Good day, ladies and gentlemen, and welcome to the Quarter 1 2012 American Public Education Earnings Conference Call. My name is Ian, and I will be your operator for today. [Operator Instructions] And as a reminder, the call is being recorded for replay purposes. I would now like to turn the call over to Chris Symanoskie. Please proceed, Chris.

Thank you, operator. Good evening, and welcome to American Public Education's First Quarter 2012 Earnings Conference Call. Presentation materials for today's call are available in the webcast section of our investor relations website and are included as an exhibit to our current report on Form 8-K filed earlier today. Please note that statements made in this conference call regarding American Public Education or its subsidiaries that are not historical facts are forward-looking statements based on current expectations, assumptions, estimates and projections about American Public Education and the industry. These forward-looking statements are subject to risks and uncertainties that could cause actual future events or results to differ materially from such statements. Forward-looking statements can be identified by words such as anticipate, believe, could, estimate, expect, intend, may, should, will and would. These forward-looking statements include, without limitation, statements about the second quarter 2012 and full year 2012, as well as other statements regarding expected future growth. 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 annual report on Form 10-K filed with the SEC, the company's quarterly reports on Form 10-Q filed with the SEC and the company's other SEC filings. The company undertakes no obligations to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future. This evening, it's my pleasure to introduce Dr. Wally Boston, our President and CEO; and Harry Wilkins, our Executive Vice President and Chief Financial Officer. Now at this time, I'll turn the call over to Dr. Boston.

Thank you, Chris. Good evening, everyone. In today's conference call, I will review the results of our first quarter operations, highlight recent academic successes and discuss our current business strategy. And Harry Wilkins, our Chief Financial Officer, will discuss our financial results in more detail and provide additional perspective on our outlook for the second quarter of 2012. Moving to Slide #3. In the first quarter of 2012, net course registrations by students using Federal Student Aid, otherwise known as Title IV, increased approximately 42% year-over-year. Net course registrations by students using Title IV now represent approximately 34% of total net course registrations compared to 30% in the prior-year period. We are pleased by the continued growth of our civilian student population. Moreover, we believe that our initial efforts to reduce financial aid abuse and fraud have been effective overall. Net course registrations by students using Department of Defense Tuition Assistance, or TA, increased 7% year-over-year, and net course registrations by students using veterans' benefits, or VA, increased 83% year-over-year. AMU's continued success in expanding its presence among active duty and veteran communities is significant in light of the already sizable military population at AMU and the potential future budgetary-constraint state in the U.S. Military. That being said, based on current information, we believe TA will likely be funded by all of the services for the remainder of this government fiscal year ending September 30. These are challenging economic times for everyone and especially so for those in the military and veteran communities. I believe our results demonstrate AMU's excellent reputation, leadership and ability to serve the unique needs of military and veteran communities. Net course registrations by students using cash and other sources increased 8% year-over-year. Generally, we see higher percentages of students paying cash when they are referred…

Thanks, Wally. If you'll turn your attention to Slide 6, which goes over our first quarter 2012 results, American Public Education's first quarter results included 29% increase in revenues to $75.8 million compared to the first quarter of 2011. The revenue outperformance was primarily driven by growth in net course registrations from civilian, military and veteran students. Operating income for the first quarter of 2012 increased 14% year-over-year to approximately $14.9 million. General and administrative expenses increased as a percentage of revenue from 21.2% -- to 21.2% from 17.9% in the prior period. The increase is largely due to investments in Title IV processing automation, ePress development cost, higher bad debt expense and increase in cost associated with regulatory changes. Selling and promotional expense as a percentage of revenue was slightly higher in the first quarter, increasing to 19% of revenue compared to 18.6% in the prior year period. We believe this result illustrates our continued ability to attract civilian students through a relationship-oriented approach at a reasonable cost. Instructional costs and services decreased to 36.7% of revenue in the first quarter of 2012 compared to 37.7% during the first quarter of 2011. This decrease was primarily related to the number of full-time academic support staff increasing at a slower rate than revenue and new full-time faculty engaging in student teaching. In the first quarter of 2012, net income increased 15% to approximately $9.1 million or $0.50 per diluted share, slightly ahead of our guidance. Our cash balance as of March 31, 2012, was approximately $125.8 million or $6.91 per diluted share. We have no long-term debt. Cash from operations for the 3 months ended March 31, 2012, was approximately $14.8 million, compared to $19.9 million in the same period of 2011. The decline is largely related to timing associated…

[Operator Instructions] Our first question comes from the line of James Samford of Citigroup.

Just wanted to dig into a little bit into the fraud prevention efforts that you're taking. I'm just wondering how confident you are that some of the changes you're making are not excluding too many of the good students out there? And any kind of sense of -- I know you can't provide an organic growth rate, but how do you -- how should we think about sort of the long-term organic growth rate of APEI from a new student perspective?

Well, I think if you look at the first quarter of 2012 and then the April, May numbers that we gave you, we felt that we were proceeding with a decent new student growth rates. And in late March, we added one more feature which had been recommended to us by a number of nonprofit online programs that had -- and it's an automated software that is used in the commercial credit card industry. And we implemented it without much of a pilot, we just implemented it across the board. And we believe it impacted our June registrations since our FSA students actually have to register about 37 days in advance. We have since modified that particular software. But just to give you an example, we have some military students -- we don't give out that percentage, but a percentage of them that use FSA in addition to the TA benefits. And one of the indicators we got was when 3 of them informed us that, evidently, they were put into a special holding pattern because they did not identify an address that they previously lived at, which as you might imagine, students move around all the time in the military. So we've made some adjustments to that software and we're hopeful that we can look at our rates bouncing back to really where they were for the first 3 months of the year. But it's too difficult in some ways to give greater guidance on it, only because we now have, for example, half of the military branches are approving TA registrations only 30 days in advance because of the budgetary uncertainty, and we don't have the 60-day foresight into the future like we used to.

Just a quick follow-up. On the tech fee that you're instituting, I think you said, September. It's $50 for nonmilitary-related students. Is that what I heard? And is that effectively, I don't know, a 5% to 6% tuition increase? Or we should see some kind of increase in revenue per student from that?

That's correct. It would impact our undergraduate civilian non-TA students, non-Tuition Assistance students. And it's $50 per course. So yes, that is revenue.

Our next question comes from the line of Suzi Stein of Morgan Stanley.

Can you give us an update on Wal-Mart and how that's proceeding?

Sure. Wal-Mart is a relationship that has gone slower I think than anyone, us or them, anticipated, primarily because of the slow roll out of their reimbursement program. We are holding steady in the first quarter about the same number of registrations as the year before. And I think we're going to hold steady until they begin either promoting the program again or perhaps roll out their reimbursement program, which is really not within our control. I think that on a good news perspective, there was a very favorable article in this week's Inside Higher Ed that talked about the relationship. And I think that we continue to have good dialogue. So I think it's just a matter of time. We've been invited to go down to Bentonville for their Annual Meeting, which includes an annual employers -- employees' meeting and present diplomas from the first graduates. So I think that there'll be another promotion of the program after that graduation, which takes place on May 29 and 30.

Okay. And then I think it was last quarter that you said that by Q2 you thought you'd be kind of 98% through dealing with this fraud issue and rectifying that. Do you still think you're on track for that?

Yes. Harry, you want to...

Yes, I believe that the number of steps we've taken have really curbed the potential financial aid abusers and discouraged them. Unfortunately, we may have also discouraged, and we believe we have discouraged, some potential good students. And that -- this is not an exact science. We're changing our intake process and adding a lot of hurdles to get through to make sure that only valid students get through. And there are some ramifications that we may have overdone it a little bit with that software we implemented in March, but we're adjusting. I believe, in the long run, we certainly are going to fix the problem of financial aid abuse to the extent that we can. But hopefully, we can do it without impacting enrollment of good students.

Our next question comes from the line of Bob Craig of Stifel, Nicolaus.

Wally, I was wondering if you can embellish a little bit on that software package. What was the designed measure? How did it screen out unwanted students?

It's a software package that's used by many of the commercial credit card companies and it's really identity verification, Bob. So what is it does is it takes public information that all of us use when we apply for credit and other things. And during the FSA application process, and by the way, this only impacted students who indicated they were applying for Federal Student Aid, it would randomly ask you questions such as, "Are you the Wally Boston who once lived at 111 Pine Street?" And it -- or actually, it gives you 4 addresses and asks you to pick the correct one, 3 of them being wrong. And if you don't do that, then it puts you in a holding pattern basically, where in order to get out of that holding pattern, you have to deal one-on-one with one of our financial aid representatives. So it was another way to -- we had received the recommendation from Rio Salado and a couple of other schools that this was very helpful software to implement, as well as some of our dealings with the Department of Education. And it's very accurate software, except we probably had too many switches that were turned on. And so, we've now removed some of those questions and are going to be much more deliberate in tweaking that software. We haven't thrown it out, but we're just not going to use it at full strength because -- in the example that I gave earlier with the 3 military students who called us who got put into the holding pattern because they didn't match up the address correctly.

Yes, it would ask you a number of questions and it's -- I guess some of our students found it to be fairly intrusive and didn't like it.

Are there other filters, specifically those designed to be more academically oriented, are those working well?

They're working great.

Okay. And how many students did you filter out this quarter? Do you have any idea?

We're still going through that but it was a good number.

It was reduced from the numbers that we had in the third and fourth quarters.

Okay, one more quick one. Your comparisons in the second half of the year would appear to be even more difficult than the first half. Do you feel comfortable in your ability to grow new students in the second half?

Well, I think we can increase the number of new students that we're bringing in month by month, Bob, but comparing them to numbers that -- I think the 1 quarter last year where we only had 1 measure in place, where we're actually able to approximate how many course takers we had, I think we had -- that was the third quarter and we had 52. And we estimated that, that number might have been 37% or 38% growth. So we have put so many measures in that we're pretty comfortable that if people are getting through, it's a very small percentage. But if you look at the data for the first 5 months of this year where we put all of these processes in place, we can track in numbers month-by-month. But I'm not sure from a comparative perspective since some of those months in the summer and the first part of the fourth quarter were so high in terms of new students, it's tough to make that a meaningful comparison.

Bob, I would say, I think we're growing our new -- our good students compared to last year. If you could separate the good students from the course takers last year, I think we're growing our population of good students this year.

Our next question comes from the line of Jeff Volshteyn of JPMorgan.

If you would look up at student persistence in the quarter and what you see for the second quarter, what do you see there? You have your activities for fraud prevention, can they help in persistence?

Student persistence, measuring it quarter-by-quarter is actually not a good indicator for us because of the way our students enroll, particularly those in the military. So we typically -- I can just tell you that even our internal measurements on that aren't accurate. We look at a cohort of new students in the year that it starts and then look at them a year later after we subtract out the military students who ask for deployment deferrals. So we believe that with our good students, our retention continues to improve. But we certainly will have some of the new students from the second half of last year who are not going to persist because they really had no intent to matriculate to earn a degree. Quantifying them is fairly difficult. We've looked at ways to quantify them and come up with that the exact number is not a meaningful calculation.

Okay. And as a follow-up, when I look at the second quarter guidance for revenues, it seems to be much wider than in the past. Can you give us your sort of thought process as to what goes into the wider range?

Well, yes. I mean, where it appears -- where the enrollment is a little bit more volatile than in the past. So that's really what went into the thought process. We're still are several weeks out for June enrollments. We've taken steps to try to correct what we think was maybe an overreach of trying to weed out bad students. So -- and May, we haven't even had the add/drop here for May. May started -- our classes has started the first Monday of the month. That was May 7. That was just this past Monday. So they have a week to add -- to drop or add classes. And we don't even have -- we don't even know what May's enrollment numbers is going to be until next Tuesday morning. So without knowing exactly what May's enrollment is and with June being a little bit more volatile -- or a lot more volatile than normal, we just thought it was prudent to give a wider range.

Our next question comes from the line of Adrienne Colby of Deutsche Bank.

Last quarter, you had talked about pulling out of some of the markets in the Southeast where I think you had seen a higher prevalence of fraudulent enrollment. And in some subsequent presentations, you talked about moving back into a few of those. Can you just update us as to where you're at in terms of that marketing?

Sure. We are pretty much marketing in all of the markets in the southeast except for the state of Mississippi, where it's not just us but many of the other schools that have been willing to talk about the problem have had extreme problems with organized rings there. We do have, though, some phone blocks on certain area codes in some of the Southeast where we believe there are rings of these types of students. Those blocks actually go into a voicemail box so that they don't interfere with our day-to-day processing. But we do follow up on every one of them. And the ones that are legitimate, we call back, and the ones that aren't legitimate, we just don't call back. So but we are -- all of our advertising switch is on everywhere in the Southeast, with the exception of Mississippi.

Great. And then to follow up, have you had to increase the number of folks internally that are working in sort of these administrative rules to help handle this?

What we did -- I don't have an exact number, unless Harry does, but we haven't decreased them yet. We hope that all of our steps that we've taken to block them once the attempts die down that we can actually move them over to normal roles, either in admissions or financial aid processing, and obviously, they've been well-trained.

Our next question comes from the line of Jeff Silber of BMO Capital Markets.

Just wanted to circle back to the issue on the new step in the FSA processing. Can you tell us roughly when that software was implemented with the full filters and when you sort of turned the more grievous [ph] filters off? I'm just trying to get an indication of what the impact might be on the next quarter.

We turned it on, on March 22 and I turned it off a week ago, Tuesday.

Okay, all right. Thank you for being so specific. I appreciate it. And moving back to the course technology fee. So just to double check, this would apply to those students that get funded through the Veterans Administration, correct?

Correct.

And how are you go to be recognizing the revenues on this?

Harry will recognize it according to GAAP.

Yes. The tuition? I mean, the technology fee?

Technology fee. Is it something that...

Yes, it will be recognized over the course, the same way we do with tuition.

Okay, great. And have you done any studies on the potential elasticity of demand by implementing this?

Because we're only doing it for undergraduate civilian students, most of them, the vast majority of them use Title IV funds. Almost all of Title IV recipients borrow excess funds. It will really reduce the refunds we give the financial aid students. We don't anticipate it'll have much of an impact on demand.

But we did a competitive matrix and many of the schools that are direct competitors of ours have technology fees. And those technology fees range from $100 to $150 a year to as high as $1,400 a year.

Yes, you have to realize that even with the technology fee, we're still about 20% less than in-state tuition at public universities. And this is the first increase of any kind we've had at the undergraduate level in 11 years, and it's about 6%. So while we think it's definitely needed to help offset the cost of increasing technology and some of these regulatory costs we're incurring. We think our students will understand that. And we don't -- there's still no place else they can go and get a more affordable education.

We'll be outlining in a letter to them, the existing students, what we're doing and also the improvements that we've made in technology and...

Great. If I can just sneak in a numbers question, as I turn off the phone. Sorry about that. Just for the rest of this year, what should we be modeling for capital spending and depreciation and amortization?

Yes, we haven't given guidance on that. But I think our cap -- we're building -- the big CapEx spend has been building our new finance center in Charles Town, which was about an $18.5 million project, of which we still have about $5 million to go, and we plan to be in that building in September. After that, we really don't have plans for a lot of building CapEx. Our IT spend, we have announced previously to -- our ongoing IT CapEx spend is about $6 million of maintenance a year. But then depending on what new technology we need, we add on to that. But we really do anticipate that if we don't do any near-term construction then our CapEx spend should come down next year. So we should have pretty good cash flow, certainly next year, and then we have good cash flow right now.

Our next question comes from the line of Corey Greendale.

Few questions on different topics. So first of all, I was hoping -- so it sounds like the -- that fraud prevention measure, the software that you talked about, that was focused on the FSA students. I was wondering if you might give some color on what happened with the TA students who weren't using Title IV through the 3 months of the quarter?

For -- on the first quarter?

No, no. The April, May, June.

I don't know if we gave that number or not, Corey. But the first quarter, we had single-digit growth, and we're still continuing to see growth with the TA students. So I imagine, unless somebody here has the exact the number, that we'll see similar growth in the second quarter with TA...

Yes, we haven't given that out with our guidance. But we give it out historically, once we know what the numbers are because we're still -- we still have quite a ways to go for the quarter.

But I'm just trying to get a qualitative sense. You didn't see the same kind of precipitous drop off in June?

No, no, not at all. We only asked those questions when someone indicated they were applying for Federal Student Aid, which some military students do use both programs, TA and FSA. And that was where we realized that perhaps some of the screens were a little too harsh when we had some military students who were in both programs who e-mailed us to indicate they had problems.

Okay, good. The second question is on bad debt, which I think was up to like 4.5% of revenue. You talked -- Harry, in the last call you mentioned, I think, 3% to 4%, so it's something that's a little bit above of what you're expecting. So can you just give us a sense, like with all the measures you have in place, do you expect that to fall off pretty soon, pretty dramatically? Or what should we expect on bad debt?

I don't know how dramatically. We said from the very beginning that if we had 90% of our students who were civilian students, we have about 5% bad debt. Now if that -- using that kind of ramp up, we should be about 3% right now. I mean, I would say if it hadn't been for these course takers who sometimes drop out and we end up having to refund money and trying to collect from the student, our bad debt would be about 3% right now. It was 5 -- it was 4.5% for the quarter. I would expect it to come down once we get the pig through the python with these course-taking students, which should be in the next quarter, 1.5 quarters. So I would expect to see some bad debt improvement. Now this time last year, it was 1.1% of revenue. We're not going to get back to there again because we have twice as many civilian students as we had this time last year. So I would expect it to get closer to 3% in the second half of the year rather than closer to 5%.

Okay. And just to be clear and to kind of orient this discussion, even though -- still throwing out the stipend chasers and you had the growth last year from the stipend chasers, so maybe it hits the new student number. But still throwing these people out, you actually lose money on these people, is that correct because of the return of Title IV funds?

Yes. Well, it depends on if they haven't earned F or not, believe it or not. I mean, it really gets technical. But yes, generally, you do lose money on these [ph] students because you actually have to return the money.

So it might hit student number. But bottom line, investors should not be upset about filtering these folks out?

That's a very good point. That's exactly right. They hurt the quality of the classroom and they don't help the financial statements.

Okay. And just one other quick one. It's a little bit of a hypothetical question, but since you mentioned it in the Q. The Department of Defense doing this report on what would happen if service members have to pay 25% of their expenses, could you just maybe talk a little bit about how you -- if they end up going that route, how you might respond? And just some historical perspective on what -- how the company -- back in the days when the TA didn't cover the entire amount of your tuition, kind of what that did to demand? And what we should expect if that were to happen?

I don't think anyone knows. And by the way, we haven't seen that report yet but -- because I think it was actually delayed. It was originally supposed to be done in February and they pushed the date back. But at the CCME Conference, they spoke about the fact that there was another study going on that was examining Tuition Assistance program in light of all [indiscernible] programs, and that they weren't going to pick up on it individually and refer indirectly to this particular study. But we knew that, that was initially a potential situation or risk. And I think we've got a whole bunch of stuff in our Risk Factors section about that. We talked about -- our goal would be to try to lift [ph] people to the GI Bill, which they can use when they're in active duty. We're going to continue to track it. We don't believe that it will happen before the end of this fiscal year based on verbal assurances that we've received. Of course, it is an election year so anything could happen to cause it to change. But we have, as you might imagine, we've done a lot of scenario planning. And we've analyzed the different ways. And I just think that rather than play "what if" analysis on this call, we'll just tell you that we've done that internally. And we'll continue to make sure that we stay very competitive within reason to our market, to serve our service members like we have for the last 20 years.

Our next question comes from the line of Gary Bisbee of Barclays.

I guess the first question, after you put -- after you made the adjustments to that software package, and you said that the leading indicators or applications or whatever it is for July, were looking better, can you give us a sense what the growth rate year-over-year was or is at this point for July?

No. It's way too early to give the July numbers out. We've only got 20% of our registrations in.

Let me take another crack at it then. I think you said in another comment that the first 5 months growth was sort of a reasonable range, that mid-teens. If we looked at -- for the back half of the year, the 38% you said in the third quarter was you thought is a better estimate of what the real students were. It looks like there were 2,400 there that were not good. Would it be a reasonable way to think about the comparison in the back half of 2012 being pulling out that 2,400 students and then growing at a mid-teens rate off of what you'd be left with? Is that a reasonable way to think about it right now? And I think what that would imply is low single-digit growth in line with what you guided for Q2.

Yes. I mean, right now, there's just too many factors that impact the numbers for the third and fourth quarter for us to speculate at this time. But what we can say at this point is that we've seen some improvement from July over June, as soon as we started lifting that procedure that we put in place in March. So to say whether July is going to get closer to the first quarter or just a slight improvement over June, it's too soon. And I'm not going to speculate on our third and fourth quarter registrations at this time.

Could the improvement in July be down, but down less than June?

I'm not going to speculate. It's too -- we have 20% of registrations in for July. It's really too soon to speculate where July is going to end up.

Okay. Then, I guess, can you give us an update on the ePress initiative? And I guess what I'm most focused on is are you on track with what you laid out a quarter ago, which was that you'd like to be able to see somewhere in the ballpark of $4 million in savings in the second half of 2012 from that initiative?

Yes. As you might imagine when we gave out that number, we've held our academics to a pretty tight budget. So we just looked at that last Friday and still think we're on track. And if they do a good job, we'd likely get them better than that track. But for right now, we're still on the number we gave out last quarter.

And then just a last question from me. Any comment on the proposed bills that were looking at recruitment of military students that are going on in Congress, any thoughts on that?

Well, I think the bills really don't have a chance given the partisan nature of Congress currently. But I think the Executive Order was something that everyone -- the President showed his true colors and issued the Executive Order for what he thought he could issue it for. And so we're waiting to see the details of the Executive Order. I mean a lot of the things that he cites as good practices are things that we do already. At the same time, there are hints that there could be further regulatory hassles, steps we have to take, webpages we have to update, even if you're as transparent as we are. So until we get the final details of those along with -- I mean, he said the regs have to be out in 90 days, so we'll see. But right now, we're -- we believe on the surface that this was just designed to get rid of the bad players. At the same time, we haven't seen all the details of things we'll have to comply with.

Our next question comes from the line of Jeff Meuler of Baird.

Just wanted to be clear that the new student number for June, the minus 25%, just wanted to make sure that, that includes the TA and VA students in the new student number, correct? So the FSA students or new students are probably down something like 40% in June? Is that directionally correct?

That's directionally correct.

Okay. And I guess, what -- did it kind of fall off as soon as you turned on this new measure? And what, I guess, what took so long? I know a month's not that long, but if it went from plus 17% to minus 40%, what took as long as it did to kind of make the revision?

Yes. I mean, again, you got to remember that the June comp -- June last year was when we start to see these stipends. So the 25% decline year-over-year is against a tough comp. So that's -- that number, that's a little worse than it might have -- for the actual numbers. But we weren't -- we thought we'd give it a month and see how it went. And, yes, we left it on a month and maybe there's a -- we should have turned it off sooner [indiscernible]. But one thing that is also a little bit different is that we did have, I think it was, 4 days less registration this June than last June, if you look at when the first Monday of the month is. So when we're registering 400 or 500 students a day, there's a little bit of that in there too. And then the other thing we don't know is we have almost twice as many civilians as we had last year. And we may start to see a little more seasonality in June and July because the civilians weren't that big of a population in the past, when I -- in my former life, when I was at Strayer Education, we had quite a bit of civilian students, we had quite a bit of seasonality and June and July were not historically good months. So we have a lot of factors playing into it. And it's -- we're trying to prevent fraud students. At the same time, we don't want to make it too difficult for our students to get in. We tried the software package, it seemed to be a little invasive. It took us about a month to realize that, then we turned it -- we set it back. And we're still going to use it but we're going to try to make it a little less difficult and invasive on our good students. So it's not an exact science. We're managing the company in a difficult environment. We're trying to do the right thing for -- to protect Federal money, and we also need to grow the business. So I think we're doing as good a job as we can right now.

No, and I'm not trying to grill you too much on that. I just was trying to figure out the magnitude of the swings. Is there anything else other than the days impact and some difficulty of trying to figure out because of potential seasonality? But did you see anything that indicated other signs of incremental weakening? Or as far as you can tell, was it kind of isolated to this measure that you put in and then just some of the other factors that you had already mentioned?

I mean, overall, I will say -- look, just to give you an idea, in April of last year, our new students were up 19% year-over-year. In June, they were up 62% year-over-year. So June is when we really started to see a big influx last year, and we're comping against that number. So we're down 25% against that number, and we also think we kind of overdid it with the gatekeeping function. So at this point, this is all happening and within the last 3 weeks. And we're taking the appropriate measures to make sure that we get good students and good growth going forward. And this is what -- we have to give a call today with guidance and this is the best we can do right now.

Okay, that's very helpful color. And then just finally, on G&A expense, obviously, you had quite a bit of build over the last 3 quarters. Just anything you can say on the future trajectory, kind of the rate of growth from here?

Well, we ramped up in FSA staff because of the huge increase in FSA. We also ramped up in VA. We had a significant increase in bad debt year-over-year and we've also ramped up in IT. And we had a little bit of color on last quarter's call when we talked about in the first part of the year with the IT. You aren't allowed to capitalize any of those costs on projects until the projects are specked out. And then you're actually mandated to capitalize the cost related to the programming once the project engages. So the first quarter or first couple of months of this quarter, we're mainly project planning. And so we expect to see some shift related to that as well.

But I mean, and again, we're only giving guidance for the second quarter. But it's not difficult to model if you just take some of the information we're giving, that $50 per course for about half of our student population revenue increase in -- with the new technology fee starting in September, about $4 million in the second half of the year, $8 million in annualized savings from the eBook -- ePress initiative. And then we should start seeing some operational improvements next year from less bad debt expense as we get rid of these course-taking students and also some operational improvements in processing Financial Aid as we implement some of these new technologies. So I think we're setting a stage for good potential for margin improvement going forward. Right now, we're not realizing it.

Our next question comes from the line of Kelly Flynn from Crédit Suisse.

A couple of questions. First, just back to the topic of the Executive Order issued a couple of weeks back. Can you speak specifically to the part of the order relating to changing refund policies so that there are more in military -- your own refund policies need to be more in line with the Title IV return of funds policies. Have you looked at that in detail? And do you have any views on whether or not that's significant for cash flow or revenue recognition?

Yes, I mean, we read the executive order. That was the only thing we saw in there that could cause us to change our -- that we're aware of that could cause us to change, potentially, some of our business practices. However, until the specific regulations come out, we're not going to know what the impact might be. But generally, those refunds impact students who aren't doing well in their first course or 2. So the impact in the long term is, overall is fairly minimal.

But I mean, does it have -- the way it reads it looks like that it could cause you to have to change your revenue recognition because you won't be able to collect that money anymore, is that wrong?

That has nothing to do with revenue recognition. It might expense bad debt expense, but it has nothing to do with how we recognize revenue.

Okay. But you're basically just waiting until the final language comes out to figure it out?

Yes.

Yes.

Okay. All right, that's fair. And then I want to go back to Gary's question related to the new registrations in the back half of the year. I respect that you don't want to give guidance, but I'm kind of concerned that you're going to have trouble managing expectations because you did say in your remarks that you thought mid-teens rates from early in the year were reasonable and that you are optimistic that you could return to prior growth rate. So, feel like you kind of implied mid-teens growth. But...

Actually, we said growth in numbers. We did say that the growth rates for the first 5 months, but then those were the 5 months where we didn't have these course takers flooding in. And so I think it was Bob Craig who asked me the question that I said I think we can grow in numbers. But the percentages are going to be really, really tough beginning in June because of the course takers last year.

Yes, so it's growing the good students is what we need to concentrate on, and I think where we're focused right now. How that plays out in comparison to last year for the next 2 quarters is going to be interesting and difficult to quantify.

Okay, that's fair. And could I just go -- end with one final one related to cash flow? I mean, you talked about, I think, the payables timing changing but then also mentioned changes in when tuition is remitted from various funding sources. Can you elaborate on that?

I can. And it's much more simple than -- people read a lot into these quarterly cash flow fluctuations. But the simple fact is we pay our accounts payable for our vendors every other Friday. And it's about $4 million to $5 million usually. So last year, for instance, April 1 in 2011 was a Friday. So on March 31, we haven't paid that $5 million. This year, March 27 was a Friday. We paid $5 million. So you can have a $4 million or $5 million swing in your accounts payable in at the end of every month. And it works on the other end, too. We collect about $4 million or $5 million a month from Air Force Tuition Assistance. We bill them on -- after the add/drop date, which is the second Monday of the month. They pay sometimes within 14 days, sometimes within 28 days. So if we get the check for $5 million on the 30th of the month, we'll have $5 million more in cash. If we get it on the 2nd of the following month, we'll have $5 million left. I mean, it really is that kind of simple, just timing differences that can make numbers look strange, but it really has no impact on this business overall.

Our next question comes from the line of Brandon Dobell of William Blair.

Want to hit on the student registration issue for a second. I recognize that the June new number was down as big as it was. And I'm guessing obviously there was an impact on the total student number, but it seems like an awfully big deceleration in the total student number unless there's people who were there a couple of courses ago that the software was now somehow catching. I guess I'm trying to disaggregate the impact of the software and all the changes you put in place on the new versus the total population, if we should see the same kind of trajectory in the total student recovery once this impact has comped or if there's something else going on?

It could have impacted returning -- if they have -- if they're entering in a new award year, they had to do a new SOI, a new statement of intent. It would have impacted returning [indiscernible] students also. But only ones who are trying the process a new financial application between March 22 and first week of May. But it would have had some impact.

All right, air enough. Any thoughts on the upcoming gainful employment data release, kind of timing or content or what you guys expect to see from all that stuff?

Well, I mean, in the preliminary numbers, we were fine on all accounts. I think the interesting thing that we can only speculate on is that now they're going to issue social security earnings data by degree program graduate. And while our overall debt numbers for our graduates are still pretty low, the one concern I have, and I think it applies to anybody, not just us, is if you have a particular program where you have graduates who may set up their own businesses, and a perfect example I have is we have a degree in child and family development, where we believe that number of students in that program actually set up daycare centers either in their home or somewhere else, and they're self-employed. So they may not have -- as low as our tuition is and as low as our debt is, they may not have significant social security income. But we've never seen that data before, so we'll have to look at it and see what we think. But other than that as the one example, I think until we see the data but we don't expect any surprises other than something with an entrepreneurial bend [ph].

Okay. And then from a cost point of view, a couple of times in the call you talked about different ways or different areas of investment, including financial aid processing. I would imagine there's still some lingering investments for the Wal-Mart contract and those kinds of things. Those kind of out of the ordinary course of investments, how should we think about the incremental investment here in 2012 versus 2011? Or as -- obviously, not including ePress in this, but are you guys going to continue to make out of the ordinary course of investments in financial aid processing, marketing, technology, those kind of things, in the back half of the year? Or do you think you've kind of hit a peak, we shouldn't see a whole lot of incremental spend?

I think our capital expenditures for software development is going to be pretty steady, consistent through 2012. But we're really trying to catch up on being much more efficient and prevent that processing Financial Aid and some other financial functions. So assuming that we're able to get our projects done, I think it will provide us benefits in 2013.

And then final question for me. In terms of faculty, where do we stand now? Part-time, full-time, you guys happy with where that mix stands? And I don't think you guys have made any changes to faculty compensation levels recently, but I just want to make sure.

We have not mentioned the faculty compensation on the edge [ph], I'm sorry. We're now up to 450 full-time faculty who are salaried and get increases. So -- but we actually think that with our ongoing enrollment, the number of programs we have, that's designed to improve quality. And if we improve quality, we believe we'll improve student persistence. So we have 450 full-time and we have approximately 1,400 part-time faculty members as of the end of the quarter.

[Operator Instructions] As no further questions have come through, I would now like to turn the call over to Chris Symanoskie for closing remarks. Please proceed.

Thank you, operator. That will conclude our call for today. We wish to thank all of today's callers for their participation and interest in American Public Education. Thank you, and have a great evening.

Thank you, ladies and gentlemen. That concludes the presentation for today. You may now disconnect. Good day.