American Public Education, Inc. (APEI) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the American Public Education Incorporated Fourth Quarter 2015 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instruction will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference Mr. Chris Symanoskie, Vice President of Investor Relations. Mr. Symanoskie, you may begin.

Great. Thank you, operator. Good evening, and welcome to the American Public Education conference call to discuss financial and operating results for the fourth quarter and full year of 2015. 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 upon current expectations, assumptions, estimates and projections about American Public Education and the industry. These forward statements are subject to risks and uncertainties that could cause actual future events or results to differ materially from such statements. Forward-looking statements can be identified by words such as anticipate, believe, seek, could, estimate, expect, intend, may, should, will and would. These forward-looking statements include, without limitations, statements regarding expected growth, amounts in nature of anticipated charges, expected registration and enrollments, expected revenues, expected earnings and plans with respect to recent and future investments and partnerships. Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described in the Risk Factors section and elsewhere in the company's annual report on Form 10-K filed with the SEC and the company's other SEC filings. The company undertakes no obligation to update publicly any forward-looking statements for any reason, unless required by law even if new information becomes available or other events occur in the future. On our call today we will also discuss certain non-GAAP financial measures in connection with our GAAP results for the quarter and full year of 2015. These non-GAAP financial measures are not intended to be a substitute for GAAP results. However, we believe they will allow investors to better compare results to prior year periods. American Public Education urges investors not to rely on any single financial measure to evaluate its business and to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures that were included as a part of an exhibit to our current report on Form 8-K filed earlier today. This evening, it's my pleasure to introduce Dr. Wallace Boston, our President and CEO; and Rick Sunderland, our Executive Vice President and Chief Financial Officer. Now, at this time, I will turn the call over to Dr. Boston.

Thank you, Chris. Good evening, everyone. I would like to start today's call with a summary of our recent results and review our progress with respect to our long-term goals. And our CFO, Rick Sunderland, will discuss our financial results and provide perspective on the company's outlook for the first quarter of 2016. Moving on to slide number 3, in the fourth quarter of 2015, overall net course registrations at APUS declined 9%, and net course registrations by new students declined 24% compared to the prior year period. The overall decline was primarily driven by a 36% decrease in net course registrations by new students using FSA or Federal Student Aid. We believe that efforts to improve our quality mix of students through a new admissions process and a greater focus on targeted advertising, as well as increased competition among online programs were the principal contributors to the decline in net course registrations by students using federal student aid in the fourth quarter of 2015. That said, we believe our quality mix of students is improving as evidenced by several factors, including the year-over-year improvement in the first course pass and completion rate. While we experienced double-digit declines in net course registrations by new students, overall net course registrations by returning students only declined 6% year-over-year possibly indicating that our goal of attracting better students and retaining them is working. Net course registrations by new and total students using military tuition assistance or TA, decreased year-over-year by 11% and 4% respectively. We believe this decline is primarily the result of changes in how the TA program is being administered by the Department of Defense. Although net course registrations by new students using veterans’ benefits decreased 8% year-over-year, total net course registrations by veterans increased 2% in the fourth quarter of 2015. Net course registrations by students using cash and other sources declined 9% year-over-year, and net course registrations by new students using cash and other sources decreased 4% compared to the prior-year period. In the fourth quarter of 2015, enrollment at the Hondros College of Nursing increased 3% and new student enrollment declined 10% compared to the prior-year period. We believe the decline in new student enrollment was primarily related to decreased enrollment in the ADN program as a result of fewer graduates from the practical nursing program which is the primary source of new ADN students. Moving on to slide number 4. We continue to focus on several important goals by simultaneously managing our costs. In the fourth quarter of 2015, we continued our targeting advertising as we worked to improve the application and assessment processes in an effort to improve conversion rates. In December 2015, we launched a new application that we believe is significantly less complicated than the prior version. In January 2016, we realized a double-digit year-over-year increase in the percent of applications that are completed by prospective students who start the application and then the percent of prospective students who returned and completed an incomplete application. We are pleased with the performance of the application, and we will continue to explore ways to further improve the enrollment experience. In late January, we changed our new student assessment processes, including allowing transfer students to choose between completing the new assessment or providing documentation of previously earned credit to fulfill initial admission requirements. It will take more time before we can fully evaluate the impact of these changes, and additional modifications may be required to improve student assessment completion rates. We also continue to seek ways of improving the quality of our new students through various marketing initiatives. We believe the student persistence is improving in part due to our changing quality mix of students, utilization of ClearPath and Civitas, and other initiatives aimed at increasing student engagement and classroom interactivity. There are now more than 29,000 undergraduate APUS students using ClearPath, our learning relationship management system powered by Fidelis, Inc., and we will soon be inviting alumni to join the network. APUS Mobile, our native classroom app is now installed on over 44,000 devices with usage averaging 1.2 million page views per week. We continue to view our mobile app as having unique capabilities and the potential to be a differentiating factor for prospective students. We also continued to expand our use of Civitas, a predictive analytics tool to improve student persistence through greater faculty and advisor engagement with at-risk students. Many academic IT and marketing initiatives underway, we hope to realize improvements in our conversion rates and further improvements to student persistence this year. In the fourth quarter of 2015, the percentage of undergraduate FSA students who complete and pass their first course, increased 38% year-over-year. Furthermore, in December 2015, enrollment of new FSA students who passed their first course increased by 4.4% year-over-year. This represents the first month since July of 2014 where the total number of passing students using FSA exceeded the previous year despite an overall decline in net course registrations. Although work remains for us to reach our desired overall goals for persistence, we are pleased with the initial results. I'm also pleased by our financial outperformance in the fourth quarter which can be attributed to lower bad debt expense, payroll costs, and IT expenses, as well as by the earnings per share impact of our continued share repurchases. In addition, we recently received notice from the US Department of Education approving the change in ownership of Hondros and granting the institutional provisional certification to participate in the Title IV programs through December 31, 2018. Under provisional certification, Hondros must apply and receive approval from ED before initiating any substantial changes such as adding a new program or a new campus. We believe the receipt of this change of control authorization will enable Hondros to better serve nursing and healthcare communities. One of the greatest honors for a university president is congratulating graduates who have sacrificed and worked hard to reach their goals. In 2015, APUS conferred degrees to more than to 10,800 AMU and APU graduates. Today there are more than 60,000 AMU and APU alumni worldwide and more than 45% of our alumni return for a second degree. This speaks highly of the quality, uniqueness, and affordability of our programs. Faculty at APUS recently reported that during 2015 they published more than 500 books and papers, earned over 200 awards for their professional practice, research, and community service, and presented at more than 1,200 conferences, workshops, and panels. I could not be more proud of the faculty and staff of both APUS and Hondros. They have worked hard to support student success, teaching excellence, and the fulfillment of our institutional mission. Going forward, we are pleased with the enhancements that we have made with our targeted marketing, admissions processes, retention initiatives, and mobile technology. As an academic institution with a higher purpose we work to manage our institutions with a long-term perspective, build them to overcome challenges, large and small, and ensure that we continue to serve our deserving students and other stakeholders with distinction. At this time I will turn the call over to our CFO, Rick Sunderland.

Thank you, Wallie. American Public Education's fourth-quarter 2015, consolidated financial results include a 5.9% decline in revenue to $85.9 million, compared to $91.3 million in the prior period. Both our APEI segment and our Hondros segment reported declines in revenue when compared to the prior-year period. The fourth quarter our APEI segment revenue decreased 5.8% to $78.2 million compared to $83.0 million in the prior year period. The decline in APEI segment revenue is due to the decline in net course registrations. Hondros segment revenue decreased 7.2% to $7.7 million in the fourth quarter of 2015, compared to $8.3 million in the same period of 2014. The decline in Hondros segment revenue is primarily due to decreased enrollment in Hondros ADN program and the addition of evening and weekend classes which has resulted in students taking fewer total courses, each academic term as they pursue their studies on a part time basis. On a consolidated basis, cost and expenses decreased 3.4% to $70.2 million, compared to $72.7 million in the prior-year period. The decrease is primarily due to a decrease in selling and promotional expenses in our APEI segment. On a consolidated basis operating margins decreased to18.3% in the fourth quarter 2015, as compared to 20.4% in the prior-year period. The year-over-year decline in operating margins is primarily due to charges incurred in the fourth quarter of 2015. For the fourth quarter consolidated instructional costs and services expense, as a percent of revenue was 36.4%, the same percentage as the prior-year period. Selling and promotional expense or S&P as a percent of revenue decreased to 17.7% of revenue, compared to 18.9% in the prior-year period. Year-over-year, S&P costs decreased 11.6%, to $15.2 million compared to $17.2 million in the prior-year period. Accordingly, the year-over-year decrease as a percent of revenue is due to S&P costs declining at a rate greater than the decline in revenue. Generally the administrative expense or G&A as a percent of revenue increased to 22.1%, from 21.5% in the prior-year period. Our G&A expenses decreased 3.1% to $19.0 million compared to $19.6 million in the prior-year period. The decrease in G& A expense was the result of a decrease in bad debt expense, partially offset by charges incurred in the fourth quarter of 2015. For the three-months ended December 31, 2015, bad debt expense decreased to $2.0 million or 2.3% of revenue compared to $5.0 million or 5.5% of revenue in the fourth quarter of 2014. For the full-year 2015, bad debt expense decreased to $12.7 million or approximately 3.9% of revenue compared to 19.2 million or approximately 5.5% of revenue in the year ended December 31, 2014. We believe the improvement in bad debt expense is a result of our ongoing efforts to attract students with greater academic intent and college readiness, the change in our quality mix of students, and the launch of the multiple disbursement method of disbursing federal student aid to first time APUS undergraduate students. Income from operations before interest income and income taxes increased to $15.7 million compared to $18.6 million in the prior-year period. In the fourth quarter of 2015, net income was $9.8 million or $0.60 per diluted share compared to $11.8 million or $0.68 per diluted share in the prior-year period. Our net income was approximately $0.15 per diluted share, above the top of our previously issued guidance range of $0.40 to $0.45 per share for the fourth quarter of 2015. The out performance was the result of the following: bad debt expense was approximately $0.07 per share lower than projected, payroll costs were approximately $0.04 per share lower than projected, IT expenses were approximately $0.02 per share lower than anticipated and approximately $0.02 benefit from our share repurchases. In the fourth quarter of 2015, we incurred approximately $3.7 million pretax charges related to our fourth-quarter work force realignment, the acceleration of depreciation on certain IT asset and the right off of IT and other assets. The impact of these charges was $2.3 million after-tax or $0.15 per fully diluted share. Adjusting for the charges non-GAAP operating income was $19.4 million and non-GAAP operating income margin for the fourth quarter was 22.3%, non-GAAP net income for the fourth quarter 2015 was $12.1 million or $0.75 per diluted share. This was also above our previously issued non-GAAP earnings guidance range between $0.51 and $0.56 per share for the fourth quarter of 2015. We believe the adjusted EPS for the quarter ending December 31, 2015, which excludes charges for employee redeployment and the write-down of information technology and other assets, is useful because it will allow investors to better compare results to prior year periods. For additional information about our non-GAAP presentation, please see the GAAP to non-GAAP reconciliation in our earnings release filed earlier today on form 8-K. Total cash and cash equivalents at December 31, 2015, were approximately $105.7 million with no long-term debt. During the 12 month period, ended December 31, 2015, we used approximately $33.5 million of cash to repurchase approximately $1.3 million shares of the Company's common stock through authorized stock repurchase programs. Capital expenditures were approximately $26.0 million for the 12 months ended December 31, 2015, compared to $24.6 million in the prior-year period. Depreciation and amortization was $20.5 million for the 12 months ended December 31, 2015, compared to $16.1 million for the same period of 2014. Depreciation and amortization for the 12 months ended December 31, 2015, includes approximately $1.4 million of accelerated depreciation related to the early retirement of information technology assets. Going on to slide 6, our outlook for the first quarter of 2016 is as follows: APUS Net course registrations by new students, in the first quarter of 2016, are expected to decrease between 20% and 15% year-over-year. Total net course registrations are expected to decrease between 8% and 4% year-over-year, compared to the prior-year period. We believe these declines are primarily a result of the various measures we have put in place to improve our quality mix of students, to move to more targeted advertising, and increase competition for students. Moreover, net course registrations by students using TA may be adversely impacted by continued volatility in the military or by changes in how the TA program is been administered by the Department of Defense. In the first quarter of 2016 total student enrollment at Hondros is expected to decrease by approximately 6% year over year and new student enrollment is expected to decrease by 20% year-over-year. We believe that first quarter enrollment will be adversely impact by curriculum changes that resulted in certain students dropping courses prior to the beginning of the academic term. These changes were made with the goal of further improving student outcomes, operating efficiencies, and future enrollment. For the first quarter of 2016 we anticipate consolidated revenue to decrease between 4% and 2%. Net income for the first quarter of 2016 is expected to be in the range of $0.47 to $0.52 per fully diluted share. Going on to slide 7. At the start of 2015, we outlined several important initiatives for the year. Number one, expanding student persistence pilots. Number two, increasing strategic relationships and refining targeted outreach. Number three, launching APUS Mobile. Number four, implementing a tuition increase with a grant for military and military affiliated communities. Number five, implementing new admissions assessment processes, and number 6, moving to the multiple disbursement method of disbursing federal student aid to first time APUS undergraduate students. Now looking back on 2015, I am pleased to report that we either completed or made significant progress on each of these initiatives. In particular our efforts to improve persistence and the work we have undertaken to improve our conversion rates by optimizing our enrollment application have begun to yield positive results. Continued improvements in these areas will ultimately enhance student outcomes and the lifetime value of students as we increase our emphasis on attracting greater numbers of college ready students and the fulfillment of our institutional mission. Now I would like to take questions from the audience. Operator, please open the line for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Peter Appert with Piper Jaffray. Your line is open.

Hi, thank you. So, Wallie, the first quarter APUS start guidance seems pretty cautious in the context of some of the things you highlighted in your commentary, particularly the December numbers turning positive. And so, what am I missing in terms of the disconnect?

Well, I think in the first quarter, from a big picture perspective, we are going to be slightly down in revenues and primarily we're going to ratchet back up, at least we are currently projecting to ratchet back up of our marketing expenses. And so, because - we are pleased with the targeting so far that we are doing and now that we've got some of the other things in place, such as our new admissions applications and our assessment process, we're going to push that up a little bit. So that's accounting for, you know, it’s certainly a lower estimate in earnings but something that we believe is the right thing to do.

I guess my question though is more specifically about the new course registrations, right, I think the guidance calls for down 15% to 20%. It just struck me as perhaps conservative in the context of the new registrations positive in December and some of the other things you highlighted?

Well, new registrations were down in December. We highlighted the fact that new FSA students were up year-over-year…

Okay. I got it.

Due to some of the quality, but new registrations overall were down in the quarter - the fourth quarter.

Plus the guidance is year-over-year. So we are comparing Q1 of '15.

Sure.

And if you remember, we put in our, Peter we put in our new assessment process -- was put in place on April 18 last year for students applying after that date. And so, it really you know didn't fully get engaged until about July 1. So I think while we are pleased with the outcomes of all these initiatives, it just takes time for everything to, you know, run through the P&L.

Got it. Understood. And then can you talk a little bit about how we should be thinking about revenue per student as 2016 rolls out?

Well, obviously we have a goal like everybody else to grow that without increasing tuition. So, you know, we would like to see that go up, but we still see volatility in the active duty tuition assistance market. That's just, it's unpredictable. The Department of Defense has, I think, put processes in place that make enrollment for active-duty soldiers you know, unpredictable. And so, with that as such a large percent of our overall students, you know, I’d still would like to see the number go up. Hopefully, the signs are good that our number of new FSA students are up year-over-year because FSA students typically take more classes per year. Rick, you have…

Yes. What I was going to say. When you think about revenue per student, so we put in place an 8% tuition increase on July 1 with a grant back to military and military affiliated communities, and so I think we disclosed in the third quarter Q, and it's probably in the K also that about 75% of our students got that grant. So 25% got an 8% increase mid-year, but that was for registrations that were made after July 1. So as you know, our students can register up to five months in advance. So we really didn't see the impact of that until much, until after that July 1 date. So you will see some modest increase in revenue per student going across the entire year 2016 when it was just a partial year in 2015. And then we had a grant for the tech fee for certain groups of students that we’ve removed early in 2015, I think it was April. And so, early this year you will see some increase compared to the prior year because that tech fee is in place in 2016 when it wasn't in place in the comparable period in 2015. So the combination of those two ought to cause our revenue per registration and revenue per student, I think, to go up overall, a modest amount.

Got it. Got it. Very helpful. And Rick, one last quick thing, do you have an estimate of what the annual benefit from the cost take out in the fourth quarter would be in '16?

Yes, I think we disclosed that earlier, it was $3 million annually.

Okay. Thank you.

Thank you. And our next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is open.

Thanks so much. I wanted to drill down into some of the reasons, you had an EPS upside surprise in the first quarter. I think you mentioned four of them. I will ignore the share repurchase, so let's focus on three of them. Bad debt expense, payroll savings, or payroll expense less than expected, and IT expense less than expected. In terms of those items, are these just kind of one quarter items or is this something we should expect to continue going forward?

Well, ideally our bad debt expense will continue to be lower. Where it bottoms out at, Jeff, I am not sure. But we had what I would call adverse selection with people who were using FSA for things other than going to school. And it's taken us a number of years to put the appropriate measures in place so that we could hopefully have students who actually had intent to go to school instead of using FSA for some other purposes. So, I think what you are seeing with the decline in bad debt this past year and even more dramatically in the fourth quarter and what we hope is a lower number in 2016 is that, all of those measures that we were looking to put in place, we've put in place. So I think we'll expect that number to continue to go down. As well as our default number, which really isn't part of our earnings, but you know those numbers will get published sometime in the next week or two. And, you know, I think that clearly we've got goals to lower our IT costs. You know, we said that as we had declines in revenues, that we needed to make sure that we were right sized for the organization. But that doesn't mean that we stop spending on IT, we certainly believe in the power of mobile and the influence of mobile. So we are spending on some initiatives there but we are trying to be, I would say, a little leaner and a little more nimble in IT and reflect our spending there. You talked about overall payroll. I think our payroll adjustments in the fourth quarter were really in addition to IT were related to rightsizing. And so we will continue to watch that. If you noticed our numbers are year-over-year instructional cost was the same percentage as it was a year before. So, you know we've established our ability to manage you know, the instruction cost if the number of classes we are offering go down. Was there a fourth one or a third one there that I didn't…

No, that's fine. The other one was share count and actually, what share count are you expecting for the first quarter guidance?

We are not currently purchasing in the market. So whatever is in the K, it’s like 16.3.

Okay. I'll take a look.

Look in the K. But I want to comment on what Wallie said about the cost. So bad debts, I think are trending favorably and we are very pleased with that as we said. In terms of the other savings, we do continue to focus energy on managing our costs. But in particular, there is a couple of things to note. Number one, we spent 17.7% of revenue on S&P in the quarter, during a period where we were looking at optimizing some of these front end processes. We accomplished a lot. We released the new application in December. We are working on the orientation. And I think we said we're going to have a restoration of that S&P spend probably back to something close to historical levels which is 20%. And I would also point out that with January 1, in the case of our company, we put through our annual salary increases and it's a new tax and benefit year. So when you're thinking about expenses related to payroll, and then you think sequentially quarter over quarter, I think you know, we will see some increases in that first quarter of '16.

Okay, that's helpful. Just shifting back to the competitive landscape. I know, we had some noise over the last few months about one of the larger companies in the space, the University of Phoenix. First thing put on probation by the Department of Defense and then taken off. I am just wondering if you had seen any impact on your business, either positive or negative.

I would tell you it’s - that’s really impossible to tell, Jeff. I don't know how long they were - I believe what I recall about their probation was they were not allowed to take new students but as long as they kept returning students they could keep those students. And as most institutions see, the new student recruiting process has anywhere from a 45 day to 120 day window. So, I didn't really hear of any movement towards us during that two or three month suspension that they had. And, I would tell you that it would just - it would be difficult to measure unless it was of a longer duration.

Okay. I understand. And just let me finish with a couple quick numbers questions. What should we be modeling for 2016 for depreciation and amortization, capital spending, and taxes? Thanks so much.

That's a Rick question.

Well, so you can see what we did in the fourth quarter, and we gave you the one time, you know the nonrecurring charge in the fourth quarter for depreciation, I am speaking of. So that will give you some sense of a baseline to build off of for 2016.

And then our capital - we have our capital cost for '15 that we break it out, Rick, in our cash between the building, which is longer depreciation than the IT?

I am sorry, say that again, Wallie.

So in other words, we show what we spent in depreciation in capital in 2015.

Right.

Some of that was our last building.

Right, so we would expect CapEx to come off of the total for 2015 because we opened our IT center kind of in the September timeframe. So we don't have any building costs. And we've talked about managing our IT costs, that's both operating and capital, and for the tax rate, I think we're right around 39%. I would go forward with that.

All right. Thank you so much.

Thank you. [Operator Instructions] I am not showing any further questions at this time. I would now like to turn the call back over to Chris Symanoskie for any closing remarks.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Everyone have a great day.