22 campuses do not have caps on enrollment, we can continue to meet the growing demand for these programs and see a clear runway to further expansion.

Demand in California, in particular, has been very strong, well above our current campus caps. Later this year, we plan to open a second campus in Southern California. At our current California campus, we have approved -- we have been approved to raise the enrollment cap by 50%. In the meantime, we have also successfully implemented a process that channels prospective California students to Chamberlain's other campuses, further increasing enrollment and demonstrating the power of the Chamberlain brand and scale.

Our students continue to perform well academically with first-time NCLEX pass rates through the third calendar quarter of 2020 of 91%, which is on par with the national average pass rate. These academic results, achieved despite challenges from the pandemic, speaks to the continued strength of our programs, our acceleration of predictive analytics and our robust student support.

Chamberlain has worked to establish strong connections with community and junior colleges, serving as a further differentiator as we partner with these schools to build a pathway to our programs. Notably, our JumpStart program, which enables students earning an associate degree in nursing to also take 2 RN to BSN courses at Chamberlain at no cost to them is generating strong interest, and ultimately, enrollments into our RN to BSN degree programs.

In our medical and veterinary schools, we are focused on expanding and developing stronger relationships with our clinical partners. We've been focusing on driving more synergies between Ross Med and AUC, including combined operations such as marketing, admissions and student services as well as joint clinical programs with our partners. As our enrollment continues to grow, we see this as an opportunity to deliver more clinical revenue over the long term while ensuring our students get quality, clinical placements in a timely manner.

For the January semester, our medical and veterinary schools had a portion of their students successfully returning to campus to continue their educational journey, while other students remain online as we begin calendar year 2021. That being said, we are monitoring the risk of the potential impact of the nationwide surge in COVID-19 on clinicals as we enter the third quarter. We view this risk as manageable and temporary, and we continue to benefit from robust relationships with geographically diverse clinical partners. This enables us to shift a portion of the clinicals from one location to another as needed. In addition, we provide students with an increasing suite of online elective clinical options.

Ross Med continues to see increased demand for its programs as a result of its growing brand recognition, the steady consumer demand for veterinarians and an increased interest from students in animal health issues, including Ross Med way in human infectious disease. We are continuing to focus on increasing diversity, access and inclusion in medicine through the partnerships with HBCU and HSI undergraduate institutions. Since the beginning of 2018, we have enrolled over 580 graduates of HBCU and HSI undergraduate programs in our medical schools. Additionally, we've entered into partnerships with 10 HBCUs and HSIs and are in active conversation with others.

To accelerate this effort as well as build stronger undergraduate adviser relationships, we have combined our efforts across med and vet and formed a new field marketing organization, the student university partnership team. We are already seeing improved results in inquiries as a result.

In addition, we recently announced a partnership with Minorities in Agriculture, Natural Resources and Related Sciences to further our commitment to increased diversity in the veterinary profession and strengthen the pipeline of highly qualified, diverse students pursuing an education in veterinary medicine.

As a result of these initiatives and our ongoing focus on execution and agility and meeting students' needs during the pandemic, I'm very encouraged by the promising enrollment trends across our medical and veterinary schools and expect this momentum to continue through the second half of fiscal year 2021.

In our Financial Services segment, we continue to enhance our offerings, strengthen our talent and infrastructure, and expand our capabilities to position the segment for long-term growth. As a reminder, Adtalem's last 2 acquisitions, ACAMS and OCL, have achieved 23% and 22% revenue CAGR since acquisition, respectively. And we are confident both businesses are ideally positioned to capture demand to enable further growth in their respective markets.

OnCourse Learning's position as a go-to provider in the mortgage industry has allowed us to capitalize on favorable market conditions, differentiating OCL from competitors through a combination of offerings, capabilities and scale. Demand for pre-licensure and exam prep have been quite strong, and our institutional partners have been able to rely on OCL's robust offerings to support new hires. Licensed mortgage professionals are required to earn continuing education credits to maintain their credentials, and our teams have performed exceptionally well in capturing that demand.

At Becker, we are continuing to reinvest in the business to both capture increasing consumer CPA test prep demand and to leverage Becker's brand in the continuing education sector. During the quarter, we saw 20% revenue growth in continuing education, with strong market response in all segments due to our expanded content and webinar offering. I am strongly encouraged by the traction we're gaining in the space as Becker brings its expertise to address an important need for professionals and employer partners.

CPA test prep continues to see a short-term shift from B2B to B2C sales in response to the pandemic as professionals in the financial services industry seek certifications on their own, offsetting declines from corporate hiring freezes. Importantly, even with these dynamics, we are adding new institutional relationships, which we expect to bolster our test prep revenue later in the year.

As we look ahead, we are excited about enhancements we are making to our Certified Management Accounting -- Accountant offering, which is one of the fastest-growing accounting credentials in the world. Our team will bring the Becker experience to the CMA exam prep, and we are already receiving positive feedback from potential customers.

ACAMS remains the leader in the rapidly growing anti-money laundering and financial crime certification market, which is critical as global commerce continues to -- its shift online. We intend to continue expanding our offerings to meet the diverse needs within the global market, including driving growth in the anti-financial crime space. In early December, we announced the launch of our new anti-money laundering compliance certification program for fintech firms, in partnership with

FinTrail, a firm focused on managing exposure to financial crime risk. We're also seeing tremendous growth with our other new certifications, including sanctions, and in the new short course offerings, including know your customer and transactions monitoring.

Following the success of our virtual Las Vegas conference in September, we're continuing to hold other virtual conferences, including our Caribbean conference, which took place in early December and had nearly 450 participants. Going forward, we plan to use the hybrid conference model to expand participation by including attendees that aren't able or willing to travel. This will provide an alternative model that can supplement future growth of in-person conferences.

With regard to the regulatory environment, we are well positioned to support the Biden administration's priorities, including health care equity, access to education, particularly in health care and for the diverse and underrepresented communities, and championing the fight against financial crime. The Biden administration has made clear that it seeks solutions to these problems facing our nation, and Adtalem is addressing all of these challenges and making a measurable social impact.

Adtalem's medical schools graduate more black physicians than any other school in the United States, and a higher percentage of our students, 41% versus 21% for U.S. medical schools, practice in underserved rural and urban communities where they are needed most. Specifically, over 70% of graduates from AUC and Ross Med, who matched in 2020, entered primary care residency programs versus 47% of graduates from U.S. medical schools in aggregate.

With regard to other Biden administration priorities, our voluntary student commitments, reviewed by a third party for the past 4 years, demonstrate alignment with proposed regulations, including our commitment to 85/15 or below for federal funding, including VA and military benefits. Among our Title IV institutions, the percentage of combined revenue coming from Title IV funds is 71%.

Recent data published by the Department of Education showed that for fiscal year 2017, Adtalem's institutions had a combined 3-year cohort default rate of 3.1%, which is well below the combined rate for private for-profit 4-year schools of 12.9% and is half the rate of private not-for-profit schools of 6.3%, further endorsement that our programs and degrees provide a return on investment that employers are willing to fund for their employees, our students, and that our graduates are obtaining employment and paying back their loans to the U.S. taxpayer.

Our leadership team is laser-focused on operational execution, as evidenced by our commitment to grow EPS, 28% to 32%, on revenue growth of 5% to 7% this fiscal year, despite the challenges brought about by the global pandemic. As we achieve further scale and competitive differentiation in health care and financial services education through the acquisition of Walden University and organic growth across the portfolio, we are well positioned to deliver near-term and long-term growth and profitability for our shareholders as we continue to execute our workforce solutions provider strategy.

Before turning over to Mike, I also want to mention our recent shareholder engagement. You likely have seen the letters issued by Engine Capital and Hawk Ridge Partners. Members of Adtalem's Board of Directors and management have met with Engine and Hawk Ridge on numerous occasions in late 2020 and early this year. We will continue our dialogue with them and give careful consideration to the views set forth in their letters to the Board. Several of their suggestions are already being implemented as we have had a clear focus on operational efficiency and streamlining the portfolio for some time. I can assure you that as fellow Adtalem owners, we take our stewardship of your investments extremely seriously.

With that, I will now turn the call over to Mike to discuss our financial highlights in greater detail.

Thank you, Lisa, and hello, everyone.

Building off of our momentum from the first quarter and despite continued headwinds from COVID-19, we reported strong results for the second quarter of fiscal year 2021, with revenue increasing 6.4% to $283.1 million and diluted earnings per share from continuing operations, excluding special items, growing 35.1% to $0.77.

Our prior strategic decision to invest in marketing, combined with our continued operational execution and expanded offerings across both verticals, drove our continued strong performance. As Lisa mentioned, we saw ongoing strength in new and total student enrollments. Operating income and margin also benefited from continued cost efficiency initiatives focused on driving further cost reduction through centralized operations and reducing spend through supply management.

Continuing to drive increased productivity is in our DNA through our technology and our centers of excellence by combining our purchasing across Adtalem institutions. These productivity improvements are a significant contributor to margin expansion during the first half of this fiscal year.

Cost of educational services decreased 0.3% to $126.8 million in the second quarter of fiscal year 2021 compared with the prior year. This decrease was primarily driven by lower bad debt expense.

Student services and administrative expense was $103.7 million in the second quarter, a 7.3% increase when compared with the prior year. We believe our student support is and will be a competitive differentiator that allows us to provide access to diverse student populations.

We continue to thoughtfully step up investment in marketing and student recruitment and sales development to support future enrollment growth at our health care institutions and revenue growth within financial services. Adtalem has multiple vectors to drive future revenue growth, including capturing strong demand from medical and health care professionals, capturing the strong demand in the mortgage market at OnCourse Learning and continuing to innovate on its product offerings, driving growth in Becker's continuing education business and providing a broad range of options for ACAMS offerings to certify and train employees of our customers against fraud and anti-money laundering.

Our investments are focused on leaning into these vectors of growth. Consolidated operating income, excluding special items, increased 24.4% to $52.6 million in the second quarter of fiscal year 2021 driven by increased revenue at Chamberlain, OnCourse Learning, decreased bad debt and efforts to increase efficiency. This was partially offset by increased advertising and marketing expense to support future growth.

Net income from continuing operations, excluding special items, was $40.5 million compared with $30.9 million in the prior year. And diluted earnings per share from continuing operations, excluding special items, was $0.77 compared to $0.57, a 35.1% year-over-year increase.

Now turning to our segment results for the quarter. In Medical and Healthcare, revenue for the vertical was $234.4 million, a 6.5% increase compared with the prior year. The increase was primarily driven by Chamberlain achieving all-time highs in both new and total enrollments in the September and November enrollment sessions. This was partially offset by lower housing revenue at the medical and veterinary schools due to campus closures associated with COVID-19 and lower medical school clinical revenue.

Revenue at Chamberlain in the second quarter increased 13.2% compared with the prior year period. New and total student enrollment for the school increased 8.1% and 10.2%, respectively, in the November session.

As only a few campuses started new students in November, new start growth was driven by Chamberlain's 3 nurse practitioner programs, 2 of which launched in July of 2020. Revenue for the medical and veterinary schools in the second quarter decreased 2.4% compared with the prior year, driven by lower medical school housing revenue due to campus closures and lower medical school clinical revenue associated with COVID-19. We view these headwinds as transitory and expect that as the pandemic eases, we will resume growth in medical and veterinary school revenue.

Medical and Healthcare segment operating income, excluding special items for the second quarter, was $51.3 million, a 23.3% increase. This increase was driven by strong enrollment trends over the past year for Chamberlain and operational efficiencies that have been a major focus area across our medical and health care institutions.

Turning now to our Financial Services segment. Second quarter revenue was $48.7 million, an increase of 5.9% compared with the prior year, driven by revenue growth from OnCourse Learning and Becker. Growth at OnCourse Learning continues to be driven by leveraging its leadership position in a favorable mortgage market as OnCourse Learning continues to be the vendor of choice for pre-licensure, exam preparation and the continuing and professional education needs.

At Becker, revenue growth was largely due to attracting corporate and B2C customers for CPA offerings and an increased number of corporate customers purchasing continuing education program offerings. Continuing education grew 20% year-over-year. And as Lisa mentioned, we are very excited about the long-term prospects of this rapidly expanding growth category.

ACAMS' revenue was roughly flat for the quarter as COVID-19 restrictions caused a loss of approximately $1 million of conference revenue in Q2 due to the Las Vegas live conference revenue being replaced with a virtual conference. Over the last 18 months, we added 4 news certifications to address a broader range of customer needs, which provides an opportunity to propel future growth.

Excluding special items, operating income in the Financial Services segment in the second quarter, increased 37.2% to $7.8 million. The increase in segment operating income was primarily driven by strong revenue growth in OnCourse Learning.

Turning now to our balance sheet. We closed the second quarter with cash and cash equivalents of $449.3 million and outstanding bank borrowings of $292.5 million. We repurchased 1.5 million shares in the second quarter for a total of $45 million. And as a result, we had 50.6 million shares outstanding as of December 31, 2020. As we stated on our previous earnings call, we anticipate repurchasing up to $100 million of shares during fiscal year 2021.

Turning to cash flow in the second quarter. Net cash provided by continuing operations was roughly flat, which was a significant improvement over the prior year period. This was due to both favorable trends in our year-over-year operating results as well as timing of receipt of $36 million of Title IV funds in December that we would normally receive in January. Our capital expenditures for the quarter totaled $9.7 million. As a result, free cash flow used in the second quarter was $9.1 million compared with free cash flow used of $67.6 million in the prior year period. We define free cash flow as cash provided by continuing operations less capital expenditures.

Strong free cash flow is a hallmark of Adtalem's operating model. The company has generated $211 million of free cash flow on a trailing 12-month basis through December 31, 2020, and about $175 million when adjusting for timing of Title IV funds received in December that would typically be received in January.

As we move forward, Adtalem expects significant free cash flow growth in the coming years. To provide more context, we would expect Adtalem's stand-alone free cash flow to grow in line with earnings or at a low double-digit rate. All-in, post integration, we would expect Adtalem to generate over $300 million of free cash flow on an annual basis. At any reasonable multiple, this implies significant value creation for equity holders. Also, this free cash flow generation supports our commitment to delever the balance sheet to below 2x net leverage within 24 months of the close of the acquisition.

Moving on to our outlook. For the full year fiscal -- for the full fiscal year 2021, due to our strong execution, we are raising our earnings guidance. We continue to anticipate revenue this fiscal year to increase 5% to 7%, and we now expect diluted earnings per share from continuing operations, excluding special items, to grow 28% to 32%, inclusive of our share repurchases.

As we look to the remainder of the year, we continue to see momentum across our institutions and businesses. However, as we enter the third quarter, we are seeing some modest incremental COVID-19-related headwinds that are impacting both revenue and expense, which we believe are mostly transitory. In addition, we are continuing to step up long-term investments to support student enrollments and growth in financial services. Collectively, we expect this will temper third quarter results.

With this, we would expect the absolute level of revenue in Q3 to be roughly flat with Q2 and absolute earnings per share to be sequentially lower than Q2 and represents the low point for EPS this fiscal year.

As we move from Q3 to Q4, we expect the benefit from our underlying growth to more than offset these incremental headwinds and expect Q4 to be sequentially stronger than Q3.

Beyond this fiscal year, we remain confident our stand-alone business will meet our mid-single-digit revenue growth and low double-digit earnings growth targets. Additionally, we are excited about the future synergy savings and the earnings trajectory that Walden will add.

With that, I will now turn the call over to the operator for Q&A.

(Operator Instructions) Our first question comes from Jeff Meuler with Baird.

Just maybe a little bit more color on that last statement that you just made on the COVID-19 headwinds impacting revenue. Is it clinical availability? Is it just ongoing campus utilization below a typical level? Like, what specifically are the headwinds?

Sure. Let me just highlight, I would describe those as moderate incremental headwinds. And essentially, what I'd say as we're moving from Q2 to Q3 -- we did see some slightly lower supply in terms of clinicals as we move from Q2 to Q3. That's the primary difference. The other thing is, as we're bringing campuses -- as students are returning to campuses, we are starting to incur some slightly higher cost associated with having the campuses be ready for COVID-19 safety. So think about things like signage and PPE and cleaning supplies. So those 2 are creating some headwinds -- some moderate headwinds as we move from Q2 into Q3.

Okay. And then you've always given us operational metrics related to educational outcomes. You gave them again today for all of the Adtalem institutions. MLE pass rates and NCLEX pass rates, et cetera. Can you give us any similar quality metrics for Walden? And I guess, is there a plan to improve the outcomes to the extent to which they're not at your current standards? And just any playbooks that you have or anything that you did at Chamberlain over time would be helpful perspective.

Yes. Jeff, this is Lisa. Thanks for the question. As you know, we do focus on academic outcomes. On the Chamberlain side, obviously, the best comparison with NCLEX, et cetera. And then we also look at the cohort default rates because, really, that's helping us determine what our employer partners want and need and whether students at the end of the day are getting placed for those degrees that don't have the NCLEX or USMLE or something like that as it relates to the medical school.

So let me start with the cohort default rate because I think that is helpful. And I would say that both of these areas we see is very, very good in the current Walden, very strong, but also places where we have opportunity.

Again, just as a level set in context, 85% of the degrees in Walden are graduate, either masters or doctorate level, and then 15% on the undergrad, 5% of those are nursing. So when we think about the overall cohort default rate for Walden, it's around 6.8%, but it's been in the mid-6s for years. This is not a recent thing. And it compares quite well both to not-for-profit 4-year cohort default rates of 6.5%. But then also, if you look at some of their online-only competitors, Southern New Hampshire University, as an example, 12.5%; Phoenix, 11%. And then University of Mellon, they're global, which is their online-only at 6.1%.

So we see them in line with their peers in terms of placement. But again, compared to the Chamberlain or, I should say, overall Adtalem at 3.1%, we certainly will look to persistence and placement and so increasing their employer partnerships and strength there. We know that Walden does have that now. Obviously, their Title IV is right around 75% or so. So 25% of that is private pay and employer partners, but we see that as an area of opportunity.

If we then just cover NCLEX and then sort of FNP licensure, et cetera, while those are not published by Walden, we do know that all of their NCLEX pass rate this past 2019 to date, as an example -- or 2019, 80% are higher in all of the tracks, and then an average 85% or so NCLEX -- sorry, pass rate on the FNP through 2018. But I wouldn't, as a reminder, say that in comparison, Chamberlain now has an average 2020 year-to-date, we're very proud, obviously, of 91.2%, which is versus the national average of 90.9%. But to remind you, Chamberlain went from 81.5% average in 2015 to 91% or over 91% year-to-date in 2020. So we see that as a place where Chamberlain really has best practices. We know that we put that in place both for our current and then our new campuses that have consistently scored much, much higher. So we're excited about that. But I would just reiterate, we see the academic outcomes at Walden as being very, very strong currently.

Okay. And then I heard you on your independent inquiry, but on the DOJ inquiry, just any update on where that stands? And I think part of it is about clinical site placements. So just how comfortable are you with their clinical site placement practices? Or is that something that needs to be improved upon post acquisition?

Yes. Sure. I will start with that, and then let Steve jump in on the actual inquiry. So yes, we are very comfortable with Walden's practices. They use Meditrek to facilitate, but very deep faculty and hospital relationships. We know because some of those are similar or the same to the relationships with hospitals that Chamberlain has. Some are different, which is why we're excited about the complementary nature of that. But they do have a very hands-on student support for that preceptor selection and journey. They have extensive guides, and they have faculties, much like Chamberlain does, that will help guide the students through that process to find a preceptor and find clinical placement.

As you know, 20% to 25% of the total students there are in those MSN tracks. It's imperative, right, that they find clinicals and are able to get their clinical experience. And we see through both the enrollment growth as well the overall cohort default rate that these folks are getting placed as they graduate, many with hospital providers and preceptors and clinicals that they worked with during their education. So we are comfortable with Walden. HLC, CCNE are all comfortable with Walden's placement on the clinical side.

Yes. What I would add on the inquiry itself is that we feel as good as we can under the circumstances. I'll step you through why that is. Just in light of some of the recent commentary on this, let me level set the playing field here.

As you'll recall, this is all resulting from the Department of Justice making an inquiry to Laureate based on third-party allegations that it may have made certain misrepresentations about its master nursings program. In response to that, the folks at Laureate retained Sidley Austin to conduct a review of the matter. And just before the end of last calendar year, Sidley and Laureate went into the Department of Justice and presented findings of that review. That finding found no evidence to support the allegations of misrepresentation to students or creditors. And now the parties are waiting, obviously, the Department of Justice to come back and provide a perspective on what they think about the findings that were presented to them by Laureate.

As you know, in the context of negotiating the purchase agreement, we negotiated broad access rates to Walden, and we've taken advantage of those access rates and the time we have between sign and close to undertake our own investigation into the matter, and we've completed substantial work in that regard. We're by no means done, but we have done considerable work. And thus far, we've not discovered any evidence that would corroborate or support the allegations in the initial Department of Justice inquiry. That said, I can't predict for you with certainty where the DOJ will land nor can I tell you that we won't find something in what remains of our work. But thus far, based on the investment of time and effort on our part, Laureate's part, we feel good that we've not yet found anything that would suggest that these third-party claims have merit.

And Jeff, I would just add one thing to the outcomes because I know there's been discussion around graduation rates and what those are certainly on the undergraduate level. And I want to be very clear that, first of all, a lot of those clicks -- those rates are full-time first-time students, which excludes the various students that Walden serves and, in fact, Chamberlain serves.

I just want to be clear that Walden is serving a very vulnerable student population here. It's part of this massive education and retooling effort that this country and, in fact, the Biden administration have explicitly stated we need to do in the digital economy, and we feel like we're well positioned to help with that.

So if you went to the University of Brussels or MIT or Harvard, you wouldn't be in this category, but 3/4 of these students work full-time, Chamberlain and Walden would fall into that category. There are parents with children at home, almost 50% are first-generation student -- generation college graduates, and many come from diverse communities. So that is why we're focused, that's why the Biden administration is focused on access and equity in education and health care. So we are really excited about the ability to be able to serve the student population as well as drive them through a career path with a greater extent of graduate masters and doctoral degrees that we will get as a result of this transaction.

Our next question comes from Jeff Silber with BMO Capital Markets.

Wanted to shift back more towards your operations first. You mentioned all the investments you've done in marketing, and they've really provided some benefits. But some of the metrics we're tracking, inquiry costs, have really been going up over the pandemic period, especially lately. I'm just wondering are you seeing that and do you expect that to continue? And could that maybe temper some of the margin expansion you're projecting?

Yes. So -- this is Mike Randolfi, and I'll take that. So what I would say is in terms of inquiry cost, I think you can't look at inquiry cost in isolation. What you have to look at is when you're spending money on marketing, whether you're bidding on a keyword or spending money on a display ad, you have to look at the incremental lifetime value relative to the cost of acquisition. And so what I would tell you is over the last 18 months, there's been a significant increase in the analytics supporting that. So we are able to get at a pretty granular level, we're able to assess things like the value of keywords and what the cost is. And so we're able to invest very, very -- in very, very targeted ways that have very, very good returns.

The other thing I would just keep in mind, I mean if you think about at our medical schools, I mean those are students that have significant lifetime value. If you think about those that joined Chamberlain, those are students that have significant lifetime value. And then if you think about within our other businesses, within financial services, we're supporting growing businesses that have tremendous opportunity. Becker in the continuing education side is a market that's multi-hundred million dollar market. And our position is still relatively small, but we have great brand permission to win.

ACAMS, we've launched 4 new certifications within the last 18 months. We're supporting those certifications because we think they're going to provide -- they're really good for our customers, but they also provide great growth vectors for us as well. Similarly on OnCourse Learning. So I think we can't look at it just in isolation. And so at the end of the day, we think we're increasing -- will be -- give us the opportunity to increase enrollments and increase the number of customers in areas of our business that are high gross margin that are likely -- that is likely to drop down to operating margin. So I do not expect that to result in margin compression.

Okay. That's really helpful. If I could shift back to Walden -- and first of all, thank you for providing that separate deck with the increased amount of data on Walden. I think it helps answer at least a lot of the questions that we've been getting. But of course, when you put out more information, it just brings more questions. So I had a couple of questions that I just wanted to ask you. Hopefully, you can answer them or we can do this off-line.

You talk about 88% of Walden's EBITDA being from, I think, health care and behavioral science. Is it possible to get that number just for nursing? And then on the cohort default rate, Lisa, you provided a lot of good information, but you also provided some of the CDRs for your nursing programs, which are actually lower than Walden overall -- excuse me, Walden's nursing programs. Is it possible to get the data for CDRs for Walden's non-nursing programs?

Yes. So let me start with the 88% on the EBITDA and just walk through that a little bit. And again, there is, I guess, Slide 5 on the supplemental deck that's helpful that. But the way we view it is this. The -- clearly, colleges of nurse science of -- excuse me, health sciences include nursing, which is about 30% of the overall Walden. But from our perspective, the degree, particularly -- remember this is 85% graduate across the -- all 4 of these colleges, the degrees in the social and behavioral sciences are extremely valuable to us and in great demand, particularly from employers and the requirements that they are putting or that are being put on them as they think about their staffing now as well as post pandemic.

So within that college of social and behavioral sciences, which industry or sort of nationwide, the inquiries were up end of last year around 63%. Certainly, Walden is seeing this inquiry in enrollment increase. That includes the Master of Social Work, which, as you know, we launched more recently in Chamberlain, but still very, very small, right? You have to get through caps and increasing those. And we intend to do that, but much more -- much greater size currently in Walden. Master of Public Health, it includes the health care policy, nurse educator, et cetera.

So then if you also look at other graduate programs within the education and management and technology, we get a lot of questions, I'm sure you do, too, on that is not core, and that is not part of the Walden that is the "productive" part of Walden. But as we look at cybercrime and data science, again, at the graduate level or we look at principle -- masters and doctoral degrees in principle readiness, those are things that the market is demanding across multiple geographic regions. This gives us scale. It gives us a great degree of ability to solve broader problems for hospital systems, and it drives a lot of the EBITDA, including, obviously, the nursing piece. But the graduate nature of this program mix is what makes this valuable as a complementary set of degrees for Adtalem Global.

And, sorry, the second part of your question was the CDRs. So definitely, as we look at the public CDR rate, we know that it's going to be lower on the nursing side. Laureate does not publish that, but we have a good sense of where we have placed this and where we have opportunity to continue to get those programs in a place where those default rates are decreasing. Even within Adtalem, right, our 3% cohort default rate is lower on the medical school side, as you know. And in fact, our medical schools are significantly lower than U.S. medical schools. So we know that we have the opportunity to do that.

(Operator Instructions) Our next question comes from Greg Pendy with Sidoti.

First, can you just kind of help us better understand as the goal here is to be a corporate solutions provider, why, I guess, strategically it's important from the customer standpoint to have sort of a big focus with graduate nursing? Because it seems to me like you're sitting on, with Chamberlain, a very good asset, low cohort default rates, well below the Title IV and good outcomes in the sense that there's going to be continued demand over the next couple of years likely for nursing. Why do you need graduate as part of the corporate solutions?

Yes. Great questions. And let me first start by saying, we also love our undergrad nurses, both the pre-licensure BSN as well as our RN BSN programs. The reason that I raised the graduate piece is, again, going back to the EBITDA, over 60% of the EBITDA in Walden is in the social -- in the health sciences space. And so that is a place where our employees are trying to do a couple of things. They're trying to acquire talent, the nursing shortage and just health care professional shortage in general is dire at this point, but then they're also trying to retain that talent and stop churn, right, because there's a lot of competition out there for nurses with BSN, and there's a lot of places that nurses can go to expand their career offerings. And so they're trying to solve for a talent acquisition, development and retention issue.

And then at the same time, they're trying to solve for what I would call the social determinants of health. And so as in a big draw picture sense, the risk is being shifted from payers, from insurance companies to actual hospital and health care providers who are now being told that they are responsible for return visits to the hospital. They're responsible for community health. They're responsible for making sure that people are taking their medication. That takes a much higher degree of employees who are well versed and trained in social work and social health and mental health and some of those things that did not have either as big of a place or, in fact, any place within these hospital systems, they now have to really think about that as we think about public health more generally, not just as a result of the pandemic, but that has accelerated this need on the behavioral sciences piece of the health care system.

All of that is absolutely correct, but we'd be remiss also we didn't point out the fact that in nursing, in particular, these graduate degrees come with better pay, more career advancement, better hours and more autonomy in sort of the opportunity set for nurses. So as we think about our center of gravity in undergraduate nursing and being able to offer within the same family of institutions and to the same set of employer partners that opportunity for advancement for nurses is an extremely attractive option for us.

Okay. Got it. And then just one more. I understand there's a lot of transitory moving parts on the medical side at Ross, but can you just kind of remind us, I mean in terms of peak to trough, you had a low incoming cohort, I guess, a while back due to some hurricane issues and whatnot. When does that kind of cycle out? And when can you get kind of back to potentially more near-peak occupancy -- or capacity, I should say, maybe?

Yes. Enrollment, yes. Absolutely. Well, we would say we're well on our way. We see good momentum going into the back half of the fiscal year. As a reminder, the January calendar 2019 class was the first class in Barbados for -- after the relocation from Dominica. And so if you look at the sort of information cycle or sales cycle, if you will, for physicians sort of first click to enrolling in medical schools about -- almost a year, about 300 days, and so we had a period where we weren't able -- we couldn't market where the school was because we didn't have a physical location. We have moved through that cycle, and I think it's apparent in our past September enrollments, and we're seeing that momentum continue into this calendar year.

Yes. And if I could just add a couple of things there. In the last quarter where we reported enrollments -- new enrollments at med vet were up 5.5% and total were up 4.3%. And we also articulated that at Ross Med, specifically, new enrollments were up in the high single digits. AUC had double-digit growth. And to Lisa's point, we feel really good with the trends we're seeing an increase as we move forward.

And I would just say for the longer sort of term look back, certainly, our peak was sort of 2015 with the highest enrollment. But if you look at September of 2016, as an example, prior to the hurricanes, the Ross Med enrollment that year versus this year, it's 20% higher than it was in 2016 in September of 2020. And that was just sort of the beginning of us coming back to peak. So we're excited about that continued traction.

Our next question comes from Alex Paris with Barrington Research.

I just had a last question or 2 after all those excellent questions and answers. Last quarter and in prior quarters, you've quantified the impact of COVID on revenue. Did you do that for second quarter? And if not, would you?

Yes. We did. It's about $7 million impact on revenue and a similar impact on operating income for the second quarter.

And then in your guidance, in your qualitative comments with regard to third quarter, you said that there's some emerging potential incremental but modest headwinds from COVID. Would you think that the impact on Q3 would be greater than Q2 from COVID?

I would expect it to be modestly incrementally higher in the third quarter as compared to the second quarter.

Okay. And in the supplemental deck that you provided today for the Walden acquisition, you talked about the adjusted EPS accretion. I don't recall seeing that in the last deck. Is that new? And do you intend on releasing that sort of information post close of the acquisition? Are we going to move through an adjusted EPS sort of focus?

Yes. We will -- so we had adjusted EPS and -- when we previously, on September 11, when we provided the initial materials, we provided EPS. And the primary difference between the 2 is purchase accounting. So we wanted to provide a clean view for investors so they could see the impact without necessarily some of the noise that's created by purchase accounting. We'll assess, and our goal will be to be as transparent as possible as to future trends, and we'll make sure our disclosures reflect that.

There are no further questions at this time. I'll turn it back to Maureen Resac to close.

Thank you. Thank you, and thank you all for joining our call this afternoon. As always, if you have any questions, please reach out to me. Thank you for joining.

Thank you. This concludes today's call. All parties may disconnect. Have a great day.