Good day, ladies and gentlemen, and welcome to Q3 2017 American Public Education, Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I will now like to introduce your host, Mr. Chris Symanoskie, Vice President of Investor Relations. Sir, the podium is yours.

Thank you, Brian. Good evening and welcome to American Public Education's discussion of financial and operating results for the third quarter of 2017. Presentation materials for today's conference call are available via the Webcasts section of our Web-site and are included as an exhibit to our current report on Form 8-K, furnished with the SEC earlier today. Please note that statements made in this conference call and in the accompanying presentation materials regarding American Public Education or its subsidiaries that are not historical facts may be 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 events and 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, amount in nature of anticipated charges, expected registrations and enrollments, expected revenues, expected earnings, and plans with respect to recent, current 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 and quarterly reports on Form 10-Q, 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, I'll turn the call over to Dr. Boston.

Thanks, Chris, and good evening everyone. I'd like to start with Page 2 of our slides. I am pleased to report tonight that consolidated revenues and earnings per share for the third quarter of 2017 were higher than we anticipated. This outperformance was driven primarily by higher than expected net course registrations at APUS. Although APUS experienced a year-over-year decline in net course registrations during the third quarter of 2017, the rate of decline lessened compared to the rate of the previous three quarters. Net course registrations by new students at APUS declined 5% and total net course registrations declined 4% compared to the prior year period. In the third quarter, net course registrations by returning students also declined by 4% year-over-year. The overall decline in net course registrations by new students at APUS was largely driven by a 20% year-over-year decline in net course registrations by new students utilizing Federal Student Aid or FSA. In addition, net course registrations by new students utilizing Veterans Benefits, or VA benefits, declined 6% year-over-year. These declines were partially offset by a 2% year-over-year increase in net course registrations by new students utilizing Military Tuition Assistance or TA, and a 10% year-over-year increase in net course registrations by new students utilizing cash and other sources. In July of 2017, the first course pass and completion rate of undergraduate students using Federal Student Aid at APUS continued to improve and reached its highest level since the year 2011. We believe that the continued increase in this measure of student persistence is an indication that the course enhancement or retention initiatives we have launched over the last few years appear to be improving student success. For the three months ended September 30, 2017, or the summer term of 2017, total enrollment at Hondros School of…

Thank you, Wally. American Public Education's third quarter 2017 consolidated financial results include a 0.7% decline in revenue to $73.3 million, compared to $73.8 million in the prior year period. The decrease during the period is attributable to a 3.3% decrease in revenue in our APEI Segment, partially offset by 24.6% increase in revenue in our Hondros Segment, when compared to the prior year. In the third quarter, our APEI Segment revenue decreased to $64.9 million, compared to $67.1 million in the prior year period. The decline in APEI Segment revenue is primarily attributable to a decrease in net course registrations. Hondros Segment revenue increased to $8.4 million in the third quarter, compared to $6.7 million in the same period of 2016. The increase in Hondros Segment revenue was primarily due to an increase in student enrollment and an increase in revenue per student resulting from a change in program mix and other factors. On a consolidated basis, costs and expenses decreased 10.5% to $65.7 million, compared to $73.4 million in the prior year period. Please note that the prior year period includes a $4.0 million loss on the abandoned development of a new student registration engine in our APEI Segment, and a $4.7 million impairment charge resulting from the reduction of the carrying value of goodwill in our Hondros Segment. For the third quarter, consolidated instructional costs and services expense or ICS as a percentage of revenue increased to 39.2%, compared to 38.4% in the prior year period. Our ICS expenses for the three months ended September 30, 2017 were $28.7 million, representing an increase of 3.1% from $28.4 million for the three months ended June 30, 2016. The increase in ICS expenses was primarily the result of increases in employee compensation expenses in our Hondros Segment and an…

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

So, Wally, given the improving trend in starts, why the what seems like might be cautious guidance for the fourth quarter?

I went over this a little bit last quarter, Peter. So, since the services have pretty much out-moved and held to a 30-day registration process for TA, we don't get the lengthy insight into that. So if we have a quarter where we have to give guidance and only have one month of the actual, you might imagine that without the November drops and then really not having much of a runway into December, we have to be fairly conservative. And so, I would tell you that we are trying to work with the current enrollments we have with TA and they could bounce back or they may not. So we are going with the number that we think we can achieve.

So, is the issue in terms of how the process works that the services don't release funding or they are only releasing funding on a month by month basis, is that the [problem] [ph]?

I don't know that that's the case. I just know that they are not approving the TA request until it's 30 days before the course starts.

Okay. So the fundamental issue is that the military students don't know if they can go, so could increase volatility from your perspective, but it seems like the underlying demand is there if the funding is in place. Is that fair?

Yes, exactly. I mean it's just that the way the academic year works for Federal Student Aid, those students can register for up to five months. And so, any of our students can register for up to five months out, but we won't see approved TA requests for anyone that registers more than 30 days out. And for some of the automated systems, they are actually not even allowed to enter the system until the 30th day before the class starts.

Okay. And Wally or Rick, your thoughts on selling costs? So the selling expense was up fairly meaningfully on a quarter to quarter basis. I guess this is still some of the tweaking of the marketing and student acquisition programs. Can you just talk a little bit more about that?

Sure. We talked about on our last call that we were going to do a pilot of about $1 million in extra advertising cost for the third quarter, and preliminarily we like that outcome. So, from a spend perspective, we are going to try to spend at our 20% in the fourth quarter, and that's what we have the number at.

And in terms of the incremental spend, I mean where are you directing it, where does it show up, I mean is this what's driving the – how does it flow through from an enrollment perspective?

When we make decisions to do incremental spend, the last thing we are going to spend it on is traditional TV and radio advertising. We don't use lead aggregators. We do our own lead generation internally. So we have a pretty sophisticated SEO operation internally, and so we look at word combinations and search terms that we believe if we put extra money in, we won't distort the cost of our normally bid keywords, and we are really focused on student profiles that we think will persist better long-term. So, that's where we spend our money.

So for the Title IV enrollments, it doesn't really look like there is – I guess it's getting sequentially less bad, but still down 11%. What's driving the weakness there?

We have been very focused for a number of years now in improving the quality of our FSA students, and in improving the quality, we want to reduce the percentage of students who start with us and fail. So, we put in an admissions assessment, we put in – changed the way we disperse our funds, because we also wanted to drive down bad debt, because we find that the students who fail basically leave early and don't repay their loans. And we've had to do all of this through an academic lens versus anything such as geo-targeting, which is not allowed. So, it's been a very slow and laborious process. But part of it is just exacerbated by the fact that our tuition is so low, students can borrow much more than the tuition and there is very little we can do to stop that. And so, what we tried to do is define ways to make sure that we have students whose primary goal is to succeed as a college student.

Okay. Just two other things; one, Rick, your assessment of potential changes in the tax code and how it could impact the business?

At 43%, we're right up there at the top. So we're looking for a relief. The 43% is a bit of an outlier and we don't expect it to maintain at that level, but even at 39% to 40% it would be helpful.

I think the individual changes related to corporations not being able to deduct the cost of tuition for their employees, I think it's a little too soon. I don't know that that is big of an impact as if employees have to record that tuition reimbursement as income. So, until we get more clarity on that as they go through the negotiating sessions, Peter, I think it's too soon to tell. I mean the only good news is that – what would be really interesting would be to see if under where the employees might have to declare that as income, would they include government reimbursement such as tuition assistance in the same category. Usually they make exceptions for the military since they typically tend to be paid less. So I would hope that would be a carve-out, but we'll see.

Okay. And then last thing, Wally, anything new on the alternative accreditation for Hondros?

Yes. I mean, we have submitted our self-studies, we have had our visits, and we are in process to come before I think it's the Board that has for approval in January, and we believe that we are on a path to do that successfully. So we'll see.

Great, thank you.

[Operator Instructions] Our next question comes from the line of Alex Paris from Barrington Research. Sir, your line is now open.

This is Chris Howe sitting in for Alex Paris. I had a question in regard to the new programs that you had mentioned, the Strategic Intelligence and also the Global Security. You mentioned some of the remaining costs in 2017. Should we expect more costs to accrue in 2018, and is there an expectation for when you will be breakeven or profitable within these two new programs?

We certainly will have ongoing costs because we are going to launch the programs in January. We've got our first cohort. I think the date that we'll set the enrollment for that first cohort is sometime the middle of this month. So, we are certainly not expecting to breakeven in the first quarter, even the first half of next year, and I think where the breakeven point is, it just depends on the enrollments. We are not doing – I don't know if we have given clarity on this, we are not doing monthly starts in the doctoral program. There is just not going to be as much as of a demand. So we are doing three starts a year. And like I said, I think the breakeven point will probably be fairly dependent on the enrollments we have in January and May, which are our first two starts.

Okay, that's very helpful. And then my next question is just broadly speaking about Hondros, and you mentioned the [influx] [ph] pass rates, can you perhaps provide some more color on the value proposition to students that's leading the growth in enrollments?

Sure. We had always planned on expanding Hondros. We thought that there was an unmet need in the state of Ohio, and Toledo was our first choice for location. We were delayed by a couple of years because of the delay by the Department of Education approving our change of ownership. But one of the things that we identified pretty quickly in the Toledo market was that there were nine schools with PN programs only, and those schools with ADN or RN programs, not in those schools, but those nine schools did not have those programs. There was also an unmet need from the state of Michigan, which is pretty close to Toledo. And so, when we opened Toledo, even though our normal plan for a Hondros startup is to start students in the PN program, graduate them and then start the ADN program, there was so much demand in that marketplace for ADN students that after one quarter we started an ADN class. So, not only is the facility meeting our, exceeding our expectations in PN enrollments, it's far exceeding our expectations in ADN enrollments, because we really had not planned on ADN enrollments at all for 2018. So, really we are responding to the needs of the marketplace and I think we've been very successful so far.

That's very helpful. Thank you for taking my questions.

And now I'm showing no further questions. I would like to turn the call back to Chris Symanoskie for any further remarks.

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

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