American Public Education, Inc. (APEI) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the American Public Education Third Quarter 2019 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Chris Symanoskie, Vice President, Investor Relations. Thank you. Please go ahead.

Thank you, Operator. Good evening and welcome to American Public Education's Discussion of Financial and Operating Results for the Third Quarter of 2019. Materials that accompany today's conference call are available in the Events and Presentations section of our website 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 subsidiary 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 risk 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, make, should, will and would. These forward-looking statements include without limitations statements regarding expected growth, expected registration and enrollment, expected revenues, expenses and earnings and plans with respect to recent, current and future partnerships, investments and initiatives, including efforts to rebuild the nursing platform as well as information technology replacement and upgrades. 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 factor section and elsewhere in the company's most recent 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 events occurred in the future. This evening, it’s my pleasure to introduce Angela Selden, our President and CEO and Rick Sunderland, our Executive Vice President and CFO. At this time I’d now like to call – turn the call over to Angela Selden. Angie?

Thank you, Chris and good evening everyone. It's a pleasure to speak with all of you. This evening I will comment at a high level on both the recent quarter and my first impressions after 50 days about the strength and opportunities at APEI. The skill gap and the high cost of higher education are creating a national crisis. Workers can no longer afford to learn the skills that employers need. According to Wiley Education Services annual survey, 64% of the 600 HR leaders surveyed said there is a skill gap in their company. Pair that with a $1.4 trillion outstanding student loan debt and these two forces are colliding to create unmatched opportunity for those positioned to provide today's workers with access to high quality, flexible and career-relevant degree programs and workforce training that is either affordable or debt-free. It is important for our key stakeholders to understand that my priority is to grow APEI's core business with an emphasis on addressing this national need for affordability to upscale America's workforce. While the third quarter results met or slightly exceeded the company's outlook, the performance does not reflect the strong foundation and the market potential for APEI. As we move forward, our primary focus will be to grow the core business through increased learner and course enrollments across all brands, and to accelerate our reach to provide affordable, accessible, relevant and high quality post-secondary education and training to new learner markets. In the third quarter of 2019, net course registrations by new and total learners at APUS declined 5% year-over-year. The decline was primarily driven by an 11.9% decline in net course registrations by new learners utilizing military tuition assistance or TA. The decline in net course registrations by new learners utilizing TA was largely impacted by the temporary exhaustion of Navy TA program funds. As previously noted, the U.S. Navy announced that TA benefits available to sailors were expected to be exhausted by the end of May and effective May 28, 2019, the Navy ceased approving TA program funds until the start of the new government fiscal year on October 1, 2019. APUS anticipated that this development would result in a loss of 4,300 net course registrations during the third quarter. However, actual results were better than that anticipated loss by approximately 630 net course registrations. Net course registrations by new learners utilizing Federal Student Aid, or FSA, were also slightly better than expected. That said, APUS did experience a 7.7% decline in net course registrations by new learners utilizing FSA, compared to the prior-year period. The declines were partially offset by a 9.6% increase in net course registrations by new learners utilizing Veterans Benefits or VA, and a 5.4% increase in net course registrations by new learners utilizing cash or other sources. I believe APUS remains one of the best-kept secrets in higher education. One of the key reasons I joined APEI is to accelerate the positive impact that APUS can have on delivering higher education with low debt or no debt to working adult learners. As of May 2019, approximately 72% of the 90,000 APUS alumni graduated with no APUS-incurred student loan debt, demonstrating leadership in our national mission to provide affordable, accessible and relevant higher education to adult learners of all kinds. In pursuit of that mission, APUS recently announced an increase in tuition grants for active-duty soldiers who pursue undergraduate and master's level courses. The APUS book grant was also extended to now include active-duty military learners at the master's level. Previously active-duty learners pursuing master's level courses at APUS paid for their textbooks and either financed or paid out of pocket any differences between the Department of Defense TA benefit and the higher per credit hour cost of the graduate tuition. We believe the new tuition grants and the extension of the book grant may increase the number of active-duty military learners at APUS with no out of pocket cost, especially at the master's level. The extension of grants to benefit more military students continues to fulfill our commitment to service members and reflects our intention to expand our presence within our core military community. Ushering in a new period of sustained enrollment growth at APUS must be supported first by leveraging APUS capability in our core military and military-affiliated markets. As APUS was founded on the principle of assisting military learners who face barriers to degree completion, going forward we will work to assist new learner populations with similar characteristics where APUS can have meaningful impact on their success. Historically, the message of affordability in advertising at APUS has been subtle. I believe especially given this national conversation about rising tuition and student loan debt in higher education, there are opportunities to create large scale awareness and attract college-ready students with the primary message of affordability and value. At my direction and with the support of APEI's Board of Directors, we recently began a detailed review of our operations and current market opportunities for the APEI businesses. With my prior experience in large-scale business transformation, these efforts may help discover and prioritize important growth areas and lead to streamline processes, improve capabilities and better tools. The recent modest tuition increase at APUS, the first since 2015, is intended to support new investments in academic learning and student operations. We recently completed an evaluation of our information technology ecosystem, which resulted in a plan to upgrade and replace our learning management system in 2020 to modernize the APUS campus for students and faculty. Also we intend to improve the operational effectiveness of each department and many of the major functions within the university, beginning with the replacement of the CRM systems for both APUS and Hondros, which is already under way. We believe this technology transformation program, which is anticipated to cost between $6 million and $8 million in 2020 will enable APUS to better accommodate new flexible learning modalities such as credential seekers, dual degrees and custom programs for partnerships to serve new market segments, improve the operational effectiveness of our enterprise, and enhance the learning experience for students and faculty. In addition to having met many enthusiastic employees at APUS during my first 50 days at APEI, I've spent time with the management team at the Hondros College of Nursing visiting campus locations, speaking with students and reviewing Hondros enrollment growth recovery plan. As part of their comprehensive plan, Hondros, or HCN, has taken steps to build a strong pipeline of Practical Nursing, or PN, students, which serves as the primary theater to Hondros Associate Degree in Nursing, or AND program. Although student enrollment in Hondros PN program declined 9% year-over-year in the fourth quarter of 2019, the enrollment decline has lessened, representing a dramatic improvement compared to the more precipitous declines of the last several quarters. Overall, HCN's new and total enrollment increased by 53% and 13% sequentially, or compared to the third quarter of 2019. In addition, HCN, or Hondros, team reported improved student retention compared to last year, success with the deployment of the new sales force CRM software and continued progress with its new Indianapolis campus that is scheduled for opening in 2020 pending regulatory approval. In short, we are pleased with the positive momentum building at Hondros. In summary, it is an important priority for me to strengthen all aspects of the APEI core business, in part by unleashing that potential that currently exists within the organization. The initiatives we discussed today are really just the beginning of our growth story. Yesterday was Veterans Day and it was a clear reminder about what attracted me to APEI, fulfilling our mission to bring affordable, accessible, relevant, high quality educational experiences to learners who are driven to succeed. Frankly, I believe APEI is one of the best platforms available today that can continue to have a positive impact on providing workers access to affordable upskilling and have a voice in the national conversation around low debt and no debt in higher education as learners pursue their dreams of improving the lives of their families and of themselves. It is the highest honor for me to read APEI through this important part of its history. And now I will turn the call over to our CFO, Rick Sunderland.

Thank you, Angie, and good evening. Going on to Page 3, American Public Education's consolidated revenue for the three months ended September 30, 2019, decreased $5.1 million or 7% to $67.9 million, compared to $73 million in the prior-year period. APEI segment revenue decreased $2.6 million or 4.1% to $61.2 million, due primarily to the temporary exhaustion of Navy TA program funds during the period. HCN segment revenue decreased $2.4 million or 26.8% to $6.7 million, due to a decline in student enrollment. Total cost of expenses increased 7.1% to $70.8 million for the three months ended September 30, 2019. The results for the quarter reflect the following on a pre-tax basis, $2.8 million in employee compensation costs for post-employment benefits that will be payable to the APUS President upon retirement, a $1.6 million increase in advertising costs as compared to the prior-year period, a $1.5 million non-cash impairment of goodwill, and $800,000 in information technology costs related to the evaluation of replacements or upgrades of our technology and learning management systems, which by the way was approximately $400,000 lower than we anticipated. Consolidated bad debt expense for the third quarter of 2019 was $1.0 million or 1.5% of revenue, compared to $1.3 million or 1.7% of revenue in the prior-year period. APEI's consolidated net loss was $1.6 million or $0.10 per diluted share for the three months ended September 30 2019. However, adjusted net income for the third quarter of 2019 was $1.8 million or $0.11 per diluted share. Adjusted net income, a non-GAAP measure, excludes the $2.8 million in employee compensation costs in our APEI segment, and the $1.5 million impairment of goodwill in our HCN segment, as well as the applicable tax effect of the adjustments. Our core business continues to generate strong operating cash flow. Cash flow from operations increased 25% to $31.9 million, compared to $25.6 million in the prior year. Accounts receivable decreased by $6.1 million compared to December 31, 2018, driven primarily by improved payment processing at the Department of Defense. Total cash and cash equivalents as of September 30, 2019, was approximately $210.1 million compared to $212.1 million as of December 31, 2018. Cash and cash equivalents was reduced by $27.3 million used to repurchase our common stock. During the nine months ended September 30, 2019, the company repurchased approximately 966,000 shares of its common stock. Capital expenditures for the nine months ended September 30, 2019, decreased to $4.2 million compared to $5.3 million in the prior-year period. Going on to Page 4, fourth quarter 2019 outlook. Our outlook for the fourth quarter of 2019 is as follows. In the fourth quarter of 2019, we expect consolidated revenue to decline between minus 7% and minus 3% year-over-year. The temporary exhaustion of Navy TA program funds is expected to negatively impact October 2019 revenue by approximately $400,000. But we do not expect a significant impact in November. However, we are unable to predict whether and to what extent the Navy will continue to impose limitations on TA program approvals as a result of limited funding. The company expects diluted earnings per share to be between $0.35 and $0.40 in the fourth quarter of 2019. The consolidated outlook for earnings per share includes the impact of any share repurchases that may occur during the fourth quarter of 2019. In the fourth quarter, we anticipate spending an additional $1.0 million on our information technology upgrades and replacements, and spending between approximately $6 million and $8 million in 2020 focusing on specific information technology projects including replacements of our learning management and customer relationship management systems. The $1.0 million for the three months ended December 31, 2019, is included in APEI's outlook for the fourth quarter. At APUS, total net course registrations are expected to be in the range of minus 2% to plus 2% year-over-year, and net course registrations by new students are expected to be in the range of minus 1% to plus 3% year-over-year. At Hondros, total enrollment decreased by 24% year-over-year, while new student enrollment decreased 20% compared to the fourth quarter of 2018. Effective January 1, 2020, APUS will increase tuition by approximately 5% for undergraduate and master's courses to support new investments in academic learning and student operations. As Angie mentioned earlier, APUS has also increased tuition and fee grants to our active duty military students at both the undergraduate and graduate levels, and extended the book grant program to now include active-duty military learners at the master's level. APUS estimates that the tuition grant will apply to approximately 60% of its total net course registrations made on or after January 1, 2020. We believe the new tuition grants and the extension of the book grant will increase the number of active duty military learners at APUS that may pursue an undergraduate or graduate degree with no out of pocket cost. We believe this will further strengthen our leadership position within military and military-affiliated communities. Now we would like to take questions from the audience. Operator, please open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Greg Pendy from Sidoti. Your line is open, please go ahead.

Hi, thanks for taking my question. Can you just kind of give us a little color on how we should think about the cadence quarterly in 2020 of the technology spend, is it going to be front-half loaded or back-half loaded, or just kind of distributed throughout the year? Thanks.

Yes, hey Greg. I think it will be equally distributed across the year really ramping up these activities in the fourth quarter to get a running start on January 1, and so you'll see the spend likely relatively equally distributed across the four quarters of the year.

Okay, that's helpful. And then can you just kind of give us a little bit of color on the marketing spend? I think it was targeting Hondros and kind of how that played out and how you're thinking about that going forward?

Right. So there was an increased spend, we reported $1.6 million year-over-year increase. That was $1.3 million at APUS, and the balance at Hondros. So Hondros was spending into – was spending into the fourth quarter. Of course, APUS was spending into the fourth quarter also. And we did see the benefits. You can see the sequential increase in enrollments at Hondros, I believe was up – new students were up 53%, total enrollment was up 13%. At APUS, you can see from our guidance at least mid-point to the top end, we're basically zero or slightly positive. And so we're seeing those benefits. Of course, the fourth quarter also saw the resumption of the Navy. And I think as we previously reported on the second quarter call, we were talking about the potential impact of the Navy. Navy was up year-over-year through that May time period. And so we're seeing strength in the TA and including the Navy, and we expect that to continue in the fourth quarter.

That's helpful, thanks a lot.

Thanks, Greg.

[Operator Instructions] There are no further questions at this time. I'll turn the call back over to Chris Symanoskie.

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

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.