American Public Education, Inc. (APEI) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2013 American Public Education Inc. Earnings Conference Call. My name is Emily, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to hand the call over to Chris Symanoskie, Vice President of Investor Relations. Please proceed.

Thank you, operator. Good evening, and welcome to American Public Education conference call to discuss financial and operating results for the quarter and year ended December 31, 2013. 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 first quarter of 2014, 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 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 evening, it's my pleasure to introduce: Dr. Wallace Boston, our President and CEO; and Rick Sunderland, our Executive Vice President and Chief Financial Officer. Also in attendance and available for questions today is Harry Wilkins, our Executive Vice President, Chief Development Officer and CEO of Honduras College Nursing Programs. Now at this time, I'll turn the call over to Dr. Boston.

Thanks, Chris. Good evening, everyone. I'll begin our call this evening with an overview of our fourth quarter results and provide a brief update on our long-term strategy. Then Rick Sunderland, our Chief Financial Officer, will discuss our financial results in more detail and provide perspective on our outlook for the first quarter of 2014. The higher education environment remains challenging, with uncertainty surrounding student financing, possible regulatory changes and consumer cautiousness as a result of economic uncertainty. As previously announced, APUS' net course registrations in the fourth quarter of 2013 were adversely impacted by the partial government shutdown, which resulted in a suspension of Tuition Assistance programs administered by the Department of Defense. At the same time, we have made good progress with respect to growth of civilian or nonmilitary students in our long-term strategic plan. For the 3 months ended December 31, 2013, our overall net course registrations decreased 9%, and net course registrations by new students decreased 10% year-over-year. The decline was driven by a 39% decrease in net course registrations by new students using DoD Tuition Assistance, or TA, and a 35% decline in overall net course registrations by students using TA, compared to the same period of 2013. However, excluding active duty military students using TA, net course registrations and net course registrations by new students increased 6% and 3%, respectively. We are generally pleased by the enrollment rates of our civilian students. Net course registrations and net course registrations by new students in all civilian pay type categories exhibited positive year-over-year growth in the fourth quarter of 2013. Net course registrations by new students using Title IV, VA education benefits and cash or other sources, increased approximately 1%, 24% and 6%, respectively, over the prior year period. Total net course registrations by students using Title IV increased slightly, less than 1%, and net course registrations by students using VA education benefits and cash or other sources increased by 28% and 2%, respectively, over the prior year period. Compared to the third quarter of 2013, we also realized an improvement in the growth rate of net course registrations by new students in all civilian pay type categories. Year-over-year growth in net course registrations by new students using cash turned positive in the fourth quarter of 2013, after 5 consecutive quarters of declines, an early sign of improved traction with strategic relationships. For the full year of 2013, 66% of our overall total net course registrations were by civilian students. I would like to take a moment to discuss what we understand to be the most recent modifications of the Tuition Assistance program by specific branches of the military. Prior to these changes, the TA program generally covered 100% of tuition cost for higher education, up to $250 per credit hour, and up to a maximum of $4,500 per year. The branch-specific modifications include, but are not limited to, the following: One, the Army has reduced its annual TA limit from $4,500 to $4,000, and limited the maximum number of courses funded to an equivalent of 16 semester hours per year; 2, the Air Force added a stipulation that it will no longer authorize TAs for an Associate’s degree if the service member already has a Community College of the Air Force degree; 3, the Coast Guard has modified its TA policy to cover of 75% tuition cost, up to $187.50 per credit hour, and to cap the maximum Tuition Assistance benefit at $2,250 per year. In addition, active-duty or extended active-duty members will be eligible to use TA only for courses that lead to an initial Associates, Bachelors or Masters degree; 4, the Marines must have a minimum time in service of 24 months before being eligible for TA, and the program will now only be funded on a quarterly basis; number 5, we are not aware of any recently announced changes by the Navy, although sailors can only use Tuition Assistance after 12 months of service at their first duty station. Additional details about these modifications have also been provided in our 10-K. As a reminder, the typical military student at APUS takes approximately 3 classes, or nearly 9 semester hours per year on average, and it's generally an older student who is not a new recruit to the military. We are not able to estimate the effect of these changes to DoD Tuition Assistance programs or whether the services would impose other criteria, in addition to the of level reimbursement that would impact enrollments from service members. Moreover, we believe that the continued softness in the active-duty military segment is related, at least in part to confusion about our eligibility and general uncertainty regarding the Tuition Assistance program funding. Despite this uncertainty, we believe that a measure of stability may return to the TA program, and we remain committed to serving the military community through our military outreach team, composed of 22 professionals who are dedicated to helping service members evaluate their educational goals and the ability of AMU to meet those goals. Since the beginning of 2014, APUS has received approval to offer several important degree programs: a Master of Public Policy, Bachelor of Science and Master of Science in Cybersecurity Studies, Bachelor of Science in Natural Sciences, and an Associate of Applied Science and Health Sciences. These programs, most of which will be open to enrollment this summer, further diversify our program offerings and expand our emphasis on high-growth fields, including STEM programs. Furthermore, the new programs represent areas of strategic importance to our military and public service communities. Our recent hiring of Dr. Clay Wilson to serve as Program Director of Cybersecurity Programs at APUS underscores our focus on and success at expanding our brand and leadership position in several key growth areas. Doctor Wilson is the leading National Cybersecurity expert and former Program Director of the Cybersecurity Policy Graduate program in the University of Maryland University College. As a former research rep at Congressional Research Service, Dr. Wilson analyzed cyberintelligence reports for Congress and NATO committees on technology and policy for net-centric warfare, cybersecurity, nanotechnology and vulnerabilities of high technology military systems and critical infrastructures. In addition, we've recently hired Mike Netzer as Senior Vice President of Academic Program Development and Outreach. Mr. Netzer previously served as the academic Dean for the School of Applied and Information Technology at the Community College of Baltimore County. He taught Engineering and Entrepreneurship as an adjunct professor and holds several board positions, including the UMDC College of Engineering and Information Technology Board. He also previously served on the APUS Information Technology Industry Advisory Board. His talents will focus on expanding our community college outreach efforts, and developing our university's professional development initiatives. Corporate and other strategic relationships remain a key focus of our unique approach to attract these students with greater college readiness. In the fourth quarter, our Strategic Relationship Outreach team established corporate partnerships with Ntech [ph] LLC, a company focused on training and analysis of intelligence and surveillance systems, and the National Inter-Scholastic Athletic Administrators Association, a national professional association for inter-scholastic athletics. In addition, our team established a partnership with the FBI Intelligence and Law Enforcement Training Seminars in its program to provide in-service training to FBI Special Agents. APUS became one of only 3 strategic partners of the California Chiefs of Police Association, and built partnerships with several chiefs of police in law enforcement associations in 8 states. Our plan to expand access to international students has made a strong step forward, with the hiring of Paul Humphries as our International Education Business Development Executive. Having worked on several projects with the senior and leadership team of New Horizons, Mr. Humphries will lead our relationship with New Horizons, as well as work to pursue other international partnerships. Mr. Humphries is a highly respected senior management professional, with 25 years of experience securing, establishing and managing education projects and companies in the Middle East, Canada, Southeast Asia, Africa and the United Kingdom. I am pleased that we've made significant progress towards regulatory approvals for our acquisition of Hondros College Nursing Programs, which for now, we will be referring to as Hondros Nursing for short. The Accrediting Council for Independent Colleges and Schools, ACICS, will conduct a site visit within 6 months after the change in ownership. We also obtained approvals for the change in ownership from the Ohio State Board of Career Colleges and Schools and the Ohio Board of Regents, and we satisfied the requirements of the Ohio Board of Nursing. We timely filed a change in ownership and control application with the U.S. Department of Education and received a temporary provisional program participation agreement, which allows Hondros Nursing to continue to participate in the Title IV programs, pending the department's action on the change in ownership application. We continue to be impressed by the capable leadership team, knowledgeable faculty and ambitious students we have encountered. I'm also excited that our former CFO, Harry Wilkins, has taken on the role of Chief Executive Officer of Hondros Nursing and Chief Development Officer for APEI. In these roles, he's leading our campus-based nursing school, and he's working to guide our efforts to consider and pursue strategic investments, partnerships and acquisitions. Moving on to Slide #4, API's core strength. While the education industry undergoes rapid change, the key components of our strength remain unaltered. Our affordability, unique degree offerings, innovative culture and focus on academic quality. We believe these attributes will continue to be the bedrock for our future success in this challenging landscape. As we seek to expand and diversify our revenue sources, our continued attention to academic quality will be paramount. In the fourth quarter of 2013, we continue to focus on quality with progress on projects ranging from those designed to improve student persistence, to development of innovative resources for increasing student interactions and experience, as well as research on innovation and best practices on online learning. In 2013, APUS earned a Sloan Consortium Effective Practice award for creating an adaptive online learning contact hour calculator. This is the third time we received an effective practice award from the Sloan Consortium, the most any institution has received. The online learning contact hour calculator is a tool created for faculty and administrators to determine the expected time students contribute to their online coursework, including both in-class equivalent time and homework time. The instrument is used as part of our overall effort to ensure academic quality, and comply with Department of Education distance learning regulations. APUS continues to engage the broader academic community in meaningful and mutually beneficial ways. We joined the first cohort of HLC's Persistence Academy, and launched a retention task force to further improve student outcomes. In addition, APUS is a member of the inaugural program of the Gateways to Completion, G2C, sponsored by the John Gardner Institute, and work began on the G2C in late Q4 of 2013. Together with these inaugural groups, we will use the research findings to improve the quality and completion rates of some high-volume courses that had historically exhibited high incidences of either dropouts, withdrawals, incompletes or low grades. Our innovative culture in academics is leading APUS to develop a new competency-based program, appropriate to specific disciplines and professional practices. The competency-based model allows for students to reduce time to degree completion by demonstrating competencies already achieved through life and professional experience in learning. In 2013, we applied for several additional patents related to our automated practices. We also launched the pilot program, Fidelis Education, to provide a more social on-boarding and student support experience. Later this year, we plan to launch the next phase of our automated transfer credit evaluation system to further reduce the time and workload requirements of this process. We continue to invest to advance our educational technology through the creation of interactive learning activities and simulation resources that are being added to high-volume courses. Our instructional design and academic media team are developing these resources internally and in partnership with other third parties, including other academic institutions. We have plans to add these resources to at least 100 courses in 2014, as well as to further develop the capabilities of faculty for continued innovation in their classrooms. Our continued focus on teaching excellence also remains a top priority. Our goal is to continue providing our faculty with development courses and tools needed to be highly effective. In 2013, our faculty published more than 400 books and papers and earned nearly 400 awards for their professional practice, research or community service. Faculty of AMU and APU presented in more than 1,700 conferences, workshops and panels throughout the year. Thanks to the hard work of 430 full-time and 1,820 adjunct faculty members at APUS, approximately, 9,700 students graduated with a degree from either AMU or APU in 2013. We now have more than 37,000 alumni that are making a difference in their communities and in their professions. Moving on to Slide #5, Advanced and Strategic Goals. In summary, in the fourth quarter of 2013, we were adversely impacted by the temporary suspension of TA and the uncertainty regarding the Department of Defense funding of Tuition Assistance programs. We also showed positive signs of improvement with year-over-year growth in net course registrations by civilian students using Title IV VA Education benefits, and cash or other sources. To further expand APUS, we must continue to expand our strategic relationships, improve persistence and continue to innovate. We are very pleased with our new subsidiary, Hondros Nursing. We believe the institution is positioned to serve a greater number of perspective nurses, as well as serve as a platform for future health care program expansion. I'm also pleased with the progress we have made with regards to our program diversification, as well as advancing our relationship with New Horizons. In short, I believe we are well positioned to leverage our core strengths to expand access to educational opportunities by further diversifying our student population, expanding in the high demand fields and branching out into new segments through strategic partnerships, investments and acquisitions. I am pleased by the smooth transition of Rick Sunderland, to serve as APEI's CFO; and Harry Wilkins, as our Chief Development Officer and CEO of Hondros Nursing. As you may know, Rick worked with us as a consultant and as VP of Finance, prior to taking on the role of APEI CFO. I also worked with Rick before in the healthcare industry, and have the highest confidence and respect for his abilities. I am happy to welcome him now to our call. Rick?

Thanks Wally, I appreciate that introduction. I want to thank you for your support and thank Harry for the strong foundation he put in place, which has served to support an efficient transition for me to CFO. I'm looking forward to meeting many of our investors and analysts by phone, at conferences and in person in the coming weeks and months. Let's go to Slide 6, Financial Results Summary. American Public Education's fourth quarter 2013 financial results include a 4% decrease in revenues to $82.9 million, compared to $86.0 million in the prior year period. The revenue decrease was primarily driven by a decrease in net course registrations by students using DoD Tuition Assistance or TA benefits. As you heard earlier, net course registrations by TA students decreased 35% year-over-year. As discussed in an 8-K filed on October 15, 2013, we believe approximately 13,100 net course registrations were dropped as a result of the temporary suspension of TA. This represents approximately $10 million in lost revenue for classes starting in October 2013. Operating income for the fourth quarter of 2013 was approximately $14.5 million, compared to $21.4 million in the same period of 2012. Looking at cost and expenses. Instructional cost and services, as a percent of revenue, increased to 35.0% of revenue in the fourth quarter of 2013, compared to 34.5% in the prior year period. This increase was primarily related to lower revenues, resulting from the temporary suspension of TA. We did, however, continue to benefit from lower textbook costs. In the fourth quarter of 2013, our average textbook cost was $36 per net course registration, compared to $42 in the prior year period. Selling and promotional expense, as a percent of revenue, increased to 20.6% of revenue, compared to 19.2% in the prior year period. This increase was primarily related to lower revenues, as well to higher costs associated with online advertising and increased staff, focused on strategic relationships. General and administrative expenses increased as a percentage of revenue, to 22.5% of revenue and 17 -- from 17.9% in the prior year period. This increase was, again, due to the lower revenues and an increase in bad debt expense as a percent of revenue. Bad debt expense as a percent of revenue was approximately 4.6% during the fourth quarter of 2013, compared to 3.6% of revenue in the fourth quarter of 2012. The increase was primarily due to the change in mix of students to a greater percentage of civilian students. Military students on average have lower bad debt expense than civilian students. In the fourth quarter of 2013, net income was approximately $9.0 million, or $0.51 per diluted share. This compares to $13.2 million in the prior year period. For the full year 2013, revenues benefited slightly from a technology fee implemented by APUS in September 2012, and therefore included for 4 months in 2012, as compared to 12 months in 2013. This technology fee represented approximately $7.3 million, or approximately 2.2% of the full year 2013 revenue. Effective November 1, 2013, we began consolidating the financial results of Hondros Nursing. We recorded approximately $3.8 million in revenue, $276,000 in operating income and $266,000 in net income for the quarter. Please note that these results reflect only 2 months of consolidated results, and are not representative of a typical quarter, due primarily to the timing of certain revenues and expenses within a quarter. At December 31, 2013, our cash balance was approximately $94.8 million, and we have no long-term debt. We completed the acquisition of Hondros Nursing on November 1 for an adjusted aggregate purchase price of approximately $46.3 million. When including cash acquired, this lowered our cash balance by approximately $44.4 million. In October of 2013, we repurchased 167,675 shares of our common stock, at an average price of $36.86. At December 31, 2013, there remains approximately $9.4 million of availability under the authorized stock repurchase programs. Finally, capital expenditures for the year 2013 were $20.6 million, compared with $35.0 million in 2012. This decline is primarily the result of a decrease in our investment in administrative facilities. Moving on to Slide 7, First Quarter 2014 Outlook. Looking ahead, we believe APUS net course registrations by students using TA in the first quarter of 2014 will be adversely impacted by ongoing budgetary constraints and uncertainty. At the same time, we believe that net course registrations by nonmilitary students will increase year-over-year. As a result, APUS net course registrations by new students in the first quarter of 2014 are expected to decline between 9% and 7% year-over-year, and total net course registrations are expected to decline between 7% and 5% year-over-year, compared to the prior year period. Our outlook reflects an expected year-over-year decline in net course registrations by new students using TA. So far, in the first quarter of 2014, we have seen a mid-teen percentage decline in net course registrations by new students using TA. Thus far, in the first quarter of 2014, we have seen a single-digit percentage increase in net course registrations by new students using FSA. At Hondros Nursing, first quarter new student enrollment increased by 45% year-over-year to 405 students in the first quarter of 2014, as a result of enhanced outreach and awareness efforts. We anticipate consolidated revenues for the first quarter of 2014 to increase between 0% and 3%, compared to the prior year period. First quarter 2014 total consolidated earnings per share are expected to be between $0.43 and $0.48 per diluted share. In the military markets, we expect the continued volatility of softness to adversely affect net course registrations by students using TA. However, if funds available under DoD Tuition Assistance programs are further reduced or eliminated, we do believe that most service members would still be eligible and able to finance out-of-pocket tuition costs resulting from any shortfall, using various VA tuition benefits through our program called Top-Up. Thus it is important that we maintain our strong relationships with Education Service Officers, and the broader military community, in part, so that we may assist them in promoting awareness of Top-Up and other sources of tuition financing within the military community. These relationships are important -- are also important, so that we can continue to differentiate AMU from other for-profit and not-for-profit competitors. As it relates to new programs, we believe that our new cyber and nursing degree programs will strengthen -- will serve to strengthen our position in the military community. At the same time, we will continue to expand our presence in, and focus on, civilian communities. In summary, while the fourth quarter of 2013 was adversely impacted by the temporary suspension of TA in October, we were pleased by the growth of net course registrations across all civilian pay types of APUS, an accomplishment that still eludes many of our peers. Furthermore, we believe that year-over-year growth in net course registrations by civilian students will continue into the first quarter of 2014. We are confident that our emphasis on 3 value themes, academic quality, affordability and innovation, is a winning formula that will create value for all stakeholders. We will continue to concentrate on improving student persistence as well as on advancing our education technologies and processes to improve learning outcomes, enhance the learning experience, attract new students and further improve operational efficiency. Going forward, we will build our brand awareness at APUS and Hondros Nursing, primarily by building strategic relationships to attract serious-minded students, who are prepared for the rigors of higher education, as well as by internally directed Internet marketing. At the same time, we will continue to move forward with our plans to further diversify and grow our business by launching new programs, especially in high-growth fields, and entering new markets and market segments. Now at this time, we would like to take questions from the audience. Operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Adrienne Colby for Deutsche Bank.

I was hoping you could frame your enrollment outlook in terms of the changes in Tuition Assistance eligibility requirements. It seems like the changes at the Air Force and the Army, which I think are over 75% of your military students, doesn't seem like it would really impact your active-duty populations. So just hoping you could help us to reconcile those 2.

We didn't try to put that together, but I can give you some perspectives. For example, the Marines really didn't have funding at most of their bases, and just announced this month that they found another $25 million in funding for the rest of the year. At the same time, they're only committing to funding quarter by quarter, in the event that they run out. We typically have had approximately 20% of the overall Marines as our students. We've also had, when we had our call back in October, we said that the October period was typically a popular period for TA students to register, was the beginning of the fiscal year, and was also early enough that if you took an 8-week course, you wouldn't be taking the course over the holidays, and that we couldn't guarantee that the students would re-register in that quarter. And sure enough, that happened, and then once again, you get into the new year and without communication of what the budgets are at different bases, as well as some more selectivity, we just think there's general uncertainty, so trying to frame it within these changes, I think until everybody gets used to the systems and the ESOs get comfortable with their budgets, I think it's going to be difficult for anyone, including us, to be able to predict the stream or flow of registrations from the bases.

Okay. And I was wondering, if you could just talk about the seasonality in terms of enrollment at Hondros, if we should be extrapolating your guidance sheet here for first quarter for the rest of the year.

I think I'll ask Harry to answer that question. Harry?

We're going to give quarter to quarter guidance. We're not going to totally be on the first quarter, but we're very pleased with the growth potential at Hondros, and it's something we really think there's a need for nursing programs. It's growing nationwide, and we think there's a lot of opportunity to grow out that campus-based programs at Hondros, as well as their online programs. And the BSN program there, so we're -- we expect to continue to have success at Hondros.

Okay, if I can just sneak in 1 more, could you just update us on the New Horizons partnership, I know you've implemented some dedicated salespeople. Just wondering if you're seeing some changes there, maybe what percent of your enrollment is international now?

Sure. I'll ask Harry to talk about the New Horizons partnership.

Yes. We have hired a full-time person now, Paul Humphreys. We really need somebody -- we need to have a presence outside the U.S. to grow the International business, and it took us a while to get somebody in place. Now we have that, we're very happy to have Paul on board with us, he's working with Chris Eden, who's the -- about a year ago, was hired as the Head of International Operations at New Horizons to develop their international franchise operations, and also promote our programs to their international franchises. We think we finally have all the pieces in place now to do that. And New Horizons had a really good fourth quarter, their international operations and their presence are growing. They're in over 100 countries. So we really think that'll kickoff more in the second half of this year. We haven't -- you're not seeing the results yet, but we've gotten the pieces in place now, and the people we need to help -- use New Horizons' professional sales force, at their franchisees to help market our programs, but we're very optimistic about the future success of that. It's just not really showing up in the numbers right now.

So you still have about 2% international enrollment?

I think the last time we had numbers, it was between 2% and 3%, yes.

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

This is David Warner for Corey. I was just wondering if the -- sort of the paring back of the benefits at the various military branches affected how you think about pricing? And also, maybe where you seek to focus on new program rollouts programatically, either associates that are masters or masters, where you emphasize going forward, whether that's impacting your plan?

We did announce a few new degrees that we've had approved in 2014 already, and we expect to launch by the 1st of July. Most of those degrees are in the technology areas like the cyber degrees and the science degrees. What -- we're just finding that technology and simulations have improved to the point that we can offer classes that we weren't able to offer years ago. And some of those degrees are oriented towards the military as well, for example the cyber degree. I don't think your question about pricing, I don't think the cutbacks in general or some of the restrictions by branch of service have really changed our perspective on pricing. I think, obviously -- by the way, none of them increased to $250 per credit hour. And one of them, the Coast Guard, went to a $75, $25 reimbursement. But we really haven't seen a kickback from students or a negative pushback from them on that. So we're -- at the same time, we're kind of proud that serving that market has kept us in that price point. If you look at our scholarships, there's very few scholarships that we offer as a percent of revenues, and we really haven't had to do that. So I think we're in a good point, pricewise.

And just one more. Could you give some color on the margin profile of Hondros? Looks like you are at mid -- high single digits, operating margins this quarter. I would imagine that you expect some expansion from there. Any guidance or color you can provide on where long-term margins for that business will be?

Yes, we're still in the process of integrating our operations with theirs. We're not seeing all the efficiencies we expect to see down the road. And in the fourth quarter, numbers was really for 2 months, they had a lot of transaction expenses in those numbers that we know won't be there, going forward. But we're not guiding at this point on our margin percentage for Hondros, until we complete our integration and our review of their staffing, and we're also in the process of going through a period of probably campus expansion which, while it may have a negative short-term impact on margin, is certainly going to make -- set the stage for future growth there. So we're spending the growth of business in Hondros, and it's going to be more of a revenue growth story this year I think than a margin growth story, but I do think we have a lot of potential there to help grow their online programs, to move them toward our LNS, which would be a much more affordable product for them, and to help them with their marketing and get some economies of scale there, that they don't currently have as a small company.

Okay, great. And if I could just sneak one more in. The SG&A was a little bit above your long-term target of 20% and you've mentioned some higher advertising costs in the press release. Are you expecting that to come down? Or are you still targeting 20% for 2014?

Yes, you said -- did you say, selling promotion or SG&A, selling promotion?

I'm sorry, selling promotion.

Right. So, yes, it creeped up above the 20% so it'll -- because of the decline in revenue. We chose to continue to spend through, because we think that's important to the long-term growth of registrations. In terms of where it's going, going forward, I think it's going to be slightly North of 20%, but not much. And we continue to target that 20% range in the long-term, but as we're feeling the effect of the military TA, we're going to continue to spend. And I'd point out, we're seeing for non-military markets, where we're doing that marketing, we are seeing some modest growth year-over-year. So as long as we're feeling like we're getting the traction there, we're going to continue to do it.

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

So, Wally, the -- it looks like the military students are not taking advantage of Top-Up to offset these uncertainties and the turmoil in the TA program. What's your thought on that? Why aren't they taking advantage of that?

Well the, right now, the only branch that would probably use Top-Up would be the Coast Guard, because if you look at the cutbacks and the fact that traditionally, with our large volume of students, the average number of courses per year has averaged 3, 3 courses per year and $250 per credit hour is around $2,150. And plus, we don't charge a tech fee to the guys in the military. So we -- that falls below the caps. I think that there are some signs that military students who want to take more courses than the overall reimbursement, and this is really prior to the changes, would either pay for cash, use the VA program or even use FSA. They just had the CCME conference down in Savannah, and whenever we have a conference like that, we try to get some of our students together and I had a number of students that told me that with the suspension of the program, they were dipping into the VA or using their FSA.

Okay. So the students have used the alternative funding during these suspension periods, but that triggers, right, the -- or does that trigger if they use the VA money, the time-limits, in terms of access to those funds?

Absolutely. Under the current regulations with it, I think a number of institutions have actually asked Congress to consider a change. There's a 10-year limit. So once you start, you trigger a 10-year limit where you have to use all of your benefits.

Did you view that as a significant hindrance in terms of willingness of military folks to access --

I do. And that's why I think the ones -- particularly the ones at the enlisted level, who may qualify for Pell, which as you know, Pell's not a loan, it's a grant. They'll apply for Pell and if they are granted partial Pell, they'll use some of that, because it means they're not borrowing, they're pretty shrewd consumers, and we see a lot of that activity where they'll fill out the information and if they qualify, they'll use some of the Pell to supplement. And if they don't quality, they won't borrow.

Got it. And then a question for Harry, the Hondros new enrollments here in the quarter, you're guiding to a quite robust, and my recollection is that the historic growth hadn't been that high, so are you doing something different in terms of the loan programs or something unusual in terms of timing here or something that's driving this, and this is indicative of a pace of growth you'd think about for the year?

Well, again, we're not giving any guidance beyond the first quarter, Peter. But I think that we're just putting some professional marketing in place. We've got a good team in place. They've got good programs, and it's a relatively young school. I mean, it's in there. I guess, if we could, adolescence, it's not a start-up, but it's -- they've only been doing the nursing program for 5 years there. So it's still in a growth phase, and we expect to continue to carry that out. They're in 4 cities now, we think there's a lot of opportunity to expand in the state of Ohio, we have a great relationship with the nursing board in Ohio. And there's a real need, and healthcare is a very big industry in Ohio. So we're very excited about that program, and there's a lot of opportunity to put more of their courses online and to grow some additional programs there. So we're optimistic about it. I'm not going to give any guidance though about enrollment growth for the rest of year.

Peter, I would also add to Harry's comment. In the first quarter, a year ago, they were still in the process of getting their CCNE accreditation for the online RN to BSN. And after they got that CCNE accreditation, it did perk up the activities, which the first quarter year-over-year reflects some of that experience.

Got it. And should we anticipate another transaction in 2014?

Well, if you don't have anything to talk about, you don't have anything to talk about. So I think that we continue, really for the last 3 or 4 years, we've looked -- we look at opportunities, we don't have a banker who is engaged or anything like that. But things come over the transom, and if something would fit into our strategy, which I think we've been pretty good about articulating, it might happen. But right now, there's nothing really to talk about.

Your next question comes from the line of Jerry Herman for Stifel. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Wally, I was hoping you can add a little bit more color about the military side. You mentioned the government shut down and you mentioned confusion, but I also want to elaborate, or if you could elaborate on the changes of funding that took effect for fiscal '14, and if, in fact, you're seeing an impact from those changes, specifically?

I think we are, Jerry. I think the problem is, is that the branches do not share what budget they have, and the continuing resolution or whatever that technical term was, after the shutdown when Congress funded. There -- you may recall, we had a suspension of TA in April of 2013, which was another impact to our overall year numbers, and after that, there was actually a resolution, an amendment, to restore TA to its previously budgeted levels, but they had actually budgeted fairly low and were running ahead of schedule. So that only guaranteed that they would spend to the budget. And then with the 2000 -- fiscal year 2014, that started in October, and when we had the shutdown, they shut everybody out. There's been no disclosure of what the budget is, but obviously they had sequester issues that they had to consider. So what we saw was, first of all, when they initially restored after the shutdown, and we called some of this when we had the discussion in October, there was confusion about which bases and which branches had money. And, plus we, once we got to the point where students couldn't register because they couldn't get approval for November classes, generally people don't want to start classes in December, when you've got to do a lot of work over the holidays. So we had that general description for pretty much all of the branches. But then the Marines, for example, issued a statement in November, before the month had ended, that they were out of money for the quarter, and they were going to be allocating money quarter by quarter, and I think within a few days in January, they issued that they were out of money again for the quarter. And then finally in February they said, oh, we found $25 million more for the rest of the year, but we're still only going to allocate our money quarter by quarter. So we don't know what their overall budget is, all we know right now is they found $25 million worth of money, but for all we know, maybe they didn't budget much money at all, at the start of the year. So I think there is general confusion. There's also a lot of activity going on with withdrawal of troops from Afghanistan, with -- as part of the recommendation of Secretary Hagel is to reduce the manpower. So people are converting from active duty to veterans. If you look at our veterans activity, those revenues are growing nicely because of our brand, because of our reputation. And we think that until this whole thing settles out, with just how much money we have, and whether or not Congress can -- one of the proposals on the table is to do a 2-year budget versus a 1-year budget. Whether some of that can be settled or not is beyond our control. But we're trying to observe it. And I would just say that it's very difficult for us to predict, and as we stated, our forecast for the first quarter is that we're going to be down in the midteens for TA, and some of it has to do with funding. And I think other -- I don't know that much of it has to do with actually the eligibility restrictions that they put in place, I think it's more funding. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Great, that's helpful. And then, a question about the first quarter and the guide there. I know there's some distortions with the inclusion of Hondros for the full quarter, but your revenue growth is 0% to 3%. Hondros is some contributor to that, but what I'm really getting to is that the operating margin would appear to be declining substantially, by our estimates, like 500 to 600 basis points, and I'm wondering if you can help us with what's going on in the cost structure there, or are there timing issues, and should we expect that type of leverage, operating -- negative leverage for the rest of the year?

Well, we're not giving guidance for the rest of the year. But with the military student decline in the midteens for the first quarter, we have a much higher referral percentage and a much lower cost per new student in marketing cost for military students than we do for civilian students. So that part of a margin creep has to settle itself out over time. Obviously we will prefer to get 100% of our students through referrals, and while I wouldn't say that, that would mean that it wouldn't need marketing, I certainly wouldn't need to spend as much money. I think some of the other things, as we mentioned on the call, I think it was on Rick's portion of the call, we're continuing to invest and spend in information technology for some of the innovations that we're doing, so that has some issues. And clearly, when you're returning students, which you don't have to spend marketing money for, but aren't returning as frequently as in the TA students, that has an impact on margins, too. So I hate to not be able to give you much more color than that, but we're really trying to manage this on a quarter by quarter basis, to see where we're going to level out at, and we'll adapt as we get more information, we'll manage our company accordingly.

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

Wally, you just mentioned Secretary Hagel's proposal to continue to shrink, I guess, the manpower. Are you seeing the market for educating military students maybe becoming less competitive? It seems that, that sector's in a secular decline?

No. I haven't seen it become less competitive. There are a couple of universities for profit and nonprofit that seem to be pulling back in their outreach teams. But short of that, we just had the CCME conference, which is, the Military Educators Annual Meeting and there were still a substantial number of institutions that were in attendance, and still trying to focus. But I believe that in some ways, with the increasing regulations, for example, the President's executive order, as well as the new DoD MOU, I think it's becoming a much more complex market to be in unless you can scale to a certain size of students. I think some of the smaller providers are likely to say that it's not worth it to try to comply with all the additional rules and regulations, higher ed's pretty complicated as it is.

Okay, can you just remind us, in terms of your net course registrations on a rough basis, what your exposure is by the different branches in the military?

Okay. If you look at the fourth quarter of...

You don't have to be exact. Just some rough numbers I'm looking for.

No, no, I'm giving you some rough numbers, so, of our 34% of revenues, which TA represented, the Air Force is about $14% of overall revenues. The Army's at 13%. The Marine Corps' at 3%, the Navy's at 3% and the Coast Guard's at 1%.

Okay, great, that's very helpful. And just a couple of other quick numbers questions. What are you, in your first quarter guidance, I'm just curious what you're using for tax rate and share count and what we should be modeling in for capital spending for the rest of 2014?

Rick, you want to answer the tax rate?

Yes, tax rate's at 38.8%.

And the share count for the quarter?

17,900,000 shares.

Okay, great. And then, capital spending for 2014?

We're not giving guidance on that.

At least for the quarter, then?

No. We -- we're actually still trying to figure out capital, not because there's going to be -- when we give guidance, it's not because we'll put it an acquisition. It'll be much more because we're trying to figure out the scope of IT projects that we can accomplish this year.

Your next question comes from the line of Jeff Goldstein for with JPMorgan. Your next question comes from the line of Trace Urdan for Wells Fargo.

Could you speak to the sequential increase in the G&A line, and in particular, whether that would -- was there anything extraordinary in there that was specific to the fourth quarter?

Rick, you want to go ahead and do that?

Sure. So the sequential increase is primarily IT expenditures as we invest in technology. And in terms of a percentage increase quarter-over-quarter, we did have a higher bad debt expense as a percent of revenue primarily due to the change in mix, the bad debt we experienced on the military population is a lot lower than what we experienced on the nonmilitary population.

Okay, so that fourth quarter G&A number, because it relates to IT spending that's ongoing is more or less representative of what we might expect at a level?

No, not exactly. I mean, it's uncertain, ultimately based on how much our revenues are, but we had about a $10 million dip in revenues due to the shutdown.

I'm just asking about the absolute number of dollars?

The absolute number of dollars? Throw some kind of a factor on it, which is -- I don't want to throw out there. But it would probably -- the difference would be, any changes in bad debt or any increase to expenditures in IT. Those are the 2 things that'll drive it.

Meaning that the IT expenses could go up from here?

They could.

Okay. And in the same vein, I'm wondering if you could -- I understand you're not giving guidance for the year, but could you speak to, at least in the first quarter, the levels of D&A and interest income that you're anticipating?

Our depreciation D&A, $3.4 million. Interest income, about $80,000. I mean, it's not material to the equation.

I just -- it's striking at Hondros isn't -- doesn't impact either those lines, seemingly?

Hondros doesn't really have a lot of capital. They lease their facilities, they don't have a lot of depreciation expense.

Didn't you add any good will into your income statement, as a result of the Hondros acquisition?

We did, we did add goodwill trades. But that's based on intangible values, and not amortized the way it used to be. It's amortized for tax, but not for GAAP.

So, if you added the amortization, you to take that number up to at $3.7 million.

All right, that's on me, then. So can I take it then, that the guidance that you gave previously about Hondros being accretive still holds, even though you're contemplating additional expenditures?

Yes. Yes, absolutely.

Very good. And then the last question I had. I think I probably know the answer to this, but the pressures on revenue per course registration or revenue per enrollment, is that just primarily a function of the mix shift in the quarter? Or are there other factors in there as well?

I think it's predominantly the mix shift. We'll -- and 1 of the things that I've talked about before on these calls is that one of the reasons why we try to continue to target our spending at 20% is when we increase that spending at the fringes, we don't often get the same return, because of the higher cost whether, let's say our average cost to throw out a number, is $1,200 per new student all in, and you spend at the fringe, it may be a $2,000 or $3,000 number, and you're not going to get the same return. So as the mix changes, we'll have to continue to finesse and tweak how we spend our marketing dollars in order to get a quality student.

Okay. And last question, Wally, can you -- is there any chance we can get you to give us a sneak peek on your preliminary CDR number?

Do we have it? Yes, our draft 3-year number is 13.1. So it obviously reflects some of those students that weren't exactly serious students.

That was kind of the point of my question, so. But even still, pretty low.

Yes.

Your next question comes from the line of Tim Connor for William Blair. Timothy Connor - William Blair & Company L.L.C., Research Division: Sounds like it's still early days for the international strategy, but as you look out longer-term for international growth, is that going to be degree certificates, partnerships with local providers or your brand or would you consider providing a technology platform for international providers? What is the focus, looking out?

Yes, it's mainly degrees, and I would say that it's predominantly graduate degrees, because most countries heavily subsidize their undergraduate degrees, but don't do that for graduate degrees. Timothy Connor - William Blair & Company L.L.C., Research Division: And that would be under the American Public brand?

Yes. Timothy Connor - William Blair & Company L.L.C., Research Division: Okay. And then for the -- for Hondros, I think you hinted at expanding capacity. What is capacity right now, and how quickly can you ramp that up and to what level?

Well, it's very strong campus to campus. There are 4 campuses, 1 in Columbus, 1 in Cincinnati, 1 in Dayton, 1 in Cleveland. The Columbus Day programs, the only one we think we're near capacity, they don't even offer evening or weekend classes as we hoped to down the road and the 3 other campuses, Cincinnati, Dayton and Cleveland are nowhere at capacity. We're actually very excited about the opportunity in Cleveland, where we're getting ready to lease additional, actually a new space there that'll double the size of the campus. So we're going to have plenty of excess capacity to grow those programs. Timothy Connor - William Blair & Company L.L.C., Research Division: Okay. And then, in terms of state authorizations, where do you stand outside of Ohio, and what types of milestones or benchmarks are you looking for there over next couple of quarters, years?

We haven't announced that. Well, actually, it's in the K. If you look in the K, we don't have it memorized, it's kind of complicated . But we do state in the K which states that Hondros is authorized in, and which states [indiscernible] authorized in, and in APUS' case, because we have states in every single -- we have students in every single state, we have states that we're licensed in, and states that have given us a waiver, based on the access.

And that's for the online program, only. The on-ground programs, right now, we're just sticking to Ohio, and we haven't announced any future plans to expand to a regional-type strategy. Timothy Connor - William Blair & Company L.L.C., Research Division: Okay. And RN to BSN, is that going to be under the Hondros brand?

We still have, as I've announced on the call, in the previous quarter, the institutions are separately accredited, and have separate boards. And so they each have an online RN to BSN, and for right now, they'll each continue to have an online RN to BSN. Timothy Connor - William Blair & Company L.L.C., Research Division: Right. I think you just said you made some changes to the delivery platform. Was that for 1 brand or both brands, or...

We hope to make some changes.

Yes, we want to change the Hondros' LMS to our LMS. But we still try and offer distinct programs. There's a lot of loyalty with the Hondros students progressing from LTN program to ABN and RN program to the BSN program. And that we think that they like that consistency of name. The program, the BSN online programs are similar size right now, but everybody thinks there's a lot of potential to grow Hondros. So -- and for the meantime, until we figure that out, we're going to use 2 different brands.

At this time, there are no further questions. I would now like to turn the call back over to Chris Symanoskie.

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

Thank you for joining today's conference call. This concludes the presentation. You may now disconnect. Have a good day.