American Public Education, Inc. (APEI) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the American Public Education, Inc. Reports First Quarter 2020 Results Conference Call. [Operator Instructions].I would now like to hand the conference over to your speaker today, Chris Symanoskie, Vice President of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Operator. Good evening and welcome to American Public Education's discussion of financial and operating results for the first quarter of 2020. The 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 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 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, registrations, enrollments, revenues, expenses, earnings and plans with respect to recent, current and future initiatives, including marketing initiatives, efforts to stabilize and grow Hondros College of Nursing and expectations related to its profitability and information technology replacements and upgrades.Furthermore, these forward-looking statements include, without limitation, statements regarding investments and partnerships and the future impacts of and the company's response to the COVID-19 pandemic. Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including risks related to COVID-19 pandemic and the risk factors described in the Risk Factors section and elsewhere in the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC as well as 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 Angela Selden, our CEO; and Rick Sunderland, our Executive Vice President and CFO.At this time, I'll turn the call over to Angela Selden. Angie?

Thank you, Chris. Good evening, everyone. I will begin today's call by reviewing our first quarter results at both APUS and Hondros, which are in line with our expectations and largely unaffected by the COVID-19 pandemic. I will share highlights regarding positive momentum across both APUS and Hondros in the second quarter of 2020. We will discuss the activation of our business continuity plan in response to COVID-19 and the minimal impact COVID-19 has had on our Q2 2020 results.Finally, since the way we all work, learn and interact with one another is being shaped, perhaps permanently by the effects of the coronavirus outbreak, I will discuss how APEI is responding to increased demand for both online education and pre-licensure nursing education, opportunities that we could not have foreseen just a few months ago.We're moving to Page 3, first quarter results and priorities. In the first quarter of 2020, total net course registrations at APUS increased 1% year-over-year, and net course registrations by new students were essentially flat compared to the prior year period. Furthermore, net course registrations by new students at APUS increased year-over-year in most primary funding categories. Net course registrations by new students utilizing Tuition Assistance, or TA, increased 1.8% year-over-year. In fact, we experienced a year-over-year increase in net course registrations by new students from each branch of the military, except for the Navy, which continues to impose limitations on TA course approvals.Net course registrations by new students utilizing Veterans Benefits, or VA, increased 1.5%, and net course registrations by new students using cash and other sources increased 1.3% compared to the prior year period. New students using Federal Student Aid, or FSA, had net course registrations declined 5.6% year-over-year.We believe the increase in registrations among active duty military is driven in part by the launch of the AMU Freedom Grant, which was effective January 1, 2020, which extended our textbook and tuition grants to military students at the Master's level. We plan to continue building on our strengths in the military, military-affiliated and veteran communities and working toward our goal of further increasing the number of military and military-affiliated learners with minimal or no out-of-pocket cost at AMU.The technology modernization project at APUS remains on track with our stated goal of completing our migration to a new Learning Management System, or LMS, by early 2021. Thus far, we have successfully transitioned nearly 60 courses and over 100 sections out of 1,750 unique courses, representing more than 1,700 registrations to the new LMS with no unscheduled downtime.Due to the feedback regarding the new cloud-based, next-generation online campus has been overwhelmingly positive, we plan to gradually accelerate the rollout each month using our newly adopted agile methodology. This summer, we also plan to further expand the functionality and integration of our CRM system, Salesforce, with other systems, which we believe will further improve our end-to-end student experience.Improved student persistence rates at APUS, combined with our new marketing messaging and our new technology capabilities, have given us the confidence to increase our investment in marketing to drive greater awareness and grow our student population, including among a military-affiliated and nonmilitary communities.We have also continued to develop new programs that we believe are attractive to working professionals seeking advancement in today's digital economy. APUS plans to launch a new BS in Data Science, a BS in Computer Science and an MEd in higher education administration as well as 10 new Associate's degrees for enrollment starting in July.Now we move to Hondros. I'm very pleased to report on the enrollment turnaround at Hondros College of Nursing. As a result, we credit, in large part, to the efforts of its hard-working faculty and associates. For the 3 months ending June 30, 2020, new student enrollment increased 56% year-over-year, a spring term record for new student enrollment. Total student enrollment increased 14% year-over-year driven by new student enrollments and improvements in retention. In its most recent interim report to ABHES, Hondros' accrediting agency, Hondros reported that every program at every campus met or exceeded the accreditation requirement for a 70% retention rate.Hondros management team remains optimistic about reaching profitability by the fourth quarter of 2020. This profitability target includes the start-up costs for the new Indianapolis campus, which opened for classes in April 2020. These numbers are substantial, considering the incredible changes occurring at Hondros in the last 6 weeks.As the COVID-19 crisis has demonstrated, our country needs even more nurses on the front lines, saving lives. In response to the stay-at-home orders in Ohio, beginning in Q2, Hondros moved nearly all of its courses online, a move that was accomplished in a short 5 weeks. Hondros' leadership team, leveraging the online expertise of APUS, migrated curriculum online and trained faculty on the new online learning modality, significantly accelerating this transition.Most of Hondros' course content has shifted to online learning and campuses are generally closed. Additionally, because Hondros qualifies as an essential service under this pandemic, students have access to in-person advising and to certain labs and other hands-on portions of the curriculum that are required to be held in person. Open portions of the campuses are regularly sanitized using rigorous hygiene protocols. All staff and students are required to undergo at health screening and follow CDC guidelines prior to entering the campus.While our nation's path to post COVID-19 conditions is uncertain, I believe that APUS and Hondros are providing a much needed sense of normalcy in the lives of most learners.Page 4, our COVID-19 response. Our team executed our business continuity plan with excellence in an uncertain environment, rapidly transitioning the APUS, APEI and Hondros enterprises to work from home while simultaneously addressing increased demand for online learning and pre-licensure nursing programs. Our primary concern has been and remains the health and safety of our students and our employees. To support our employees, we have implemented several hardship leave and flexible scheduling policies. We send our thoughts to those affected by the virus and recognize the selfless dedication of our nation's doctors, nurses, first responders and frontline workers, many of whom are alumna of our institutions.APUS recently announced Momentum 2020, earmarking up to $20 million in scholarship funds to help bridge the gap for up to 20,000 visiting undergraduate students whose studies have been interrupted by college closures or other disruptions due to COVID-19. This scholarship offers a 50% discount for those eligible-visiting students who start courses with APUS in May through August 2020. Given our regional accreditation by the Higher Learning Commission, students can evaluate the likelihood of credit transfer in collaboration with their home institutions.Our APUS IT department was well prepared for this crisis, with its critical services functions largely operating successfully under conditions of full remote working and high student demand. And our APUS learning platform is robust with the capacity to support the addition of thousands more new and returning students.Looking ahead, our leadership team is evaluating the eventual phased-in remote opening of our administrative offices, prioritizing the health and safety of workers as our primary consideration. We are actively working to establish a time line.APEI has substantial liquidity with $197 million in cash and equivalents at March 31, 2020, and no long-term debt, thanks to years of strong free cash flow and conservative financial and risk management. We have made it a priority to increase our communication with employees, some of whom are working remotely for the first time, and with students, many of whom may be experiencing new personal challenges. Despite these new challenges, APUS experienced the lowest course drop rate since 2002 for new and returning students.We believe that COVID-19 crisis has increased demand for online higher education and nursing programs. Most learners, including active duty military, are experiencing stay-at-home orders, travel restrictions or other disruptions, making online education an attractive option. While the era of home confinement and social distancing is temporary, traditional campus operations may not fully resume in the fall, and the difficult job market is likely to persist for some time.With a heritage of more than 25 years as a leader in online education, APUS is uniquely positioned to help a wide variety of learners affordably and without interruption. Similarly, Hondros College of Nursing, with its newly online programs and limited in-person coursework, is well positioned to help in the health care crisis by continuing to advance new nurses to the front lines.Our second quarter guidance reflects the increased demand for our online courses and nursing programs. The increase of APUS appears to be strongest among veterans and active duty military. Our belief is that net course registrations in the second quarter at APUS are being positively impacted by: one, our decision to provide the AMU Freedom Grant to military service members at the Master's level; two, increased marketing to elevate our affordability message; and three, increased demand for online programs brought on by COVID-19. We believe that enrollment demand at Hondros is driven by the successful execution of its enrollment recovery plan and the nursing shortage, as well by increased interest in students looking at a service profession, in part inspired by the pandemic.We believe that the long-term strategic initiatives at APUS and Hondros are beginning to have a positive impact on stabilizing and growing enrollment. As we have mentioned before, it is our top priority to grow APEI's core businesses, with an emphasis on addressing the national need for an adult learning platform where learners of all backgrounds can obtain the skills they need to maximize the return on each learner's educational investment. We intend to achieve this goal by building on our core competencies in online and nursing education, focusing on military and veteran communities, developing new flexible courses, modernizing our technology and elevating our brand message of maximizing learner return on educational investment with uplifting purpose-driven stories.As I stated at the beginning of our call, the pandemic has created an unexpected opportunity to amplify both the APUS and Hondros' value propositions to students, namely affordability, flexibility and quality of our student services and academic experiences, while fulfilling our social mission. This increased awareness in our programs represents an opportunity for us to further broaden referrals in support of sustained long-term enrollment growth once the crisis subsides.As I said to our employees at the start of the pandemic, this truly is our time to shine in service to others. Now more than ever, learners are counting on us so their studies can proceed without interruption. Our employees have truly risen to the occasion, having recognized early on that this crisis may also be a defining moment for our organization. I thank each and every one of them for their creativity and dedication.Now I will turn the call over to our CFO, Rick Sunderland.

Thank you, Angie, and good evening, everyone. On to Page 5, first quarter 2020 financial summary. American Public Education's consolidated revenue for the 3 months ended March 31, 2020, increased 1.6% to $74.6 million compared to $73.4 million in the prior year period. APEI segment revenue increased $1.4 million or 2.1% to $67.1 million as a result of higher net course registrations primarily from military students utilizing TA and the impact of the January 1 tuition increase. HCN segment revenue decreased $0.2 million or 2.7% to $7.5 million as a result of lower total student enrollment.In the first quarter, total cost and expenses decreased year-over-year by 0.2% to $71.9 million as compared to the prior year period. In the prior year period, we recorded a $5.9 million pretax noncash impairment of goodwill in our HCN segment. The decrease in cost and expenses for the 3 months ended March 31, 2020, was primarily due to no impairment of goodwill in our HCN segment in the current year period partially offset by increased advertising costs and technology costs in our APEI segment.Consolidated instructional costs and services expenses increased approximately $1.3 million to $29.2 million, and as a percentage of revenue, increased to 39.2% compared to 38.0% in the prior year period. The increase was primarily due to an increase in employee compensation costs in our APEI segment.Selling and promotional expenses increased approximately $3.2 million to $18.2 million, and as a percentage of revenue, increased to 24.4% of revenue compared to 20.5% in the prior year period. The increase was primarily the result of an increase in advertising costs in our APEI and HCN segments and an increase in employee compensation costs in our APEI segment.Advertising costs increased $2.3 million in our APEI segment and $0.2 million in our HCN segment as compared to the prior year period. General and administrative expenses increased approximately $1.9 million to $21 million, and as a percentage of revenue, increased to 28.1% from 26.0% in the prior year period. The increase in general and administrative expenses was primarily due to an increase in employee compensation costs and professional fees in our APEI segment. The current year period includes $0.9 million in information technology costs in our APEI segment related to replacements and upgrades to our information technology systems, including the rollout of our new Learning Management and Customer Relationship Management systems.Consolidated bad debt expense was $1.0 million or 1.3% of revenue in the first quarter of 2020 compared to $1.0 million or 1.4% of revenue in the prior year period. Depreciation and amortization expenses decreased approximately $0.8 million to $3.3 million, and as a percentage of revenue, decreased to 4.5% of revenue from 5.5% in the prior year period.Operating income for the first quarter of 2020 increased by $1.3 million to $2.7 million compared to operating income of $1.4 million in the prior year period. The 3-month period ended March 31, 2019, includes a $5.9 million pretax noncash impairment of goodwill in our HCN segment. HCN segment expenses in the first quarter of 2020 include approximately $150,000 of start-up costs related to the opening of its Indianapolis campus. Consolidated net income for the quarter was $2.4 million or $0.16 per diluted share compared to net income of $1.0 million or $0.06 per diluted share in the prior year period.Total cash and cash equivalents as of March 31, 2020, were approximately $196.8 million compared to $202.7 million as of December 31, 2019. Cash from operations for the quarter increased 46% to $11.5 million compared to $7.9 million in the prior year period. Capital expenditures for the first quarter of 2020 were approximately $1.9 million compared to $1.6 million in the prior year period.Going on to Page 6, second quarter 2020 outlook. Our outlook for the second quarter of 2020 is as follows: at APUS, total net course registrations are expected to increase between 6% and 10% year-over-year, and net core registrations by new students are expected to increase between 8% and 12% year-over-year. At Hondros, total enrollment increased by 14% year-over-year, while new student enrollment increased 56% compared to the second quarter of 2019.In the second quarter of 2020, we expect consolidated revenue to increase between 8% and 12% year-over-year, with year-over-year increases in both our APEI and HCN segments. The company expects diluted earnings per share to be between $0.20 and $0.25 in the second quarter of 2020. The consolidated outlook for second quarter earnings per share includes the following items, which we generally view as important investments in our growth initiatives: number one, a year-over-year $1.3 million increase in advertising expense to further drive registrations growth at APUS. The growth in new and returning registrations gives us confidence to support elevating our selling and promotional expense by $10 million to $15 million in the full year 2020 as compared to 2019.Number two, approximately $1.8 million in costs associated with our technology modernization projects. As we mentioned last quarter, we anticipate the full year cost of the technology modernization project to be between $6 million and $8 million in 2020, of which approximately 80% is related to implementation.We are pleased by the expected growth in net course registrations at APUS. To date, the increase in demand for courses is being driven by students utilizing TA and VA as well as by those utilizing cash and other sources to fund their tuition, with no apparent negative impact from COVID-19. Furthermore, our decision to increase tuition grants to military service members at the Master's level and our increased investment in marketing, 2 important elements of our long-term strategic plan, appear to be having a positive impact.We are excited about the enrollment turnaround at Hondros. We believe the return to enrollment growth is the result of the successful and ongoing execution of the enrollment recovery plan as well as possibly increased interest in nursing as a result of COVID-19. In short, we are excited about the possibilities for near-term and long-term growth at both APUS and Hondros.Now 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 Henry Chien with BMO.

I wanted to -- congrats on the great turnaround and growth metrics. I was wondering if you could maybe provide a little more color in terms of what you're seeing, maybe from the data from or from -- or otherwise internal metrics? What drove that growth that's sort of carrying into 2Q as well? If you could maybe attribute it to COVID versus marketing or any other way that you maybe look at it.

Rick, go ahead.

Sure, Henry. Thanks. It's Rick. Yes, thank you. So really, the 3 elements, I believe, were outlined in Angie's section of the presentation. And really, all are contributing to the success. Number one, increasing the grant to our graduate military students and extending what was previously limited to the undergraduate population, the book grant, has really had a favorable impact. What it means is for our military TA students, all military TA students may go to -- get a degree without any out-of-pocket costs. And I say may because they're just a very small number of courses where there's course materials that they would have to pay out of pocket for. But almost in totality, with the book grant and by increasing the tuition grant, all those TA students attend and can graduate with no out-of-pocket costs.The second is the increase in advertising and marketing. We are seeing improved lead flow, and our conversion rates have been as good as they've ever been. So that's really driving new student growth.And then as Angie said in her presentation, we're seeing excellent retention. And so the quality mix is being maintained. That's something we've worked on hard for a long time. And so it's driving both new student as well as returning student registrations.And finally, for all the reasons stated, we do think COVID has created an opportunity both at APUS and Hondros for students to go online. Quality, affordable, very flexible, accessible, all the attributes that we've held firmly to for many, many years are now attributes that are, I think, critically important in the current environment in which everyone is living and which we're operating. So it's really a combination of those 3 that are delivering the results that we expect to see in the second quarter.

Okay. Got it. Yes. Yes. I mean I'm also trying to understand of -- how much of that is purely COVID-related versus -- I mean it sounds like it's just like an inflection from the grant. But for the new students for 2Q, is that, I guess, both -- is it primarily also in TA? Or is it like expanding beyond like military population?

Yes. So two parts to that. So it's really hard to draw a fence around any individual element, right? They're all interrelated. So not really parsing that down among the three. We continue to see strength in the military. So yes, we're seeing that extend. The results we reported for the first quarter are extending into the second quarter as it relates to the military.

[Operator Instructions]. Your next question comes from the line of Greg Pendy with Sidoti.

Just first of all, on the marketing. Just for the year, is there anything noticeable just in terms of the channels you're marketing through? Any changes on that? Or has it just been pretty much going through the same kind of channels that you've been marketing in the past, but with the more value-focused message and kind of the increased spend?

Greg, it's Angie. Great question. Thank you. As you can imagine, our marketing team had begun the pivot really in the first part of March. Many of the channels that had historically been a good yield for us were no longer relevant. And consequently, we had really 3 different channels -- 3 different levers that we had to focus on. Number one, redirecting the spend that we had already planned to attribute to, more on ground-type channels to direct those to other paid lead sources, primarily digital and social lead generation sources. So that was number one. Number two, we actually accelerated marketing dollars that we had intended to spend in the back half of the year and pulled some of that forward in order to be able to take advantage of what we saw to be an opportunity for us, particularly on the APUS side, to begin to get the word out about our online education as an alternative to those students who are suffering in setback as a result of their campuses closing.And then number three, in conjunction -- so that would basically be part of what was already in our financial plan for 2020, just redirected and then pulled forward in order to take advantage of these circumstances. Then number three was the increased spend amount, which we did continue to execute against the plans around micro segments that we believe can be specifically positively impacted by additional marketing investment. And that was the plan that we had put in place and discussed in the last earnings call, and we continue to execute against that.

That's very helpful. And then I guess just one final one, just on Hondros. Is there any disruption in terms of -- are there any sort of residency-like requirements in terms of graduating for certain kind of courses that students would be taking that might be disrupted, given everything that's going on at the hospitals?

Great question. Two important developments, we think, at Hondros. The first of which was the on-ground campus directors and our academic deans worked in conjunction with the Ohio Board of Nursing to allow our students who were supposed to be sitting for the NCLEX certification to licensure tests. However, the testing centers were closed. So our team worked with the Ohio Board of Nursing to allow those students to become practitioners and have an opportunity to sit in the future for those tests. And so we were able to get our students who had just graduated out into the workplace to help with this pandemic situation.Second, in all the other coursework that we have in front of us currently, we have evaluated each component of the coursework and have determined which parts of that coursework need to be conducted in an on-ground setting. What we're doing is we're basically splitting up the lab times across the students in cohorts of less than 6 people, alternating days and alternating times of the day, such that we adhere to social distancing guidelines. And so we have really focused on making sure that we follow those guidelines. But at the same time, for those labs that require specific demonstrable mastery of the critical nursing skills, that we still offer the students a safe way to be able to move forward in their coursework.

There are no further questions at this time. I will turn the call back over to Mr. 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. Have a great evening. Bye, bye.

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