Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the APEI Reports Third Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Ryan Koren, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to American Public Education's conference call to discuss third quarter 2022 financial and operating results. Joining me on the call today are Angela Selden, President and Chief Executive Officer; Rick Sunderland, Executive Vice President and Chief Financial Officer; and Steve Somers, Senior Vice President and Chief Strategy and Corporate Development Officer. Materials for the conference call today are available under the Events and Presentations section of the APEI website. Please note that statements made during this conference call and any accompanying presentation materials regarding APEI and its subsidiaries that are not historical facts may be forward-looking statements based on current expectations, assumptions, estimates and projections about APEI and the industry. In some cases, forward-looking statements may be identified by words such as anticipate, believe, seek, could, estimate, expect, can, may, plan, should, will, would and similar words or their opposites. Forward-looking statements include, without limitation, statements regarding expected growth, registrations and enrollments, revenue, net income, earnings per share and adjusted EBITDA as well as other earnings guidance, expected benefits of the acquisition of Rasmussen University, plans with respect to recent, current and future initiatives, including with respect to synergies and head count and future demand or expectations for online enrollment and nursing education. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, among others, risks related to the impacts of inflation, increases in labor costs and enrollment trends, the company's dependence on the effectiveness of its abilities to attract students who persist in its institutions programs, changing market demand, the effects of and the company's response to the COVID-19 pandemic and the reduction, elimination or suspension of tuition assistance programs, challenges with integrating acquisitions, regulatory matters, competitive pressures and those described in our presentation, today's press release, the company's Form 10-Q filed with the SEC today and 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 presentation contains references to non-GAAP financial information. A reconciliation between the non-GAAP financial measures we use and the most directly comparable GAAP measures is located in the appendix to our presentation and in our earnings release. Management believes that our presentation of non-GAAP financial information provides useful supplemental information to investors regarding our results of operations and should only be considered in addition to and not as a substitute for or superior to any measure of financial performance prepared in accordance with GAAP. I will now turn the call over to our CEO, Angela Selden. And Angie, please go ahead.

Thank you, Ryan, and thank you for your interest in American Public Education and for joining us today for a discussion of our third quarter 2022 financial results. First, I want to express gratitude to all those APEI team members that mobilized in the aftermath of Hurricane Ian to assist our nearly 5,000 Florida-based Rasmisin and APUS students along with the hundreds of faculty, staff and their families. From the generosity of our APEI employees, nearly 500 purchases were made of essential items and $50,000 in emergency funds were mobilized to assist those students most impacted. A big shout out to the Rassison-Florida campus operations team, the APUS emergency management team and the APEI finance, HR, facilities and executive assistance team, which assisted in enabling our Fort Myers and Orlando campuses to provide warm meals and places of respite for staff, students and their families during the early critical days of the crisis. Although about 185 Florida-based students postponed their Rates in education this quarter, we were pleased that we were able to fully resume educational operations in each of our 5 Florida markets this quarter. Turning to today's focus, 2022 continues to be a transformational year for APEI despite the headwinds based overall by higher education. APEI is increasing the floor of our recent adjusted EBITDA range, increasing the minimum and narrowing the range to $55 million -- $5.2 million to $58 million, aligning with the full year adjusted EBITDA guidance we provided in our September 22, 2022, supplemental financial information presentation. As we move to some headlines, first, the APS team, including new President, NewNoFernandis, continued to deliver revenue growth, for both Q3 '22 and year-to-date '22 for new and total student registrations and continues to expand margins due in part to cost savings delivered to last year's…

Thank you, Angie. For the third quarter of 2022, total revenue was approximately $150 million, up approximately $51 million or 52% from the comparable prior year period due primarily to the addition of Rasmussen and graduate school revenue in the 2022 period. Note, we acquired Rasmussen on September 1 of last year and graduate school in January 2022. And therefore, the 2021 period includes only 1 month of Rasmussen revenue and no revenue from graduate school. At APUS, revenue was $68.7 million, an increase of approximately $3 million or 4% as compared to the prior year period. The revenue increase was due to a 3% increase in total net course registrations in the third quarter of 2022 compared to 2021 and the timing of registrations in the quarter. We are encouraged by the fact that new student registrations were up in all 3 of our channels: active duty military, veterans and other service-minded students during 3Q 2022. Batista's revenue was $61.5 million during the third quarter of 2022, a decrease of 7% when compared to the pro forma 3Q 2021 period, driven by a decline in total enrollment compared to the prior year period. Hondros revenue was $11.4 million, an increase of $0.2 million or 2% as compared to the prior year period. This increase is driven by the year-over-year enrollment growth. Additionally, consolidated revenue for the quarter includes approximately $8 million of graduate school USA revenue in Corporate and Other. On a consolidated basis, API adjusted EBITDA was $9.5 million for the current year quarter compared to approximately $9.3 million in the prior year period. The current quarter results represent an adjusted EBITDA margin of 6.3% as compared to an adjusted EBITDA margin of 9.2% in the prior year period. The decrease in adjusted EBITDA margin is driven by…

[Operator Instructions] Our first question will come from the line of Tobey Sommer with Truist Securities.

This is Jasper Bibb on for Tobey. You talked about improving student inquiries across the nursing programs. What do you think is driving the higher interest levels there? And have you also started to see your inquiry to enrollment conversion rates normalize higher too.

We'll start by saying that we've taken a different approach to targeted marketing since we brought the paid media marketing in-house in the second quarter of 2022. And specifically, rather than coring marketing dollars tapped down and looking for the next best lead independent of program or campus, what we've done instead is targeted bottoms-up program in campus-specific plans and goals such that we align our paid media intentions and spend against those specific goals. As a result, we're able to very specifically focus and gain both leads and new students in both the markets and the programs that we intend to. And for that reason, we have been able to convert at a higher rate.

And then I know you aren't guiding for 2023, you did issue the target for $70 million to $76 million in pro forma EBITDA this year. And then today, we talked about incremental cost savings beyond that. So how should we think about the earnings power of the company next year? And is that $70 million to $76 million pro forma target a reasonable base to grow from in the '23, or are there potential offsets we should think about?

I think at this point, we're still in our planning process for 2023 in terms of budgeting. When we issued that supplemental information back on September 22, right, we were trying to assist with some baseline as to where we think the business is today in terms of what pro forma is. So I don't think it's an unreasonable place in terms of a baseline, but we'll refine that as we get through our planning process here and think about where we're investing for 2023.

Last question from me. Could you just speak to any expected impacts to your financial responsibility scores that might result from the Rasmussen write-down? And are you any -- as a result of that, would that change how you might deploy capital short term?

The composite score is impacted by that write-down. As you know, it's a 3-part calculation. When we look at the company, we have $186 million in cash. We have $52 million in operating cash flow. We have $9 million or $8 million in net debt. I think we can conclude reasonably that we are financially sound. If we end up in the zone, which would be between 1.0 and 1.4, we can comfortably operate under the alternative rules that exist there. So I'm not concerned about the financial functioning of the company and that combined score calculation.

Your next question will come from the line of Stephen Sheldon with William Blair.

So a lot of moving thesis for Rasmussen and on the nursing side over the next few quarters. So can you help us frame the impact of some of the issues around enrollment caps and some of the limitations you put in place? And what these could mean as we think about Rasmussen nursing enrollment at least in the first half of 2023. And then you talked about Rasmussen enrollment, I think returning to growth in the second half. Is that expectation for both nursing and non-nursing, or maybe just some more color on that.

So first, I want to say that what -- as I just answered on the previous question, not only are we looking with precision at the way we're deploying marketing dollars, but we're also looking at precision on program campus combinations. And so, for example, we are very pleased with the fact that Florida has 5 of our largest campuses without any encumbrances from a cap perspective. And we have many programs that are not operating at their max capacity in those markets. So we see a tremendous amount of upside across the board in Florida. And as I mentioned at the top of my remarks, with really no impact from the hurricane that we're seeing from an enrollment momentum perspective. So Florida is a really important place for us. In those markets where we do have caps, specifically, we'll start with the Twin Cities. We have other programs where we can direct our students to enroll with their interest in our rend program, for example. We're very proud to report that our BSN program in the Twin Cities market is in the top 3 of NCLEX results in all of Minnesota. And so those students who have the aptitude to be able to complete a 4-year degree, we believe we'll have keen interest in directing their attention and interest towards the BSN program instead of the ADN program. At the same time, students who may not necessarily have the aptitude to be able to complete the ADN program in the past have oftentimes been turned away. And instead, we will look to have those students begin their educational journey with us in the LPN program instead. And we have the same opportunity in the campuses in Illinois. So what we have discovered since the departure of the CEO in the second quarter of '22 is the opportunity to really with precision, identify ways to grow campus program combinations and be able to do that even in the face of some of these near-term restrictions.

And then just on the second part of that question, I guess, given what you can see now, do you think you could return to growth, enrollment growth in the second half of both nursing and non-nursing, or was that one more than the other?

Right now, the signal that we sent last earnings call as well as this one is the combined enrollment momentum for Rasmussen in the second half of '23. We will, as we get closer to that period in time, be able to further refine which areas we believe will contribute to that. Remember that the challenge we have with pre-licensure nursing, not just at Rasmussen, but at Hondros as well is that when you start a smaller cohort, as Rick mentioned in his remarks, you live with that smaller cohort through the entire time that those students are progressing through their educational journey. We can't go out on the street and find a second quarter ADN nursing student unless they happen to suspend their progress with us and want to come back. And so these self-imposed limits that we put in Bloomington in particular, we will have to work through the system for the next 5 quarters. So as those roll off and those students graduate and we can re-enroll students at the higher cohort levels, that's what we will see on the nursing side, allowing us to return to growth. But at the same time, as I mentioned, we have the opportunity to grow in the LPN program, growth in the BSN program, and certainly, we will continue to focus now with our new online tension on the post-licensure nursing programs that we have in our ladder as well. So nursing, we will be working very aggressively to grow our overall nursing enrollment. At the same time, we will be looking at our Allied Health and other health care clinical health programs to continue to enhance our enrollment momentum in our campuses. And we have seen some really favorable green shoots in our other online programs that I think are mirroring some of the overall enrollment trends in the United States where on-campus enrollment is declining, but online enrollment is growing. And so Rasmussen is seeing some of that similar momentum in its online non-nursing programs as well.

And then on the $13.5 million of annualized cost savings, I guess, are you at the full run rate now? It sounds like a lot of those decisions have been made and are in place. But just as we think about 2023, is that going to be -- are those going to be fully realized for the full year?

All $13.5 million has been executed. And so that will be -- that is able to be operationalized right now and through the full year of 2023.

And then just last one. I guess, how are you thinking about providing guidance moving forward? Would you expect to provide annual guidance on your fourth quarter results in 2023 or are you going to return back to kind of more quarter forward guidance? I don't know if you made a decision there yet, but just any color.

I think our intention is to try to put out something a bit longer term than our previous quarterly guidance, but we're still working through that. But we certainly understand that you all would like to have improved visibility to where we land. And so we're striving to deliver on that.

Your next question will come from the line of Raj Sharma with B. Riley. Raj, you may be on mute.

Can we talk about the Army Ignite. I just wanted to get clarity. It seems like the Army Ignite ad disruptions, it seems like AEI 2.0 is working really well, but 1.0 is still backed up and still got issues. And then, of course, there were AR issues. I thought the 2.0 version was going to be significantly better than 1.0, except for, of course, the delay in the AR collection. But so can you please provide some clarity on that where we are on that whole transition, the new transition?

Let me talk to 2.0 first, and then we can go back to 1.0. I would -- I think we're pleased with the transition to 2.0. We've talked in the past about the third-party provider for the new system, the 2.0 system being the same provider that works with Air Force. So they have a record of providing the service to a military branch. And also, we have the history of working with them because of their relationship with the Air Force. You couple that with the fact that the Army selected us as one of the testing providers for the new system. I think we had some input and good visibility going into the launch of the new system. You may remember in 1.0, they turned the system on in March of '21, and it didn't work, and they turned it off until July '21. In this case, they turned the system on in August of '22, and it worked. Soldiers were immediately able to register and request tuition assistance. There was a delay in the invoicing function that was recently enabled. And as Angie said in her comments, October was built. I can report that August and September were also recently built. So now we've built 3 months, a total of approximately $11 million. We haven't seen any payments under the new system yet, but those buildings recently occurred, and there is processing time on the Army side, but I'm encouraged that we were able to bill so quickly, particularly when you compare to the prior system and the expectation is that the Army will process and make those payments, I would say, relatively quickly also. So if you think about the system as a system to register and a system to process payments, I think we can…

And then just my other question is on, in September, you had issued the pro forma EBITDA sort of number of cost savings of $15 million and then another $2 million from the in-house marketing. And I'm sorry, I may have missed it, but did I hear that $13.5 million of that was in the bag or most of them have been operationalized as Angie said. If most of these are -- have been enacted upon, is it not reasonable to expect 2023 EBITDA levels at that pro forma EBITDA range. I mean I understand you haven't given guidance yet, but it's reasonable to expect that you should be able to reach that level.

Raj, I think your question is similar to the one I posed earlier, which is we think it's a reasonable baseline. Like we're going through our process right now to refine things. We're certainly aware of desire to sort of have visibility going forward for 2023. And as we work through the changes that have come through the organization, real organizational realignment, we'll see how that completely plays out. But the $13.5 million of cost savings is something that we've already worked into the calculation. And so I think that's a reasonable place to size up for 2023.

Our final question will come from the line of Alex Paris with Barrington Research.

I got a couple of quick ones. First of all, when you gave the second half guidance and the supplemental filing in September, you -- and because you already had given third quarter guidance, there was some implied fourth quarter guidance. Q3 was above expectations. Q4 is going to result in us bringing down our estimates a little bit. I haven't done the math, but did Q3 borrow a bit from Q4?

I think the way to interpret that is our second half guidance really superseded the initial third quarter guidance. So there are some timing differences. And so I don't know if it's necessarily third quarter barred from fourth quarter so much as a matter of how the timing played out, because we did not give out specific fourth quarter guidance at that time. But I mean, from a mathematical standpoint, you're right, the consensus number would shift a little bit. But from our perspective, like we're on the path that we laid out to achieve the approximately $56 million target that we issued back in September.

Either way, Q3 was certainly welcome better than expected, and the full year guidance is raised for revenues and adjusted EBITDA. My last question is more on the regulatory side. I think a couple of final rules were published last week, 90-10 as well as borrowers defense to repayment. Do you have any comment on either of those, especially 90-10. I was wondering what your thoughts were with regard to more specific guidance on how to calculate that number? Or is it still a work in progress?

The rule is published met our expectation in that we expected and it was confirmed that TA and VA would be included in those calculations. The calculation will cover the entire year 2023. So it does begin on January 1. So I wouldn't say that there was any material surprise there versus what we expected. You probably recall that some of that, I guess, the broad contours were settled via legislation and then it was turned over to the Department of Education. Bar defense the repayment. I don't have any particular comment on. We've had many conversations over the year about quality and affordability, and I think Angie in her remarks commented on being in the top 10% of return on higher education investment in the Georgetown study. I think all those are indicators of, first of all, what our core mission is and how we deliver on the promise, but also establishes us as a good player as it relates to anything that would come from bar defense to repayment.

Last one, looking for a little specific, though, on APUS. APUS obviously has a lot of TA and VA or a lot of military in general. Are you still comfortable under the new calculation that you'll be below 90%?

We've run the pro formas, Alex. I think we've talked about that over time, and we are -- we remain below the 90%.

Ladies and gentlemen, that will conclude our call for today. Thank you all for joining. You may now disconnect.