American Public Education, Inc. (APEI) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the American Public Education, Inc. Q1 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. Chris Symanoskie, Vice President of Investor Relations. Sir, you may proceed.

Thank you, operator. Good evening and welcome to the American Public Education conference call to discuss financial and operating results for the first quarter of 2017. 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, seek, could, estimate, expect, intend, may, should, will and would. These forward-looking statements include, without limitation, statements regarding expected growth, expected registrations and enrollments, expected revenues and expected earnings and plans with respect to recent and future initiatives, 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, quarterly report 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, unless required by law 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. Now at this time, I’ll turn the call over to Dr. Boston.

Thank you, Chris. Starting off with Slide 3, recent results and highlights. Thank you everybody for joining us. We are pleased to conduct today’s earnings call from Salt Lake City, the location of this year’s ASU GSP Summit. The annual conference is a gathering of some of the most successful creative and innovative organizations within the e-learning community. We feel that American Public Education’s dedication to affordability and intense focus on student outcomes closely aligns with the goals of those gathered here and as reflected by our recent progress in improving student persistence at APUS and by continued new student enrollment growth at Hondros College of Nursing or HCN. For the three months ending February 28, 2017, which is our most recent available information, the first course pass and completion rate of undergraduate students using federal student aid, or FSA at APUS increased approximately 19% compared to the same period last year. We believe the improvement in this persistence indicator suggest that our efforts to attract and retain students with greater college readiness are continuing to produce positive results. In the first quarter of 2017, net course registrations at APUS declined 9% compared to the prior year period. Although net course registrations by new students declined by 16% year-over-year, net course registrations by returning students decreased 8% compared to the prior year period. We believe that the difference in the rate of decline of registrations by new students and that of returning students relates at least in part to improvements in persistence and the quality mix of students. The overall decline in net course registrations by new students at APUS was primarily driven by a 26% year-over-year decrease in net course registrations by new students using FSA and an 18% year-over-year decrease in net course registrations by new students using military tuition assistance, or TA. We believe the decline in net course registrations by new students using FSA was due to several factors, including our efforts to improve our quality mix of students through changes to our admissions processes and adjustments to our marketing activities that may have adversely impacted enrollment in our programs and to increasing competition for online students. However, we are encouraged to see that the rate of decline lessened in the first quarter of 2017 compared to the fourth quarter of 2016. We believe that the decline in new students using TA is primarily the result of changes in the administration of the TA program by the Department of Defense, or DoD and by various DoD rules that impeded our ability to support both enrolled and prospective students on military installations. Net course registrations by new students using veterans benefits decreased 13% year-over-year and net course registrations by new students using cash and other sources increased 8% compared to the prior year period. For the three months ending March 31, 2017 or the winter term of 2017, total enrollment at HCN declined approximately 8% year-over-year. However, new student enrollment increased approximately 22% compared to the prior year period. For three months ending June 30, 2017 or the spring term of 2017, new student enrollment at HCN increased 31% and total student enrollment decreased by only 3% year-over-year. Although HCN continues to be confronted with certain regulatory and compliance risks, which are more fully described in API’s 10-Q filed earlier today, we are pleased by the continued turnaround in student enrollment at HCN. In addition to improving student enrollment, the management team at HCN remains focused on further improving the institution’s NCLEX pass rates, increasing placement rates, pursuing showing initial accreditation by the Accrediting Bureau of Higher Education Schools known as ABHES, and implementing its long-term strategy to offer new degree programs and open new campuses to serve the nursing and public health community. Moving on to Slide #4, stabilizing enrollment at APUS is our top priority, and we believe it is critical to increasing the value of our overall enterprise. To that end, we are expanding several promising initiatives and deploying new strategies as part of our overall approach to improve conversion rates and increase enrollment of new college-ready students. The blueprint for this plan includes adding new lead scoring and predictive modeling capabilities as well as improving resource allocation to the most productive marketing channels. In the second quarter of 2017, we intend to further adjust our marketing expenditures in favor of the channel partners we believe are becoming better and more efficient at reaching our optimal online target audiences. To help APUS admissions representatives better serve the needs of prospective students, we plan to develop a more robust engagement model that starts with the request for information that are tailored to the varied interest of incoming students. This personalization will be supported by greater understanding of prospect behaviors through improved information flow to enhance the effectiveness of advising an outreach. In short, we hope to improve the decision journey of prospective students through new data-driven processes, personalized content in a more nurturing approach to improve the likelihood of conversion. Furthermore, we are currently reengineering our enrollment management processes to better integrate front-end systems and adjust processes to better facilitate efficient student on-boarding and customer service. Lastly, we aim to sharpen our digital marketing campaigns to leverage relationship with military, public service and other high-value student populations, especially in the segments where we have built a strong presence. At the same time, we anticipate launching new certificate and degree programs to support future enrollment growth, especially in areas where demand is growing and employers struggle to find talent to fill job vacancies. Our product development plan includes the future launch of doctoral programs pending HLC approval that will also serve to enhance our reputation as an institution of higher learning. To further enhance the value of our new programs, we frequently seek additional programmatic accreditation. For example, the International Fire Service Accreditation Congress, IFSAC, recently accredited 5 of our degree programs in the School Of Security and Global Studies. They were our associates of science and fire science, Bachelor of Science and Fire Science, Bachelor of Arts and Emergency Management, Master of Arts and Emergency Management and Master of Arts and Emergency Management and Homeland Security. In addition, our Bachelor of Arts and Entrepreneurship and Master of Arts and Entrepreneurship have been approved for accreditation by the Accreditation Council of Business Schools and Programs, also known as ACBSP. These recent developments and accreditation resulted from 4 years of preparation and hard work that included exhaustive self-study and accreditation site visits. I am pleased by the recent launch of our competency-based initiative called Momentum and by our ongoing outreach to strategic partners. We expect minimal enrollment in Momentum until we are able to offer the programs with federal student aid. We are currently in the process of applying with the Department of Education for approval. APUS recently announced the expansion of our partnership with the Transportation Security Administration, or TSA to provide carrier relevant education to nearly 20,000 TSA employees at 147 airports nationwide. We believe APUS is well-positioned with affordability and quality to help employers advance the capabilities at our workforce and lower the cost of human capital in addition to helping job seekers close significant skills gaps to find employment and advancement. As indicated by our outlook, we expect a decline in net course registrations by new students at APUS to ease in the second quarter of 2017. We believe this modest improvement is driven by easier comparisons with the prior year period and to a lesser extent, strengthening in our military channels. We also cannot rule out the possibility that our initial efforts to stabilize enrollment may be having an impact on enrollment. It is important to note that several of the initiatives we outlined today have only recently been implemented and the remaining items are expected to be applied later this year. Thus, it’s still too early to for us to estimate the impact of that these efforts may have on conversion rates and enrollment of new students. In closing, this is an exciting and busy week for us, as we will be soon be departing the ASU GSV Summit for Washington, DC to participate in the graduation ceremonies for nearly 11,000 AMU and APU students. For me, it’s an honor of the highest order to congratulate in person many of the graduates and their families to attend our commencement ceremonies this weekend. We expect more than 1,100 graduates to be present beyond this graduate this year’s 18 years old, earning associates degree and the oldest is 80 years young, earning a masters degree. Congratulations to all of these highly successful professionals, who will now join the ranks of over 80,000 AMU APU alumni representing more than 34 countries. Additionally, I would like to thank the faculty and staff at APUS and HCN for their hard work and efforts to support our students and advance our respected institutional admissions. At this time, I will turn the call over to our CFO, Rick Sunderland. Rick?

Thank you, Wally. American Public Education’s first quarter 2017 consolidated financial results include a 9.9% decline in revenue to $75.5 million compared to $84.0 million in the prior year period. Both our APEI segment and our Hondros segment reported declines in revenue when compared to the prior year. In the first quarter, our APEI segment revenue decreased 10.7% to $68.1 million compared to $76.3 million in the prior year period. Decline in APEI segment revenue is primarily attributable to a decrease in net course registrations. Hondros segment revenue decreased 1.8% to $7.6 million in the first quarter of 2017 compared to $7.7 million in the same period of 2016. The decline in Hondros segment revenue is primarily due to a decline in total enrollment at Hondros. On a consolidated basis, cost and expenses decreased 0.9% to $67.4 million compared to $68.0 million in the prior year period. For the first quarter, consolidated instructional costs and services expense or ICS as a percentage of revenue increased to 38.3% compared to 35.4% in the prior year period. Our ICS expenses for the three months ended March 31, 2017, were $29.0 million representing a decrease of 2.5% from $29.7 million for the three months ended March 31, 2016, as a result of a decrease in employee compensation expenses in our APEI segment. The increase as a percentage of revenue was primarily due to our consolidated revenue decreasing at a rate greater than the decrease in our instructional costs and services excellences. Selling and promotional expense or S&P as a percentage of revenue increased to 20.4% of revenue compared to 19.6% in the prior year period. Year-over-year, S&P costs decreased 6.3% to $15.4 million compared to $16.5 million in the prior year. The increase as a percentage of revenue was due to our consolidated revenue decreasing at a rate greater than the decrease in our S&P expenses. General and administrative expense or G&A as a percentage of revenue increased to 23.4% from 19.9% in the prior year period. Our G&A expenses increased 6.5% to $17.8 million compared to $16.7 million in the prior year. The increase as a percentage of revenue was due to the increase in G&A expenses during a period when consolidated revenue decreased. For the three months ended March 31, 2017, bad debt expense decreased to $1.4 million or 1.9% of revenue compared to $2.1 million or 2.5% of revenue in the first quarter of 2016. We believe the improvement in bad debt expense is a result of our ongoing efforts to attract students with greater college readiness and the change in our quality mix of students. In the first quarter of 2017, we reported income from operations before interest income and income taxes of $8.3 million compared to $16.0 million in the prior year period. Our effective tax rate during the quarter was 46.1% compared to 37.7% in the prior year period. Please note that the adoption of ASU number 2016-09, also known as improvements to employ share based payment accounting, increased our income tax expense by approximately $500,000 in the first quarter of 2017 as a result of the expiration of stock options during the period. In the first quarter, we reported net income of $4.5 million or $0.28 per diluted share compared to net income of $10.3 million or $0.64 per diluted share in the prior year period. Total cash and cash equivalents as of March 31, 2017, were approximately $147.8 million compared to $120.0 million as of March 31, 2016, with no long-term debt. Capital expenditures were approximately $1.7 million for the three months ended March 31, 2017, compared to $3.1 million for the prior year period. Depreciation and amortization was $4.7 million for the three months ended March 31, 2017, compared to $4.9 million for the same period of 2016. Going on to Slide 6, second quarter 2017 outlook, our outlook for the second quarter of 2017 is as follows. APUS net course registrations by new students in the second quarter of 2017 are expected to decrease between 11% and 7% year-over-year. Total net course registrations are expected to decrease between 9% and 6% year-over-year. We believe that these prior year comparisons and the recent strengthening of certain military channels at APUS are the primary contributors to the modest sequential improvement and the decline of net course registrations by new students. Although a positive impact by our initial efforts to stabilize enrollment may also be a contributor. Excluding net course registrations by new students using – utilizing Federal Student Aid, year-over-year growth in net course registrations by new students is anticipated to be approximately flat to slightly positive in the second quarter of 2017. This represents the first time since the fourth quarter of 2012, excluding the quarter impacted by the government shutdown in 2013, that APUS will have realized year-over-year growth in net course registrations by new non-FSA students. In the second quarter of 2017, new student enrollment at Hondros increased by approximately 31% year-over-year and total student enrollment decreased by approximately 3% year-over-year. As Wally indicated earlier, we are pleased to see the turnaround in new student enrollment growth and the resulting improvement in total student enrollment at Hondros College of Nursing. Hondros new student enrollment clearly benefited from the opening of a new campus in Toledo, Ohio. However, on a same-campus basis, new student enrollment increased 6% compared to the prior year period. For the second quarter of 2017, we anticipate consolidated revenue to decrease between 10% and 7% year-over-year. Net income for the second quarter of 2017 is expected to be in the range of $0.19 to $0.24 per fully diluted share. As we execute on our plans and stabilize enrollment, we expect operating margins to be challenged, possibly to the point where total enrollment stabilizes as we would likely continue to invest in marketing, product development and student support services. In closing, APUS is focused on enrollment stabilization as an institutional goal that is beneficial to our students, alumni and other key stakeholders. We are encouraged by the smaller than expected decline in net course registrations by new students at APUS. As indicated by our outlook, we currently anticipate this trend will continue into the second quarter of 2017. We are also optimistic about the turnaround in new student enrollment at Hondros. However, we still have work to do and we have outlined the ongoing steps we are taking to improve enrollment, increased conversion rates and achieve other operational goals. Now, we would like to take questions from the audience. Operator, please open the line for questions.

Thank you, sir. [Operator Instructions] And our first question will come from the line of Peter Appert with Piper Jaffray. Please proceed.

Thank you. Wally, can you give us any more color on what’s driving the improved military performance?

I would say that we really are unable to predict that Peter. It was somewhat seasonal, I think in the first quarter, the month of February was up and other two months were down. And we are seeing a projected improvement in the second quarter. I don’t know that I can – technically, the $25 billion extra that was approved for the military and the defense budget isn’t going to improve the number of soldiers we have on duty for probably another 18 months based on my estimate. So maybe it’s just some people who have been looking at the estimated time that will end their investment and saying that they would rather have education paid for by TA before they become be a VA student, really unable to make a prediction at this point in time.

So it’s not better access to basis, it’s more or something, it some sounds like just a random occurrence from your perspective?

Well, in fact the base access issues that we have spoken about really haven’t ended because the new administration doesn’t have their appointees in place yet, so it’s definitely not better access to basis.

Okay. And Rick, can you talk about the year-to-year increase in G&A, what drove that and is this a new run rate number we should be thinking about?

No, we are looking hard at G&A. I wouldn’t take that as a new run rate number. Broadly, there are some professional fees we incurred in the first quarter, which drove that year-over-year increase. I would not project that as a new run rate.

Okay. And then can you give us an update on where things stand from a regulatory standpoint at Hondros?

Sure. We had issued a Q talking about a show cause that we had gotten from the current accreditor, ACICS. And on the good news perspective, we pointed out to ACICS that there were some placements that the show cause was related to placement rate. There were some placements that had not been accounted. They allowed us to open up the data files that they keep and started those placements and then it took a month or so before they reviewed them and then they vacated the show cause last Friday.

Excellent, great. Where do things stand on your new accreditation?

It’s in process. We have had some interim meetings. I believe that we will have our visit in November. So we are anticipating based on our preliminary visits with liaison we have been assigned, that all is in order there. It’s a good line of communications and we are certainly hopeful that the visit happens in November. We have good result and they inform us of a successful outcome in January or February.

And then lastly Wally, on the issue around the NCLEX scores, where do things stand on that?

They are improving Peter, we have put in a new curriculum primarily because the types of questions that were asked on the NCLEX, we had a nationally renowned consultant who said one of your reasons for your pass rates is they have changed type of questions more didactic and less memorization. So we changed our curriculum to be much more reflective of that. The curriculum was put in place last January. And so from the RN program, our first graduates test in the second quarter, but everything looks good and we have gotten – otherwise, we hired also somebody with experience in just improving NCLEX test rates in general, without even changing the curriculum. And in the latter part of last year, those test results started improving. And so far in the first quarter, they are improving. But the ones that we really expect to improve, we will start taking the test in the second quarter.

Okay, great. Thanks Wally and Rick.

Thank you. [Operator Instructions] Our next question will come from the line of Jeff Silber with BMO. Please proceed.

Hey, good afternoon guys. It’s Henry Chien calling for Jeff.

Hey, Henry.

Hi, guys. Just a question on some of your initiatives to stabilize enrollment, I know you touched a little bit on marketing enrollments. Is there anything that you can point to where you are seeing some signs of improvement or some signs of stabilization or any kind of – any metrics or anything that you follow where you are starting to see some kind of impacts from your initiatives?

Well, I think to give you really granular specifics is probably a little too soon to tell on that, but we have implemented – part of the issues we had, we were not satisfied with the first course pass rate of many of our FSA students. And it’s been a slow and arduous process. We put in an admissions assessment was the first thing that we did. After that admissions assessment, we looked at the test results. We altered the test results. We had a mandatory essay. We made some adjustments to that. And slowly, but surely, we have improved our quality, but we have reduced the number of FSA students as you can see, the pass rate has improved dramatically quarter-by-quarter. So we are doing the right thing and screening candidates to make sure that we accept students who are capable of completing our college courses and earning a degree in general. As far as non-FSA, the VA market has been pretty good for us and still continues to be pretty good, but it’s what I would call a market that is tough to predict because of the fact that the housing allowance for distance education students is only 50% versus a 100% for students who attend on-ground or face-to-face education. I think the slight improvement that we have seen with cash paid paying students is just due to a renewed focus on corporate – partnerships with corporations and relationships with those corporations and one of which we announced recently was our new relationship with the TSA.

Got it. Okay. And my follow-up, you actually just was curious on what drove the, I believe, you said it was 8% increase in new enrollments for cash, was that directly related to some of the corporate relationships that you are pursuing?

Yes, cash is pretty much related to corporate relationships.

Got it.

I mean, we have a too few oversea students who you may know that oversea students are not eligible for federal aid, but I think that – they are not as material as our students who get reimbursed for their tuition from employers.

Got it. Okay. And just finally on the TA improvement for next quarter, I know it’s hard to kind of parse out what’s driving that, but is there any sense of – if you have any confidence that it is kind of trying to keep continued?

Well, I would like to think that maybe it’s because there is a new attitude in Washington, but that’s – I can’t tell you that I’ve got any algebraic or magic formula that tells me that.

Yes, fair enough. Alright. Thanks so much, guys.

Sure. Thank you.

Thank you. I am showing no further questions in queue. So now it’s my pleasure to hand the conference back over to Mr. Chris Symanoskie, Vice President of Investor Relations, for closing comments and remarks. Sir?

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

Ladies and gentlemen, thank you for participation on today’s conference. This does conclude the program and you may all disconnect. Everybody, have a good day.