Ladies and gentlemen, thank you for standing by. My name is Sherrill, and I will be your conference operator today. At this time, I would like to welcome everyone to the APEI Reports Third Quarter 2023 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] Thank you. I would now like to turn the call over to APEI, Investor Relations, Christopher Symanoskie. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to American Public Education's conference call to discuss third quarter 2023 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 today's call are available under the Events and Presentations section of the APEI website. Statements made during this conference call and any accompanying presentation regarding APEI and its subsidiaries that are not historical facts may be forward-looking statements based on current expectations, assumptions, estimates and projections. Forward-looking statements may sometimes be identified by words like anticipate, believe, seek, could, estimate, expect, can, may, plan, should, will, would and similar and opposite words. Forward-looking statements include, without limitation, statements regarding expectations for registration and enrollment, revenue, earnings and EBITDA and other earnings guidance, recent current and future initiatives to improve NCLEX pass rates at Rasmussen University and reposition it for growth and profitability and other company initiatives, including with respect to leadership changes, future competition and demand and our cost saving efforts. Forward-looking statements are subject to risks and uncertainties that could cause actual future events to differ materially from those expressed or implied by such statements. These include, among others, the risks and uncertainties related to our ability to meet regulatory and creditor requirements, including the 90/10 rule and the impacts thereof; our dependence and the effectiveness of our ability to attract students to persist and are likely to succeed, federal appropriations and other budgetary matters, including government shutdown, our ability to effectively market our programs and expand into new markets, the reduction, elimination, suspension or disruption of tuition assistance, changing market demands, economic and market conditions, challenges with acquisitions, our ability to meet our cost-saving goals, our debt and preferred stock and other risks and uncertainties described in our presentation, today's press release, our Form 10-K for 2022 and our Form 10-Q filed earlier today and other SEC filings. The company undertakes no obligation to update publicly any forward-looking statements for any reason unless required by law. 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 of 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, 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. Angie, please go ahead.

Thank you, Chris. Good afternoon, and thank you for joining our call to discuss our third quarter 2023 results for American Public Education. APEI's performance during this quarter reflects continued positive enrollment and positive revenue trends at APUS, Rasmussen University Online, Hondros College of Nursing and Graduate School USA. Also, our previously announced operational improvements were completed in this quarter, including improved marketing efficiency, and the rightsizing of our cost structure, both now in better alignment with current levels of enrollment and revenue at Rasmussen. With Q3 APEI revenue above the top end of the range at $150.8 million and adjusted EBITDA of $18.1 million which exceeded the top end of guidance by nearly $8 million. We once again delivered on our guidance for revenue and adjusted EBITDA when combined with our outperformance in this quarter. Today, we are providing full year 2023 adjusted EBITDA guidance of approximately $50 million. I'd like to start my detailed discussion about our education units by focusing first on Rasmussen. From a management standpoint, Rasmussen is now operating with a complete management team for the first time since 2Q of 2022. This has brought much needed focus stability and leadership to the university. The leadership team has focused on continuing the now five quarters of sequential enrollment growth at Rasmussen Online, while also accelerating campus program growth and diversification. PN and BSN nursing program growth, along with other Allied Health program growth begins to mitigate an almost exclusive historical concentration in ADN Nursing. More targeted programmatic marketing is starting to pay dividends as we have greater visibility and improved processes and efficiencies in identifying and attracting new students. The efforts are yielding promising results. In addition to the Q4 non-nursing enrollment increasing overall by 5%, BSN starts are up over 20% in the quarter…

Thank you, Angie. Third quarter 2023 financial results. Looking at third quarter 2023 financial results, total revenue for the quarter was $150.8 million, up $1.3 million or 1% from the prior year period due to increases in revenue at three of our four education units. The net loss per diluted common share of $0.27 includes a $5.2 million noncash investment loss on a minority equity investment made by APEI in 2012. The loss is the result of the investee entering into an agreement to be sold at a price that results in no proceeds to the equity holders. Excluding the $5.2 million noncash investment loss, net income available to common shareholders was positive $400,000 and compared with guidance of a loss of $5.7 million to $4.3 million, while adjusted net income per diluted share was $0.02 compared to guidance of a loss per diluted share of $0.32 to $0.24. For the quarter, API adjusted EBITDA is well above our previously issued guidance. On a consolidated basis, adjusted EBITDA was $18.1 million compared to $9.5 million in the prior year period. The current quarter results represent an adjusted EBITDA margin of 12% compared to 6% in the prior year quarter, reflecting the strong revenue growth at APUS, Hondros and graduate school as well as improvements in operations, particularly around marketing spend, previously announced efforts to right-size our overall cost structure are leading to improved profitability. The reduction or, for example, is expected to reduce pre-tax labor and benefits costs by $6.2 million, net of severance in 2023 and is expected to reduce labor costs by $15.5 million on an annualized basis. In APUS, revenue was $76.4 million for the third quarter, up 11.2% compared to the prior year, due primarily to continued growth in net course registrations for military students utilizing…

[Operator Instructions] Your first question comes from the line of Jasper Bibb with Truist Securities. Jasper, your line is open.

Hey, good afternoon. I was just hoping you could share any early insights from the new leadership team at Rasmussen now that they've got their feet under them on the plan to return that business to a profitable growth over the next couple of years?

Hi, Jasper, it's Angie. Thanks for the question. We're very pleased with the stability, the focus, and the prioritization of the key areas of growth and operational efficiency that Paula and the leadership team have brought to Rasmussen. They're focused on growing non-ADN campus program enrollment and RAS online enrollment. They're keenly focused on improving NCLEX pass rates, focused on not just identifying but capturing cost savings, improving retention, specifically in our online programs, improving the program mix online for maximization of profitability and ensuring that we continue an open dialogue with our state nursing boards and our programmatic accreditors to ensure positive momentum in the regulatory activities over the next couple of years?

Appreciate the detail there. Do you think you're finished realigning cost structure at Rasmussen, or is there potentially more to do there over the next quarters?

Also a great question. I think we will continue to hone and refine the cost structure. I would say the biggest opportunity continues to be in making sure that our marketing investments are focused in the right markets or MSAs are also focused on the right programs and the right campuses. And so we are continuing to refine the channel mix along with optimizing the lead to conversion rates in each one of our markets. We are also continuing to focus on the markets that are most important to us, and we will continue to look at that in 2024.

Thanks. And then maybe pivoting to APUS, one as a follow-up on the 90/10 discussion, like this year it sounds like it's going to be close. Obviously, the rule is two consecutive years of noncompliance. But I was just hoping maybe you could outline what operational tweaks you can make there to reduce the risk of a potential violation this year or in 2024?

It's Rick. The most obvious and most important, of course, is focusing on cash-based students and sources of cash payments and the team is very focused on that. That's obviously impacting the 10% part of the 90/10 calculation.

Okay. And the APUS margins, super impressive in the quarter now at 30%. Like do you think this is a sustainable margin figure going forward? Or how should we think about the cadence of APUS margins over the next couple of quarters?

Jasper, it's Rick. I do think we can sustain those margins. But at that margin level, I would say, it provides a lot of opportunity and flexibility to invest in additional growth areas in that business, and we're going to look to do that. As Angie said related to Rasmussen, we want to continue to look at how we spend our marketing dollars. I think you noted in your quick dough. Thank you for that. Some cost efficiencies, if you will, in that area. We're growing that business with fewer dollars, but we also look to where we can take those dollar savings and invest to continue to drive the revenue growth. And we would like to sustain those margins that at higher revenue levels.

Right. Last question for me. Just maybe following up on that marketing point. I was hoping you could maybe outline some of the tweaks you've made there. It seems like you're seeing improvement across all of the portfolio of schools, but maybe specifically, I'm interested in the changes that were made after you in-source that function at Rasmussen.

Great question. I would start by saying, we are building marketing plans for Rasmussen bottom-up, campus-by-campus, channel-by-channel and ensuring that we're looking at the conversion rate of each of those different marketing levers and also the markets that we're investing in. So we have prioritized the markets where we have the most potential for enrollment momentum. And we have, as you can see in our results, have saved some money by slowing down the investments in some of our other markets as we test, basically the resilience of the marketing investment changes over the next quarter or two. So we're really focused on with channels, which programs, which markets and also specifically training our admissions folks to be sure that we are taking every precious lead and converting them into new students.

Definitely makes sense. Thanks for taking the questions.

Thanks very much.

Our final question comes from the line of Raj Sharma of B. Riley. Raj, your line is open.

Yes, thank you for taking my questions. Could you talk a little bit about -- a little bit more about the Rasmussen changes, the NCLEX scores, there's been really good improvement. And the self-imposed enrollment caps, and I know you talked about growth in the second half. Can you talk about these measures? And when do you think those caps could be lifted? I know you also addressed that in your ADN commentary. But also, when do you think we could expect to see profitability? Is there a timeline for Rasmussen on profitability?

Hi raj, this is Angela. Yes, I'm going to try and answer all of your questions, but you may have your come again because you had several bundled into that question there. So, let's start with NCLEX results. We're really pleased with the 2024 nursing program NCLEX score improvement. There has been a lot of work done by our new lead Vice President of Nursing, including strengthening, the faculty onboarding, and the factory training. We've installed student success coaches at campuses, specifically focused on NCLEX preparation. We have introduced specific remediation strategies for students who have already graduated. And as you may or may not know, we also know that the national averages for NCLEX scores have gone up with the new exam, which was implemented in April. So, overall, we are pleased with how we are pacing against the national averages. So, I think there's been a lot of great really systematic operational improvements that have been made to help us see improvements in our overall NCLEX pass rates at each of our campuses and programs. Your second question was about enrollment cap. As we mentioned, I believe it was in the Q, we had in past years, talked about the concentration of ADN enrollments in the Bloomington campus, and today, that campus now represents less than 2% of our enrollments. That campus that continues to experience self-imposed caps. We are working tirelessly to be sure that we can demonstrate improved NCLEX scores, Unfortunately, Bloomington is one of the two ADN programs that did not have a passing score in the quarter. And so we continue to be sure that we are not enrolling more students in the Bloomington campus until we know that we've got an engine that allows us to deliver a high-quality educational experience for students and one that will allow them to pass the exam. As it relates to Illinois, the other place where we have enrollment caps. As we discussed briefly on our last call, we're very pleased with legislation that was recently enacted in Illinois. It takes effect in January of 2024, allows our Illinois program to remove -- be removed from any probationary status from an NCLEX perspective for three years. So, we believe that, that's going to help us with accreditation, state approvals. And as a result, will allow us to both enroll -- continue to enroll students in the ADN program and also allow us to add new programs to our Illinois campuses. And you had another question about profit, but I don't …

Yeah.

I don't remember what the third question was. So if you could repeat it, I really appreciate it.

Yes. Sure, of course. I know you mentioned that enrollment for us, for investments were going to be up year-on-year in second half. Is that only -- is that only nursing or also non-nursing? And then my next question was could you tell us when you would be profitable in Rasmussen?

All right. Okay. So we are seeing improved enrollment in all categories except for ADM. In all nursing except for ADN in all of our allied health, so those are all of our campus-based programs. And we're seeing positive growth in our online program. So only the ADN remains the area of Rasmussen that is not yet growing. As it relates to your question, we still see and expect to have positive overall enrollment growth in the second half of 2024. And we would expect profitability to follow that positive enrollment growth. Certainly, we want to make sure that depending upon when that occurs, we take into consideration seasonality, but we expect to see profitability following that turn back to positive enrollment momentum.

Got it. Thank you. And then just last question on Hondros, we were almost profitable in the quarter and then last quarter. And then you were not profitable this one. Is there any expectation that we should get to Hondros being profitable sometime soon? Or what is holding you back? Or what is holding Hondros back in achieving profitability on a segment basis?

Good question. I'll start and then, Rick, I'll let you …

Sure.

…follow on. As I mentioned in my comments, we do expect Hondros to be profitable in the fourth quarter. We want to be sure that we can offset the cost of opening new campuses. And as a result, we really believe that as we enter 2024 and beyond that the focus on marketing spends and the savings from a headcount perspective will help us with the predictability around continued profitability at Hondros. The other thing I will say is that, where we had to recalibrate our nursing faculty salaries in the last year. We do not expect to see that continuing to grow at the pace that it has in prior years. We are not experiencing the same challenges around recruiting and retaining nursing faculty that we saw a year ago. And so we believe that, that stabilization will allow us to create more predictability around what our nursing faculty costs are going to be.

Great. Thank you for answering my questions. I'll take it offline.

There are no further questions at this time. I would like to turn the call back over to Christopher Symanoskie, Investor Relations.

Thank you, Operator. That will conclude our call for today. Thank you for your participation and your interest in American Public Education. Good evening, everyone.

Ladies and gentlemen, that ends today's conference call. You may now disconnect.