American Public Education, Inc. (APEI) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 American Public Education, Incorporated Earnings Conference Call. My name is Shequana, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Chris Symanoskie, Vice President of Investor Relations. Please proceed, sir.

Thank you, operator. Good morning, and welcome to American Public Education's conference call to discuss financial and operating results for the quarter ended June 30, 2013. Presentation materials for today's call are available on the Webcasts 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 or 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 third quarter and full year 2013 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 obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future. This morning, it's my pleasure to introduce Dr. Wallace 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 morning, everyone. I will begin today's call with an overview of our second quarter operating results and a brief discussion about our approach to improving our quality mix of new students. Then Harry Wilkins, our Chief Financial Officer, will discuss our financial results in more detail and provide a perspective on our outlook for the third quarter of 2013. For the 3 months ended June 30, 2013, net course registrations increased 7% compared to the prior year period, and net course registrations by new students declined 9% year-over-year. We believe that net course registrations were negatively impacted in part by the temporary suspension of new enrollments in the Department of Defense voluntary education Tuition Assistance programs that occurred in March of 2013 and primarily in April of 2013. In the second quarter of 2013, excluding net course registrations by students using TA, overall net course registrations would have increased 14% year-over-year, and net course registrations by new students would have increased 1% year-over-year. Moreover, net course registrations by new students using Federal Student Aid increased approximately 3% year-over-year compared to a decline of 5.6% in the first quarter of 2013. While we continue to address several challenges, we see these increases an early sign that certain aspects of our overall approach are producing positive results. For example, we continue to adjust our marketing mix away from traditional media in favor of interactive media and a more targeted relationship-oriented approach to improve the qualifications of our incoming students. On average, our FSA completion rates continue to improve, a clear indication that we are positively impacting student quality overall. We believe these adjustments, coupled with new programs and new strategic partnerships, will ultimately lead to an expanding overall student population with greater college readiness and higher overall success rates. In fact, today, we are conducting our earnings call from Orlando, Florida, where we are attending New Horizons' global franchise conference. In 2012, we announced plans to expand our international student population through a new investment in and relationship with New Horizons Worldwide, Inc., a global independent IT training company. At this annual conference, we are presenting, networking and developing relationships with New Horizons' franchisees from around the world. The next few weeks, we plan to launch a new program, a beta test with one of the largest franchisees to offer their students and corporate customers access to APU's degree programs. During the second quarter of 2013, we further expanded our corporate and other relationships through new agreements and relationships with the Software & Information Industry Association, a leading global association representing approximately 700 member companies and thousands of professionals in the software and digital content industries; the U.S. Hispanic Chamber of Commerce; the Association of Latino Professionals in Finance and Accounting; and the American Society of Transportation & Logistics, as well as with several public safety organizations and community colleges. As we continue to cultivate these opportunities, we seek to continually optimize our operations and improve student success through innovation. For example, our ePress online library solution initiative has been tremendously successful at lowering textbook and course material costs while at the same time, supporting student success and satisfaction. In July, we launched an updated version of Sakai that offers multiple device capability including mobile. In addition, we believe our extensive efforts to reduce Title IV fraud and abuse have had positive effects. We believe this reduction in fraud and abuse has also led to improvements in the classroom experience and completion rates, as well as the lower bad debt expense as a percent of revenue. While these developments and innovations benefit students and the efficiency of our online delivery of services, they also lead to growing recognition. Once again, American Military University was ranked at the top of the Military Times Magazine's top 50 most popular schools in its June 2013 edition. Moreover, the increased recognition for academic quality and affordability helps build greater reputation and capital. Moving on to Slide #4. Adding to our momentum in this regard is the strong ongoing relationship with the Lumina Foundation for Education and our adoption of the Degree Qualifications Profile or DQP. The DQP is a transformative learning framework with specific benchmark learning outcomes that clearly define goals for quality and student achievement. Having adopted the DQP learning outcomes framework as our institutional learning outcomes, we added digital information literacy as an additional area of learning, which we believe is a differentiating feature of our institutional mission and that it will result in our students being better prepared by aligning their learning outcomes with higher education and industry standards. As of July 2013, APUS has mapped all degree programs to the Lumina Foundation's Degree Qualifications Profile. As a result of our successful implementation, the National Institute for Learning Outcomes Assessment or NILOA, an association dedicated to establishing best practices in student assessment, plans to publish our DQP implementation as a case study. APUS has also been invited to participate in the John Gardner Institute for Excellence Gateways to Completion or G2C research initiative, a comprehensive institutional course improvement process for courses challenged by low national completion rates. Our Provost, Dr. Karan Powell, has been invited to be a member of the G2C executive advisory committee. As a leader in research and the implementation of innovative distance learning technologies, APUS has partnered with the University Professional & Continuing Education Association, UPCEA, the University of Illinois, Springfield and several other member institutions to examine the potential of massive -- massively open online courses or MOOCs and how MOOCS could integrate into traditional degree completion programs. This pilot program, funded through an American Council on Education or ACE grant from the Bill and Melinda Gates Foundation, will help determine how students succeed after having received credit for a MOOC. JSTOR, a leading archive of scholarly research material, reported the APUS was the second most active user. A few years ago, APUS was the first for-profit university to gain interest in this leading international archive of scholarly articles. APUS student research activities continue to expand and are assisted by the specialized tools, course materials and award-winning library services provided by APUS. In expanding the foundation for our international outreach, we must also meaningfully engage and support the international academic community. As such, we've been invited to be a member of the International Council for Open and Distance Education, ICDE, a leading global organization and consultative partner with UNESCO. In addition, Dr. Fred Stielow, our Vice President, Dean of Libraries, was appointed to the American Library Association position as library representative on the U.S. National Commission for UNESCO. This federal advisory committee supports worldwide humanitarian development by delivering expert advice on issues of education, science, communications and culture. Our academic quality initiatives also build a strong foundation from which we can develop new programs. With the recent addition of 5 new programs: an MA and BA in Entrepreneurship, a BA in Mathematics, a BS in Engineering, a BA in Sports and Health Sciences, APUS now offers more than 90 degree programs to over 100,000 students. We believe these programs and several other programs currently in development properly address areas of higher long-term demand and otherwise challenging overall higher education market. Moving on to Slide #5. While our leading academic provider position within the military community continues, evolving budgetary and administrative practices within the DoD's voluntary education program create additional challenges. For example, several services recently issued guidance to their Education Service Officers or ESOs to approve applications for Tuition Assistance no more than 30 days in advance of a class start. A short enrollment period makes it more difficult for us to predict future enrollment by active duty military. Moreover, as the DoD's fiscal year end approaches on September 30, we believe that certain branches of the military may be reaching their budgeted amounts for Tuition Assistance, which in turn may mean that some applications for Tuition Assistance will not be approved until the start of the new fiscal year in October. Although we believe many of these matters are temporary, we operate under the assumption that the U.S. military will be confronted with sequestration and other funding-related challenges for the foreseeable future. We're encouraged by congressional support for the Tuition Assistance program and by the availability of additional funding sources for active duty military, including veterans' benefits and Federal Student Aid. There are no assurances, however, that the voluntary education programs at home or abroad will not be changed in a manner that could have an adverse impact on our operations. We intend to continue with our successful relationship-oriented approach to serving military members and their families, seek new approaches to engaging key influencers and add new degree programs that meet the career needs of military members, such as nursing and engineering, to name a few. Our efficient business model and long-term goal of serving a growing number of civilian students in today's challenging market rest in the large part on finding the right quality mix of students, students with higher overall persistence and success rates. We believe that the adjustments we have made to our outreach efforts in favor of interactive media and a more targeted, relationship-oriented approach have produced positive results so far, including an improvement on our first course completion rates. Our task is now to enhance these efforts in a way that increases the persistence rates and identifies and enhances the preparedness of civilian students. We believe this is best accomplished through an even greater focus on relationships and referrals, programmatic adjustments to high-demand fields of study such as healthcare and engineering, enhancing the first year experience for transfer students and through diversifying into new segments, including through international students and schools of service. We will also continue to innovate and create operational efficiencies. Our PAD system, automated credit transfer evaluation system and ePress initiatives are important examples of how we create efficiencies and improve student services. As we previously discussed, we are bringing our financial aid processing in-house to improve student services and generate additional cost savings. The initial feedback from students regarding the financial aid application process under the new system has been positive. We're hearing that students find My Aid Portal, a new user interface, to be informative and intuitive. However, a third-party vendor had issues with converting data from our proprietary PAD system and transmitting information to the Department of Education, resulting initially in disbursement delays in July, some registration delays and perhaps a loss of net course registrations. This caused dissatisfaction from students seeking disbursements and was reflected in social media and elsewhere. We have been working with our vendor to resolve the various issues causing these difficulties. At this time, we cannot estimate the impact this may have on student satisfaction and on our net course registrations. And while we anticipate these issues being resolved, there are no assurances as to when they will be completely resolved. Once resolved, we expect to have a more cost-effective scalable system with significantly improved student service capabilities. Our outlook for the third quarter of 2013 reflects our caution and the continued uncertainty with regards to the military's voluntary education program, the estimates of the potential impact from delays in financial aid processing and to the impact of our marketing shift in a difficult overall environment. That said, we believe we are making the right choices for the future and for the benefit of our students and alumni. Going forward, we intend to further refine our marketing mix of media and outreach spending. We also plan to continue our partnership initiatives and efforts at international outreach. We believe that the most effective and affordable approach to achieve our goals is to build partnerships, focus on high-demand fields, diversify tuition funding sources and address opportunities and new segments. At the same time, we will continue to work to innovate in order to create operational efficiencies and improve student services. Most importantly, we will continue to focus on academic quality and positive student outcomes as we have successfully done in the past. We believe our focus on academic quality, diversification of tuition funding sources and improving the quality mix of our student population, combined with a commitment to affordability and innovation, is the winning strategy. Now I'll turn the call over to our CFO, Harry Wilkins, for a review of our financial results in more detail. Harry?

Thanks, Wally. Turning to Slide 6, our second quarter of 2013 financial highlights. American Public Education's second quarter 2013 financial results include a 9% increase in revenues to $80.9 million compared to $74.5 million in the prior year. The revenue increase was primarily driven by growth in net course registrations as well as by increased revenue associated with the implementation of a technology fee for courses beginning after September 1, 2012. Operating income for the second quarter of 2013 increased 15% to approximately $17.2 million compared to $15 million in the same period of 2012. Instructional costs and services decreased to 33.6% of revenue in the second quarter of 2013 compared to 35.2% in the prior year period. This decrease was primarily related to cost savings from our ePress initiatives, online library initiatives, greater use of e-books and improved utilization of full-time faculty. Selling and promotional expenses as a percent of revenue increased slightly to 19.8% of revenue compared to 19.5% in the prior year period. This increase is primarily related to higher costs associated with online advertising and increased staff focused on strategic relationships. General and administrative expenses decreased as a percentage of revenue to 21.3% from 21.6% in the prior year period due to a headcount growing slower than revenue and a slight improvement in our bad debt expense. Bad debt expense as a percentage of revenue was approximately 3.9% in the first quarter -- I'm sorry, in the second quarter of 2013 compared to 5.1% of revenue in the second quarter of 2012, a clear indication that we are attracting fewer fraud and abuse students. Moreover, our overall margin improvement has resulted from innovations in areas that first and foremost, improve student services, student success and student satisfaction. In the second quarter of 2013, net income was approximately $10.8 million or $0.60 per diluted share, ahead of our guidance. This represents a 17% year-over-year increase in net income, with an 18% increase in diluted earnings per share. Please also keep in mind that the second quarter earnings per share included approximately $0.02 per diluted share of legal and financial due diligence expenses incurred in connection with the company's review of potential transactions. Our cash balance as of June 30, 2013, was approximately $128 million. We have no long-term debt. During the quarter, we repurchased approximately 62,000 shares, and there remains approximately 16 million of authorized availability under our authorized stock repurchase programs as of June 30, 2013. As Wally mentioned in the beginning of July, we brought our financial aid processing in-house, and we are experiencing additional unexpected delays in processing. We believe these delays are a result of various conversion issues with the new software that result in some student records being rejected by the Department of Education. Our financial aid team and our software vendor are working quickly to analyze, code and deploy fixes to correct these issues as we identify them. However, this is affecting financial aid registrations in the third quarter of 2013. Currently, we cannot estimate the impact this may have on course registration, which is in part because we cannot estimate when these issues will be fully resolved and we cannot estimate the number of students who will decide not to enroll with APUS as a result. The initiative to automate and bring financial aid processing in-house is aimed at improving our financial aid services and bringing approximately $120,000 per month more of future cost savings once this matter is resolved. Moreover, the initial feedback from students not impacted by disbursement delays has been quite positive. The new financial aid portal is easy to use and is informative. Turning to Slide 7, third quarter outlook for 2013. APEI believes the net course registrations in the third quarter will be adversely impacted by delays in processing certain FSA applications and the transition of our marketing mix away from traditional mass media. We also believe net course registrations could be adversely impacted by evolving budgetary and administrative practices within the Department of Defense voluntary education program and other possible factors. As a result of these events and other factors, the American Public Education expects growth in the net course registrations by new students in the third quarter of 2013 to decline between 15 -- negative 15% and negative 11% year-over-year and net course registrations to be approximately flat compared to the prior year. The company anticipates third quarter 2013 revenue growth of between 0% and 4% compared to the prior year. Earnings per share are expected to be between $0.52 and $0.56 per diluted share. In summary, we're pleased with our second quarter results. Especially noteworthy is our improving quality mix of students and operating margin performance. We enjoy continued cost savings from our ePress initiative. Bad debt expense as a percentage of revenue continue to improve, owing in part, we believe, to the measures put in place last year to reduce financial aid fraud and abuse. Moreover, we accomplished these successes while dealing with the temporary suspension of Tuition Assistance in April and making continuing -- and continuing to make programmatic and marketing-related adjustments to improve our overall effectiveness. In light of these challenges, we believe that we are making the right choice and right choices for long-term success. Our strategy includes increasing our presence in the military and civilian communities through even greater focus on relationships and referrals and by focusing on high demand fields to further help drive growth in a difficult overall market. In this challenging economy and regulatory environment, diversification of revenue away from government sources and new lines of business are an important part of our long-term strategy to create value and stability. We plan to expand our efforts to develop relationships with corporations, associations, community colleges and government agencies, an approach that we think will be highly effective. Now at this time, we're happy to answer questions from the audience. Operator, can you please open the line for questions?

[Operator Instructions] Your first question comes from the line of Jerry Herman, representing Stifel. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: I appreciate you guys giving some color on the delay in disbursement from the financial aid processing issue. I hope you could fill in. I'm not sure I quite understand how the third party came into play and was a factor in that impact.

Sure, Jerry. We used to use Global, which is an outsourcing company. And we decided for a number of reasons to bring it in-house, and we're using a software package which comes from our company called Regent. And so using their package, it's required for all the calculations and how you actually package the materials of the students. That implementation, particularly the conversion of people from one system to a new system, coinciding with the switch of the fiscal year caused some -- there was some file issues that caused delays. I think, Harry, if you want to add some more color to that.

Yes, the front end of the process, the actual patching of the students, has gone very smoothly under the new system. This is the system -- the software that we use as our virtual financial aid office when students apply for financial aid. The part of the system that was difficult to test was the interaction with the Department of Ed with whom their disbursement files, their COD system, as they call it -- you can't test -- the department doesn't allow you to test files in their system yet because it's actual live data. When we sent the first files over to them, many were rejected. And apparently, it's just the conversion issue with the new software abstracting data from our PAD system and putting it in a way that the Department of Education can get the information they need and disburse the funds. So that's the very last thing in the process. So -- and the other thing is that other companies delay their disbursements for students. They use multiple disbursements. We have not done that. We've chosen to continue to have one disbursement for students when they first start, and that doesn't delay the disbursements for them. So the students that are delayed with us, if they've gone somewhere else, they wouldn't get the money yet anyway. So this is something that we're working on to correct. It's causing some disruption for certain amount -- part of our student population. And I think until we get it straight, they probably will not be able to enroll in August and September classes. So that's reflected in our guidance for the third quarter. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Is there some reject rate associated with the department saying no, i.e., the percentage of apps that were rejected?

Actually, Jerry, most of the ones that were rejected were the ones that converted over, and so applying reject rates to file conversions where people had transitions, for example, they had held that transitioned over the fiscal year and had to have awards, and that data required data coming over from the Global system correctly. We believe that most of the new students processed are not going to have these similar issues because they're not bringing over a file from the old system. And it's primarily the conversions and the dissatisfaction of people whose file converted over. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And a high-level question for you, Wally, I guess, in particular. There's been a lot of, let's call it price competitiveness or discounting scholarshiping in the sector. I mean, how do you view your value proposition, which has always been based on being priced so much lower than the competition? Do you in any way sense some erosion of that differentiation?

I don't know that I'd see an erosion. I think the market-- the online market is much more competitive with many public institutions now offering online degrees that they didn't a year ago. But if you look at our second quarter results when you take away the TA because of the suspension, we actually had some decent growth. And whereas where comps are, people still having negative numbers. The third quarter, we're showing negative growth, but we believe a big piece of that is due to our FSA situation. So I think the affordability still resonates. When we've benchmarked ourselves, we're about 20% below the national in-state average for tuitions. So while in certain markets, it -- we may not be that low. Nonetheless, we think that our affordability still holds up well to everyone, even the for-profits that are discounting. The only thing that I might say is that perhaps, psychologically, people feel better by hearing that they're getting a $20,000 scholarship. If they actually compare the numbers, we're still more affordable.

Yes, and the other thing is, Jerry, while the similar competition is trying to do some things to get down to our price points, we can hang at these prices for a long time. We haven't increased our tuitions since 2001. So we can be very competitive for a long time at lower tuition prices. We'll see with how that strategy in the long run bears out for our competition with higher cost structure than we had.

Your next question comes from the line of Adrienne Colby, representing Deutsche Bank.

I was wondering if you could break out the impacts of the Tuition Assistance issues and financial aid on the guidance you've given for new course registrations, just to help break that out a little bit.

I don't think we...

Yes.

Have an idea. We try to aggregate our projections based on enrollments without looking at the type of payor. And right now, we think these projections are as accurate as we can give. And there are 2 things that are influencing them downward. And one is some of the bases are running out of Tuition Assistance money. But even more so, with our FSA situation, we just think it's causing some students to go somewhere else where they're comfortable that they can get their disbursement quicker.

Well, yes. I mean, we have this -- we run into this problem every year in the third quarter. The end of the government's fiscal years is September 30. And as different bases or different branches of the services run out of TA money for this year, they may be encouraging students to wait until October to register. And we don't really have any way of knowing that. So it makes it difficult for us to give guidance in the third quarter. Then, of course, with this FSA situation, we're not sure. We have some students who are upset with this because a portion of them didn't get the funds as soon as they would've liked disbursed to them. And how many of them will delay registrations for future periods or just get themselves [indiscernible] with us and they leave, we're not really sure at this point. So we've -- we're always cautious with our guidance. I think that's reflected in the guidance we've given, but we really can't be much more specific at this time about it.

Okay. I guess I'm also just trying to understand, too, why you're expecting to see flat new course registrations. I know you've -- in the past, you've had negative new course registrations from new students, but you've been able to maintain positive growth at least in your total course registrations. And I think a lot of that was due to persistence. So I'm wondering if you're seeing some changes there.

Again, the situation with TA and the situation with these FSA or -- they wouldn't affect both new and continuing students. So I just think that our guidance is -- reflects that.

Yes. I think also a certain portion of our total registration growth is dependent on new students. So if we're showing a decrease higher than we normally do in new students, that's going to impact the overall total.

Okay. Do you still anticipate being able to stay at or below 20% of marketing as a percent of revenue for the full year?

That's our goal.

Your next question comes from the line of Corey Greendale, representing First Analysis.

First question. And maybe I'll try to play a different angle on what Adrienne was asking about. The -- can you give us a sense what the new student registration trends were in Q2 specifically within Title IV and TA?

Yes, the -- you said new or total?

New.

The new TA students were up about 3%, and TA was down about 2% to 3% -- I mean, FSA, FSA. Title IV was up about 3%.

Okay. Sorry, so Title IV up 3%, TA down 2% to 3%?

Yes.

Okay. and then...

But it's outside -- because of April, new students -- we didn't have any new student -- military students in April because of the TA situation. So Tuition Assistance students, new Tuition Assistance students in the second quarter of 2003 (sic) [ 2013] were down 23%.

23%?

Yes.

Okay. With effectively 0 in 1 of the 3 months?

Yes, that's correct.

Got it. Okay. And then kind of digging into some of the -- I understand kind of what's going on. I'm hoping to get just a little bit more color on the reasons for it. So with the FSA processing issue -- so you had 2 of the Q3 monthly starts so far. Can you just give us a little more on why the issue hasn't been resolved in the August start when it came up in the July start?

Actually, the August disbursements aren't scheduled yet. While Harry said we do one disbursement, it's fairly early. It's not scheduled until the middle of the month. So we've only had one disbursement scheduled run in July, and we had that run initially a little late that -- later than we planned. But most of those disbursements have been made. It's just there are a couple of different categories related to file conversion that we still need to make disbursements...

And as we discussed on our last call, in order to implement this new system, we had to actually shut down financial aid processing for a week, and our registrations are fairly steady when we connect. So when we shut down for a week, you don't know when -- how much of a deferral that actually costs.

Okay. So does all that suggest that it was more of a July start issue and that should be somewhat resolved for the August start?

It's -- well we're hoping on that, but we certainly can't predict it for you, so...

Well, then you have the shutdown in July compounding the -- I -- actually, it was late June we shut down the system and couldn't process anybody. Then you compound that with delaying disbursements for a portion of the July population. So you're not sure -- we're not sure how much of an impact that actually is going to have in August and September at this point.

Okay. And then on the TA side, so there was the temporary suspension. It doesn't sound like you've seen students come kind of rushing back. So why is it that the overall TA pool would be running out of money given that you had a -- there was suspension for a couple of months?

Well, the TA was actually running ahead of budget in terms of expenditures before they suspended it. And then when Congress restored it with their amendment, they restored it to the original budget levels. So while it was suspended for a full month and a few other branches might have delayed for a couple of weeks bringing it back, we did have a situation, I think, it was in the month of June. For example, the Marine Corps decided to take their remaining funds and allocate it by quarter. And so for the month of June, they suspended it again. Now didn't make any headlines, and it's not really material to us. But it was -- each of the services did something different with their money, and they were actually spending ahead of budget, which is typical. Most years, they spend ahead of budget, but in most years, they found the money to cover it somewhere in the DOD budget. But we're -- we don't feel comfortable predicting that they'll find the money to cover it this year given the sequester issues.

Okay, that's helpful. And then last one for me on the initiative to kind of shape your incoming classes from people more likely to succeed. Is that primarily a change in marketing mix and the things you've done to screen out stipend chasers? Or are there other things you're doing to screen people out once they begin an enrollment process?

Well, we put a number of things in there to chase out the stipend chasers. But at the same time, the combination -- what we were doing before with our traditional media was focusing that on getting the biggest bang for the buck in the major population areas. And so we drilled down much more strategically to match up demographics with the -- what the profile of the most-likely-to-succeed college student will be, and that's how we're applying a combination of interactive media with some traditional media in targeted markets.

Your next question comes from the line of Jeff Silber, representing BMO Capital Markets.

Sorry to go back to this financial aid disbursement issue. But you'd mentioned that new students were not the ones that were hurt. It was only continuing students. So if I look at the total amount of students that applied for financial aid from the federal government, roughly what percentage were rejected in July?

Well, actually, what -- the bigger problems were in file conversions. But initially, we had a problem because the Department of Education changed its loan origination fee. And just about everybody who was using automated software didn't get the right loan origination fees to all of those packages. So we even had new students who initially were impacted until we could put the correct loan origination fee in.

Yes, there were a couple of different issues. The department did raise their loan origination fee from 1% to 1.05% in July 1 and didn't really get the word out. And a number of -- that was impact -- a number of schools were impacted by that. So when you submit their loan disbursement files [indiscernible] origination fee, they reject that. So by the time we got the rejection, which was 2 weeks into the quarter and then go back and fix it, it does impact a number of students. Then by the time you get the aid, they may not even be eligible for it based on their academic performance. But the bottom line is we're still not sure what the total impact will be in the third quarter. Remember the third quarter includes September enrollment. So we're not sure what the impact on enrollment will be, and we're not going to give out any percentages until we get the situation completely fixed.

Okay. All right. Let me go back to second quarter results then. The revenues in your total net course registrations came in a little bit light compared to your guidance. Where was the weakness compared to what you had expected?

I think it was in TA primarily. We hoped that most of the April losses would come back at a quicker pace than they ultimately did. And as I mentioned, I think, on Cory's question, the Marine Corps blocked out June because they said they ran out of funds. Now the Marine Corps is only single-digit percentage of our overall military population, but nonetheless, it did not come back as fast as we originally projected.

Your next question comes from the line of Jeffrey Volshteyn, representing JP Morgan. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: I wanted to ask about cost and expense line items. What is the target level for full-time faculty? And how much efficiencies do think you'll still have in that line?

Well, a lot of that -- the efficiencies we're getting in that line -- let's talk about the book initiative to begin with. Our -- 2 years ago, because we -- we're the only company I know that actually pays for textbooks for undergraduate students. So other companies can't get savings there. We were paying, 2 years ago, $62 per course for books for students. We've dripped -- gotten that down about $41 per course per student, and we expect to get that even lower by additional initiatives. And we're finding that the students are adjusting just well. They actually -- a lot of the e-books they like just as well, if not better. So we're actually seeing improved services for our students with the cost savings there. Then the other thing that we try to do is manage our full-time faculty, and we -- that's a continuing issue, how much -- how many courses you give the full-time faculty versus the adjuncts. The adjuncts are paid on a per student basis so that their -- that cost is totally variable. The full-time faculty is more of a fixed cost, and to the extent we can manage that, we can get some cost savings there.

But this year -- we've been gradually adding full-time faculty. This year, we've decided to keep it at the same numbers as last year primarily because we weren't sure as to how Obamacare might impact our costs since full-time faculty are eligible for full benefits including health care. Christopher Shutler - William Blair & Company L.L.C., Research Division: Good. That makes sense. And on the bad debt expense, how should we think about it going forward third quarter and perhaps fourth quarter?

We've always said that if we were 90% financial aid students, we have about 5% bad debt. So as our percentage of the financial aid students increases, you would expect bad debt to go up a little bit. We really got it down this year by implementing a lot of procedures to keep abuse students out of the system. So that's been effective. But I think somewhere between 4% and 5% is where bad debt is going to end up for us for the next year or so. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Last question for me. Any updates on the more formalized Wal-Mart relationship?

No, no updates. We continue to have students that come to us from Wal-Mart. I believe on a minor basis, they're actually updating their internal website. So hopefully, that internal website will generate some more students. But as far as what they do with their benefit programs, we've just left that up to them to make that announcement if and when it happens.

Your next question comes from the line of Peter Appert, representing Piper Jaffray.

So Harry or Wally, can you give us any more color in terms of the economics of the New Horizon deal in terms of price points and expectations around number of students you might be anticipating over the next couple of quarters?

I -- well, actually, no, only because really, for a number of reasons, this has been -- we decided we weren't going to send a whole team of people to all 70 countries where they have franchises. And it was strongly suggested that really, the way to make this work would be to attend this annual meeting that we're doing here in Orlando. So I think, the good news, we did mention that we've got a beta going with one of the largest franchisees that'll kick off in the next couple of weeks. But last night, there was an event that we were able to meet a number of franchisees that we had not had any discussions with previously. So we think that we'll come out of this with a positive approach. We think we'll come out of this with more betas and eventually, hopefully, a program that works for all of the locations. But it's really too soon to tell.

Yes, and we're currently exploring. We don't have a lot of history of dealing with regulatory environment in foreign countries. It's -- we have a tough regulatory environment in the U.S., we're very familiar with dealing with that. So that's where we are now. We -- well, there's a lot of interest we're finding with these foreign franchises of New Horizons and trying to help us get our market -- get our product to the market in foreign countries. What we're trying to do now is determine which countries would be best for us from a competitive standpoint for our product and then also, which countries there were -- have a more favorable regulatory environment. And we're still in the infancy stages of rolling that out. But when we do decide, well, I think we can make a push fairly quickly. We have a very good partner in New Horizons. They're very experienced in marketing educational products in foreign countries. They have locations in 70 countries now, and they sell to working adults. So that's our target market. And we're thinking this is going to be a really good long-term strategy for us, but we probably won't see many results until the fourth quarter into the first and second quarter of next year.

And is it a revenue share kind of deal?

No, no.

So whats going on?

I mean, what we've done is we've evaluated their programs and -- for learning and several other programs that have evidence of academic learning that can transfer, for example, into information technology, either certificates or degrees. They'll get credit. So it's sort of a win-win. It helps them promote their programs, but it gives us a good source of students who are interested in taking their learning to the next step, which is to earn a college certificate or degree.

And we're -- there's various models we're experimenting with because -- and some of them are dependent on the regulatory environment of the specific country. So there will, obviously, will be some type of way to make sure both companies benefit, but we're exploring which models work right now.

Okay. And then, Harry, is your expectation that you have sufficient visibility around the problem with the financial aid challenges that this will be resolved in the third quarter? Or you think it lingers beyond that?

At this point, we're still in a -- we're still fighting the good fight. And I'm confident it will be resolved. The exact date of when it will be resolved, I don't know. But I -- each day, we -- is a step forward, and we're fixing things on a daily basis. So that's what we're going to say at this point. We're making progress, but we're not there yet.

[Operator Instructions] Your next question comes from the line of Tim Connor, representing William Blair.

I wanted to make sure on the timing of the course taker issue. I think you're through the worst of this. You put some pretty aggressive filters in place in the second quarter last year. Is it fair to say that going forward, you're going to be comping against quarters were you're filtering out the kind of right level of students?

Yes.

Yes, I think that's very fair.

Yes.

Okay. And then whether it's MOOCs, direct assessment models and a number of the new, I guess, delivery mechanisms that are out there, where are you guys focusing your efforts and where do you see the most opportunity?

Sure. Well, we've always done direct assessment and competency-based learning evaluation, so that's nothing new to us. It's not a big piece of what we do, but we continue to look on ways to expand that, particularly as it becomes more acceptable, including approval of programs by the U.S. Department of Education. As far as MOOCs go, our thoughts about MOOCs are simply that they're probably much better for use for marketing than they are for effectively teaching people. We've kept our class size at 25 for years. And in fact, when we have math classes, we kept the class size at 16. And we found that we generate better learning outcomes. I think the MOOCs -- the reasoning to put a whole bunch of people in the class is because they're not charging them for it. So they're -- it's really a self-motivated, self-disciplined learner, and that's okay when you're not charging for it. But when you're charging tuition, people expect much more interaction, and that's -- best practices show that lower. And also, we're getting much better completion rates with the lower capacity courses. So I think we do have plans, though, to offer a MOOC or 2 just because our faculty want to do it. But it's more of a learning exercise -- will be more of a learning exercise for us and our faculty than it will be any -- towards any long-term trend.

Okay. And then for FSA Title IV, it looks like your growth there is rebounding or at least flattening, and you've got a different medium mix now. Is that -- yes, as well as bad debt expense down. Is that an area where you feel like you can actually start to grow and get a little bit more aggressive and still keep yourself under that kind of 20% -- self-imposed 20% marketing cap?

Well, I think we can certainly grow there. There are a couple of challenges, one, with many of the nonprofits finally wising up and coming online. If you go to Google, you can see that the cost of search terms has gone up about 25% year-over-year. So we've absorbed that 25% cost without going over 20% of revenues, and it's our hope to continue to do that. I mean, we've got much more directional in terms of how we place our keyword purchases and our ads. And so far, our marketing team has been able to keep the costs there. And certainly, in order to keep our tuition affordable long term, we need to keep it at 20% or less. So while there could always be fluctuations in the quarter, we're working hard for those relationships, which are longer term to complete and to achieve. But we think that running our university for the long term is the best way to go. And so making decisions for the long term is better, even though it may impact the quarter.

And we really do believe that we're the best value out there in the education space if you want to go to school online. And it's students who have to pay their loans back, as they get the word -- as the word gets out more and more about the fact that American Public University can really be America's public university. If we compete very cost-effectively with state universities, I think we'll see more FSA growth.

You have a follow-up question from the line of Jerry Herman, representing Stifel. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: I know you have some disruptions on financial aid. I know you're changing your marketing mix. But can you give us some color on sort of the front-end interest in the programs, However you want to frame that, whether it be inquiry, lead flow, web traffic? How do you see demand for your programs?

Our interest in terms of web traffic is up, and our conversion rates are down slightly. And we think the reason the conversion rates are down, particularly with civilian students, is there's a lot more competition. As Harry just mentioned, we need to do a better job of getting the word out, but getting the word out through traditional media proved bad because we got sucker-punched with these fraud and abuse students. And so now we're being much more selective, Jerry, in how we target a market and combine the interactive media with the traditional media. And I think that if we get a quality student, their registrations on an annual basis are going to be a lot more than these in-and-out students who, quite frankly, have much more interest in a refund check than they do in pursuing an education. And so it makes it a little tough to predict exactly whether we're tuning it and targeting it right. But we're working our fannies off here to make that happen. And directionally, it's where we're going, and we think that ultimately, it's a win for the university, it's a win for our students, it's a win for us, and it's a win for our shareholders.

Yes. And, Jerry, it will impact -- as we get...

Better-quality students who have higher persistence rates. And a civilian student, an FSA student who makes it through our first course successfully, on average, takes 6 courses that first year with us. Whereas, a military student, on average, takes about 3 courses a year. So every civilian that we get through the process and as we improve the quality, they're going to take more and more courses. That'll benefit us. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And I guess I will ping it one more time on the financial aid processing thing. Understanding you really don't know when it's going to be fixed, I guess I'm trying to understand what will fix it. Are we talking about some code rewrite or a patch or some software correction? Is that the fix?

What you have is 3 software packages talking to each other. Regent is trying to take information from our PAD system and send it to the Department of Education. Whereas when we process a student now with our new software, some of the information is input by the student actually when they're applying for aid, some is input by our people, and some Regent has extracted from our PAD system. And that combined information file is sent to the department in the disbursements file, and the department's COD system then disperses financial aid information. If there's discrepant information in the file or if the file doesn't give the department the information they're asking for specifically, they'll reject it. So it's really -- you have to almost go through case-by-case basis with each student file that gets rejected and figure out the programming error that took place and then try to fix it. It's -- and it's multiple small fixes in some cases. In some cases, with the origination fee, it was wrong in all the files. But we're in the process of fixing it. It's painful for us. It's painful for our students. But in the long run, we're going to have a better and more efficient and effective way to process financial aid that the bulk of students will like and we'll like and will make us more efficient. So we make decisions in our company for the long term. We don't make them to do the best we can this month all the time. We do things that we think will benefit us. And whenever you do a big change like this, this is -- almost 50% of our students are going through our completely new system. We're 3 weeks into it, and we've had some challenges, and we're addressing them.

You have a follow-up question from the line of Corey Greendale, representing First Analysis.

Real quick. The Q3 guidance calls for total registrations to be flat with last year, revenue to be flat to up but EPS to be down. Is that entirely driven by higher sales and promotion spending? Or is there anything else going on, on the cost side?

No. It's actually just that the revenue isn't high enough to cover our increase in fixed costs from last year. It really is -- it's just we need more revenue.

Okay. And I don't know if you'll comment on this, but given that it sounds like the biggest issues impacting the Q3 registrations are the TA, which gets replenished in October, and the financial aid processing, which hopefully gets resolved relatively soon, is it reasonable to think that new student registrations should be backed up year-over-year in Q4?

Yes, we're not giving any Q4 guidance right now. But yes, I do think that things that you pinpointed as affecting Q3 are the things that are affecting Q3.

I will now like to turn the call back to Mr. Chris Symanoskie for his closing remarks.

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

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.