Ladies and gentlemen, thank you for standing by and welcome to the APEI Reports Second Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker for today, Chris Symanoskie. 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 second quarter of 2020. 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, plan, 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 grow Hondros College of Nursing 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 and the economy. 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 related to the 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 reasons, 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. Now, at this time, I'd like to turn the call over to Angela Selden. Angie?

Thank you, Chris. Good evening, everyone. I'd like to begin our call today first by expressing my gratitude to the faculty and staff of American Public University System, APUS, Hondros College of Nursing, HCN, and American Public Education, Inc. APEI. Our heritage of serving those who serves has never been more crucial in these unprecedented times. During our second quarter, our faculty and staff have selflessly mobilized to continue to safely serve our students. APUS students continued to benefit from our fully online operating model while [Technical Difficulty] to a modified learning environment with virtual coursework, supplemented by on-ground labs and clinicals. Please note that the health and well-being of our students, faculty, and staff remains a top priority. We are pleased to report that enrollment momentum continues, reflecting the ongoing transformation that has been taking place at APEI. APUS delivered double-digit increases in registrations from both new and returning students. At Hondros, both new and total enrollment increased meaningfully. Overall, we are pleased that our second quarter financial results are ahead of expectations. Today, we will also share news on our ongoing enterprise transformation, including new leadership, new board members, as well as positive progress on our technology modernization initiatives. We are incredibly grateful that a growing number of adult learners are seeking affordable, safe, and uninterrupted access to high quality, higher education experiences. Our institutions were built on the belief that quality education should be accessible to all, not reserved for the few. Our heritage and our belief has shaped today's APEI mission, to help adult learners of all backgrounds fulfill their purpose and obtain the skills they need to maximize their higher education return on investment, a term we call HEROI. Since our founding by a retired Marine Corps officer, APUS has strived to create a more…

Thank you, Angie. Good evening, everyone. American Public Education’s consolidated revenue for the three months ended June 30, 2020, increased 16.4% to $82.1 million compared to $70.6 million in the prior year period. APEI’s segment revenue increased 15.9% to $73.5 million, as a result of as a result of higher net course registrations, primarily from military students utilizing TA, which is of a lower revenue per net course registration than other funding sources. HCN segment revenue increased by 20.5% to $8.6 million, as a result of higher student enrollment, we believe the increase in enrollment at Hondros was due, in part, to the continued impact of initiatives implemented in 2019 as well as changes in the competitive landscape due to COVID-19 and increased demand for nursing education. In the second quarter, cost of expenses increased year-over-year by 12.6% to $73.1 million as compared to the prior year period. The increase in cost and expenses was primarily due to an increase in employee compensation costs, advertising and marketing support costs and professional fees in our APEI segment as well as an increase in instructional materials costs in our HCN segment, which was partially offset by a decrease in commencement and travel costs in our APEI segment. Consolidated instructional costs and services expenses increased approximately $2.0 million to $30.7 million and as a percentage of revenue decreased to 37.4% compared to 40.7% in the prior year period. The increase in instructional costs and services expenses was primarily due to an increase in employee compensation costs in our APEI segment, and an increase in employee compensation and instructional materials costs in our HCN segment, partially offset by a decrease in commencement and travel costs in our APEI segment. Selling and promotional expenses increased approximately $3.0 million to $17.1 million and as a percentage…

[Operator Instructions] Your first question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Thank you so much and congratulations on the momentum that you guys have going forward. I’m just curious, compared to the guidance that you gave us three months ago, from your perspective, what were the biggest areas of surprise?

Thank you for that feedback. Really appreciate it. Yes, hi. It’s Angie Selden here.

How are you?

I would say that – great, we’re very pleased with a few areas that our results of this platform and this investment and momentum that we’ve been building over the past three quarters. We’re very pleased that we’ve seen year-over-year increases in graduate programs and certificates in our military-affiliated segment. We’ve seen year-over-year increases in our undergraduate degrees and certificate for our non-military and certainly significant momentum across all different segments of our military. So, we’re just very pleased with the momentum that we’re seeing across all of those segments.

Okay, great. That’s helpful. Given that you’ve seen this big increase in demand, I’m just curious, from your perspective, can you handle this demand? What do you have to do to make sure that you can serve these students?

Great question. If you recall, in the first earnings call I had the privilege of participating in, we discussed our growth strategy, which was first and foremost focused on organic growth, focused on APUS and focused on Hondros. And in that organic growth strategy, we identified operational areas where we needed to invest both in talent and in technology in order to be able to grow the business and we had the good fortune of making the decisions to make those investments in advance of the pandemic, such that, we then as a result, we’re able to handle the increased demand without a hitch. So, we’re very grateful that we had begun the growth initiative in the fall of last year to lay the foundation for the operational capabilities necessary to support the increased volume due to the pandemic and some of the other investments we’ve made.

Okay, great. If I could sneak in one more, this one’s on Hondros. First of all, in terms of the numbers that you reported, can you remind me – the Indianapolis campus, is it already in the same-store number or I’m just curious what – if it’s not, what kind of your same-store enrollment growth would have been?

Rick, can you answer that question?

Yes, sure. Jeff, it’s not in the same-store. It opened April 1 of this year. So, it’s not in the prior number. The Indiana Board limits the initial enrollment for a new campus. And so, the enrollment this year will be limited to I believe a total of 30 students. So, it’s inconsequential to the large growth that we’re seeing at Hondros. That said, in the future, the expectation is, it will grow well beyond that and certainly contribute to the enrollment momentum we’re seeing at Hondros.

And is there any limit on opening up new campuses in that state?

In Indiana or Ohio?

Well, I know you already in Ohio and may be more room for more, but I was more curious about Indiana.

I’m not aware of any limitations. We’re authorized in that state. That’s a market-by-market evaluation, Jeff, and we’re going to obviously look to the most compelling markets as we think about opening additional campuses.

Okay. Fantastic. I’ll get back into queue. Thanks so much.

Thank you.

Your next question comes from the line of Austin Marlow [ph].

I had one on Hondros as well. Given what we’re seeing in healthcare now and knowing of all the macro trends that make nursing so in demand – countries’ needs, can you talk about how the nursing offering might evolve and potentially expand over time? Like, I believe that you have RN to BSN in Ohio and could that go more nationally or are there other to create tracks that you might experiment with over time?

I’ll start and then, Rick, if you have other comments to add, that would be great. So, thank you for your question. Today at Hondros, we offer two programs. We offer the PN program, which allows eligibility for students who sit through the NCLEX exam and become an LPN, and we offer an ADN program which allows a student to sit to become an RN. When – several years ago when Hondros was acquired, the other post licensure programs that were offered at Hondros were migrated to APUS. And APUS today offers some of those post-licensure degree programs. As you imagine, we are continuously evaluating the opportunities in the State of Ohio specifically as it relates to post-licensure degree programs and at the Board level, we discuss periodically which of those may be of interest for us to offer in the future, but at the present time, what we are committed to in Ohio and in Indiana is the PN and ADN program offerings.

Yes, I would just add that, when you think about Hondros and APUS together, we offer everything from an LPN which is at Hondros all the way through MSN Master of Science in Nursing at APUS. So, we do have a fairly broad nursing offering when you considered across the two institutions.

Got it. And would you be able to elaborate a bit more on the changes in nursing competition you mentioned in your HCN segment commentary?

You want me to answer that, Angie?

Sure. Yes, go for it.

Yes, I mean, quite simply, rather than choosing to go online and offer a blended virtual as well as on-ground offering, some schools, perhaps many just closed, thereby limiting the choices that prospective students have. So, they're very much a localized market in certain markets. The competition was reduced due to closure.

Got it. And my last question, you mentioned inorganic growth opportunities in the press release. Can you elaborate a bit on those? Is that referenced to the enterprise transformation or is that something else?

Well, I'll start by reinforcing what our APEI mission really is about, which is to provide learners of all backgrounds access to the skills they need to achieve their purpose and maximize their higher education return on investment. When we began the growth initiative in Q3 of last year, our focus was really on organic growth and making sure that we had the people, the processes and the tools in place to unlock organic growth at APUS and at Hondros. We additionally said we would be looking opportunistically for ways to continue to reinforce that mission of creating a platform, offering ways for learners to obtain new skills, but all underpinned by the notion of maximizing their higher ed return on investment or HEROI. So, we're very committed to making sure that the any additional learning experiences that we offer our students or our learners in the future really follow that principle. And so, we're evaluating now ways in which we can expand, how we serve those students beyond APUS and Hondros.

Great. Appreciate the color.

[Operator Instructions] And we do have a question from the line of Jeff Silber from BMO Capital Markets.

Thanks for letting me back in. Given we've got a big election coming up over the next few months, I'll ask the question that a lot of folks are asking. If we see a change in administration, do you think there might be any impact on your business and I'm specifically focusing on the inclusion in the 90/10 broad potential inclusion of military and veterans funding. Thanks.

I think I'll start at the high level and then, Rick, I'll turn it over to you for the 90/10?

Yes.

So, the thing that we're very pleased with, Jeff, is that our value proposition to students doesn't really fall into one or the other political side. The fact that we can offer students an incredible value proposition of affordability, high quality, and 72% of our students graduate with zero student debt, is something that both sides of the aisle will embrace. And so, we believe that's a message that perhaps has not been made widely known in the past about APEI and in particular APUS. And we're – as I mentioned on previous earnings calls, we're higher education's best-kept secret. And so, we really believe that, that value proposition will persevere in the face of whatever political wins come at us. I think I'd like to turn over the question on 90/10 to Rick.

Right. Jeff, so obviously, the conversation's not only about including TA and VA, but also about will it shift to 85/15. We pay very careful attention to that and at 90/10, if you look at the payer sources, I think you could surmise achievement of that. At 85/15, it's probably closer, and I would point out the experience of this quarter where albeit off a smaller number, cash and other was one of our fastest growing funding sources. So, we have an eye on that and we follow the details as it comes up periodically in Congress and in the Senate.

One of the things I'll also add is that, our marketing initiatives, recently in 2020, are really focused as we've discussed on past earnings calls on micro segments and one of the micro segments that we're focused on is something that will assist with creating some more distance on that 85/15 potential threshold.

Okay, great. Looking forward to hearing more progress on that. Thanks so much.

So at this time, there are no further questions. I would like to conclude the call for today. And I wish to thank you for your continued interest in American Public Education. Have a great evening everyone.

Ladies and gentlemen, this concludes today’s teleconference. You may now disconnect at this time.