Perdoceo Education Corporation (PRDO) Q2 2021 Earnings Report, Transcript and Summary

Good evening, and welcome to the Perdoceo Education Corporation Second Quarter 2021 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Wyatt Turk. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us for our second quarter 2021 earnings call. With me on the call today is Todd Nelson, President and Chief Executive Officer; and Ashish Ghia, Chief Financial Officer. The conference call is being webcast live on the Investor Relations section at perdoceoed.com. The webcast replay will also be available on our site, and you can always contact the Alpha IR for Investor Relations support. Let me remind you that this afternoon's earnings release and remarks made today and include forward-looking statements as defined in Section 21-E of the Securities Exchange Act of 1934. These statements are based on assumptions made by and information currently available to Perdoceo Education and involve risks and uncertainties that could cause actual future results, performance, business prospects and opportunities to differ materially from those expressed in or implied by these statements. These risks and uncertainties include, but are not limited to, those factors identified in Perdoceo's annual report on Form 10-K for the year ended December 31st, 2020, and subsequent filings with the Securities and Exchange Commission. Except as expressly required by the Securities Laws, the company undertakes no obligation to update those factors or any forward-looking statements to reflect future events, developments or change in circumstances or for any other reason. In addition, today's remarks refer to non-GAAP financial measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The earnings release that accompanies today's call contains financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures and has been available within the Investor Relations page of the company's website. With that, I'd like to turn the call over to Todd Nelson. Todd?

This is the conference operator. Mr. Todd Nelson please go ahead.

Good afternoon, everyone, and thank you for joining us for our second quarter 2021 earnings call. I'd like to begin by thanking our faculties, student support staff and all other employees for another quarter of hard work, diligence and dedication in serving our students. Overall, we are pleased with results of our quarter and our team was able to adapt well to a changing environment while keeping student experiences, retention and academic outcomes at the forefront of our operations. We also continue to put our balance sheet to work and executed another strategic acquisition that I'll outline for you in a few minutes. We believe the prolonged pandemic and its resulting social distancing practices and safety measures as well as the macroeconomic and governmental responses has impacted overall student engagement similar to what other academic institutions in the post-secondary education industry may be experiencing. While prospective student interest remains in line with our recent experience, during the quarter some students began deferring their decision to begin classes and there has been an increase in current students taking a pause from their academic programs. Based on what we're seeing so far, going into the traditional back-to-school months, we believe this change in student behavior may be temporary and was impacted by a better than expected opening of the economy and the various stimulus packages supporting it. However, additional time is needed to assess the impact of the evolving pandemic environment on student behavior. For the quarter, we reported net income of $26.6 million or $0.37 per diluted share while adjusted earnings per diluted share which excludes certain significant and noncash items was $0.41. Our balance sheet remains a source of strength that has enabled us to make investments in student-serving functions as well as evaluate acquisitions of high-quality academic programs. Speaking of which, let me take a minute to discuss our recent acquisition of DigitalCrafts which closed on August 2nd. Launched in 2015, DigitalCrafts has helped provide individuals an opportunity in the technology area through reskilling and upskilling courses within the areas of web development, web design and cybersecurity. The acquisition of DigitalCrafts fits well with our overall objective of extending the breadth of our academic program offerings while diversifying revenue away from federal student financial aid funding. Learners are looking for ways to elevate their skills in a targeted manner without a long-term commitment of time and we believe the programs of DigitalCrafts can offer that opportunity. We're excited to welcome DigitalCrafts' team and are already exploring ways we can leverage our marketing and technology expertise to further grow DigitalCrafts program offerings. Turning to student enrollments. Total student enrollments as of June 30, 2021, grew 7.5% as compared to last year. At CTU, total student enrollments increased 14.2% due to the academic calendar redesign at CTU. As a reminder, CTU implemented the redesigned version of its academic calendar in 2021, similar to what AIU had implemented. At AIU, total student enrollments decreased by 1.8% due to lower enrollments at Trident. Excluding Trident, total enrollments at AIU showed growth as our teams focus on serving prospective students and improving student engagement. As a reminder, Trident primarily focuses on serving active-duty and military-affiliated populations. We believe the transition of the Army registration portal and the subsequent technical challenges with the portal impacted Trident enrollments more than we expected. Trident's leadership continues to work with the portal support team to serve prospective students more effectively. The prolonged pandemic also resulted in cancellation of most military in-person support events, educational affairs and office hours. We believe the sustained impact of these interruptions manifests itself in the total enrollments for the quarter. We do however believe these issues may be transitional and we are already seeing military events increasing. And most importantly, installations are reopening their education offices to support in-person activity. Overall, we're very pleased with how Trident transitioned into our organizational and complements AIU. Trident expanded and diversified our academic program offerings, particularly at the graduate level and importantly, it has also allowed us to internally develop a framework for integrating acquisitions. Now turning to our technology initiatives. We believe investments in technology and student-serving functions have been key drivers to our total enrollment goal due to the incremental impact on students' experiences and student learning. Both CTU and AIU have continued to leverage data analytics and technology to enhance the effectiveness of their services to students. Technology investments in machine learning and data analytics are mostly a continuation from previous quarters as we expand their use across various student-serving processes. Additionally, we are evaluating a redesign of our digital internet tools and technologies that are utilized by our teams to serve and educate students through their academic life cycle. We are confident that continuing to refine these internet-based student platforms will further enhance the student experience, especially for our nontraditional adult learners, while driving further efficiencies within the business. Finally, a quick comment regarding our efforts on some of our other initiatives, specifically expanding the corporate partnership program at CTU and offering workforce development training programs at Trident that can help develop skills and knowledge in a specific endeavor or interest. The enhanced corporate partnership team at CTU is fully in place and is already engaging with employers to leverage their tuition assistance programs and provide a debt-free education to their employees. At Trident, we have already launched seven training programs in the medical, human resource and project management fields and are looking to launch more. Overall, we believe our academic value proposition resonates well with our students, especially nontraditional students, including adult learners, and remain confident in our objective of diversifying our academic program offerings. With that, I'd like now to turn the call over to Ashish for a deeper review of our operating performance and quarter. Ashish?

Thank you, Todd. I will now review our second quarter results and then discuss our balance sheet and 2021 outlook before handing the call back to Todd for his closing remarks. Please note that all comparisons I discuss are versus the comparative prior year period unless otherwise stated. Before I begin, a quick reminder about year-over-year comparability. Operating results for AIU reflect the Trident acquisition commencing on March 2nd, 2020. Beginning with this quarter, AIU's operating results are fully comparable to the prior quarter as it relates to the Trident acquisition. I would also like to remind everyone that we are no longer including adjustments for any expenses related to closed campuses when presenting adjusted operating income or adjusted earnings per diluted share because these expenses are no longer material. All prior year period amounts have been recast to maintain comparability. Let's start with an overview of our operating results. For the second quarter of 2021, total company operating income was $36 million as compared to an operating income of $37.4 million. Adjusted operating income, which excludes certain significant and noncash items and which we believe is more reflective of the underlying operating performance, totaled $42.3 million for the quarter, reflecting an increase of 1.8% versus the prior year. Net income for the quarter was $26.6 million or $0.37 per diluted share, while adjusted earnings per diluted share, which again, we believe is more reflective of the underlying operating performance was $0.41 for both the current and the prior year quarter. Let me quickly comment on the adjustments to the reported operating results for the quarter. In addition to the typical depreciation and amortization adjustment, we are also adjusting for legal fees associated with two matters: first, acquisitions; and second, responses to the Department of Education relating to the loan forgiveness applications submitted by former students. Please note that the prior period amounts were recast to maintain comparability. Improvement in the adjusted operating income for the quarter was partially due to operating efficiencies gained by reallocating resources across various student-serving functions while administrative expenses excluding adjusting items for certain legal fees were lower as compared to the prior year. This was partially offset by the revenue decline at AIU as well as an increase in employee hand insurance expenses. Moving on to some more details around the second quarter 2021 results. Total company revenue of $175.5 million for the quarter was slightly lower than the prior year quarter revenue of $176 million. We believe this decline was primarily due to some of the unique issues faced by Trident in serving the military population as well as due to the evolving pandemic environment and the resulting impact on student engagement. As Todd mentioned, we believe these issues may be transitory in nature and are already seeing some improvements. But as a reminder, there is a lag impact from enrollment fluctuations, so these issues may impact revenue in the second half of the year particularly in the fourth quarter. As it relates to our segments, second quarter revenue at CTU increased 1.8% or $1.8 million to $102 million due to the academic calendar redesign that resulted in more revenue days for the quarter. Operating income was up 7% to $35.4 million, primarily supported by the revenue growth. Turning to AIU. Revenue decreased by 3.4% or $2.6 million to $73.2 million for the quarter while operating income was approximately $1.3 million lower as compared to the prior year quarter. Note that this decline in operating income is primarily attributable to our marketing efforts to support the launch of the new workforce development training programs at Trident. Total student enrollments at June 30, 2021, increased by 14.2% at CTU while decreasing by 1.8% at AIU. Please note that CTU's total student enrollments were positively impacted by the academic calendar redesign. Moving on to corporate and other. Second quarter operating losses totaled $8.7 million versus $6.2 million in the prior year quarter. This increase in losses was primarily due to $2.4 million of legal fees incurred during the quarter associated with responses to the Department of Education relating to the loan forgiveness applications by former students and acquisitions. Please refer to our 10-Q disclosure regarding borrower defense to repayment for additional information on that matter. Now to income taxes. For the second quarter, we recorded a provision for income taxes of $9.3 million, resulting in an effective tax rate of 25.9%. The second quarter tax rate was benefited by 0.4% for the net impact of the tax effect of stock-based compensation and the release of previously recorded tax reserves. As a reminder, we utilized all of the $109.7 million of federal net operating loss carryforward in 2020 and anticipate utilizing the remaining $10.3 million of ODL supported foreign tax credits in 2021. As a result and as discussed during our last call, we have started making quarterly estimated tax payments beginning in the second quarter and expect to continue to doing so in each quarter moving forward. Finally, we expect that for the full-year 2021, our effective tax rate will be between 26% and 26.5%. This full-year estimated rate is negatively impacted by increases in tax reserves for uncertain tax positions and the tax effect of expenses that are not deductible for tax purposes. Now to our balance sheet. Year-to-date net cash provided by operating activities was approximately $82.7 million as compared to a $105.4 million in the prior year. The decline was primarily attributable to the timing of cash flows that positively impacted the prior year as well as federal tax payments made in 2021. We ended the quarter with approximately $480.7 million of cash, cash equivalents, restricted cash and available-for-sale short-term investments. This represents an increase of approximately $70.3 million over year-end 2020. Key drivers of cash through the second quarter were positive cash flows from our universities which were partially offset by cash outflows related to federal tax payments, capital expenditures, share repurchases. Speaking of which, during the quarter we repurchased approximately 440,000 shares. Capital expenditures for the second quarter were approximately $2 million or 1.1% of revenue. We now anticipate full-year 2021 capital expenditures to be approximately 2% of revenues as we invest in our technology infrastructure upgrade and relocate our Colorado Springs Crown Campus at CTU. Finally, let us discuss our outlook for the remainder of the year. Our full-year adjusted operating income outlook remains unchanged in the range of $165 million to $171 million as compared to a $159 million in 2020 or expected growth of approximately 3.8% to 7.5%. We have not adjusted the outlook for the acquisition of DigitalCrafts because we currently believe the acquisition will not have a material impact on the adjusted operating income outlook for the year. Adjusted earnings per diluted share is expected to range between $1.58 and $1.64 per diluted share versus $1.56 in 2020. For the third quarter 2021 outlook, we anticipate adjusted operating income to be in the range of $39.5 million to $41 million as compared to $36.1 million in the prior year quarter with adjusted earnings per diluted share to range between $0.38 and $0.39 per diluted share versus $0.35 in the third quarter of 2020. As mentioned earlier, beginning this quarter, legal fees associated with borrower defense to repayment claims as well as those to support our acquisition efforts will be an adjusting item to our operating results. However, due to the inherent difficulty in forecasting the timing or amount of these legal fees, the third quarter and full-year GAAP to non-GAAP reconciliations for adjusted operating income and adjusted earnings per diluted share outlook do not include any amounts for such legal fees. As a result, forward-looking GAAP financial measures may vary materially from the actual GAAP results. Let me conclude by commenting on our balanced approach to capital allocation. We continue to focus on maintaining a strong balance sheet and adequate liquidity while prudently investing in organic projects such as academic programs at our universities and evaluating diverse strategies to enhance stockholder value including acquisitions and share repurchases. As Todd mentioned, we just completed the acquisition of DigitalCrafts this week. The initial cash consideration of $16.25 million was funded with the company's available cash balances on the date of acquisition and is also subject to a working capital adjustment. In addition, a post-closing contingent consideration payment of up to $2.5 million is expected to be paid in early 2024 based upon the level of its achievement of certain financial metrics. As mentioned earlier, we do not expect the acquisition to have a material impact on our adjusted operating results for 2021. DigitalCrafts will be a part of our AIU university system and we are excited to welcome the entire DigitalCrafts team on board. Please refer to our earnings release filed today for important information about the key assumptions and the factors underlying this outlook and other expectations discussed on today's call as well as the GAAP to non-GAAP reconciliations. With that, I will turn the call back over to Todd for his closing remarks. Todd?

Thanks, Ashish. Again, I'm extremely proud of the entire Perdoceo team, which has shown a steadfast commitment to serving and educating students while adjusting their outreach and engagement strategies in response to the ever-changing and evolving pandemic. We look forward to continuing to educate and serve our current and prospective students while keeping our focus on student experiences, retention and academic outcomes. Thank you again for joining us today, and we will now open the line for any analyst questions.

Thank you. [Operator Instructions] Your first question comes from Alex Paris from Barrington Research. Please go ahead, Alex.

Hi guys, thanks for taking my question today. I have a couple of questions all over the place but I guess I'll start also with the acquisition of DigitalCrafts. I hear you that it's not going to have a material impact on adjusted operating income for the year, what about revenue?

Yes, it will obviously impact revenue. However, as we have not disclosed any of those numbers and but yes it will obviously positively impact revenue for the third quarter and full-year.

Okay. So, not disclosed. Then I had a question about the workforce development programs at Trident. You got seven launched and I realize you're considering others. Could you perhaps give us some color on those seven programs, when did they launch and what's the initial response from prospective students.

Sure, thanks Alex. Yes, we're -- they have been launched. We have been really very pleased with the 1000s of inquiries, which is good. We surpassed 100 students, which is also something we're pleased with. And we're obviously just getting going but really excited about the future of that.

Great, thank you. And then is it still your intention to roll these programs out to AIU at large or CTU at some point?

Well, they right now yes, absolutely. I mean anybody who would have interest in that and obviously there are those who have expressed interest in the past. But right now, again, we just, as I said very pleased with the response that we have which has given us encouragement to develop additional programs. It takes time obviously to build enrollment but the answer to your question is yes.

Okay, thank you. And then just a few cats and dogs left. You're relocating the Colorado Springs campus at CTU. I wasn't aware that that was planned. Why was that and maybe a little color there.

You bet! Great question. We like the facility we had but it was a leased facility and we made the decision to frankly upgrade to a better facility and obviously take advantage of the lease rates in the Colorado Springs market. But again, based on demand and that being our home campus, it was very important that we maintain a presence in Colorado Springs but again it was a good opportunity for us to upgrade.

Great. And then I guess the last one from me is, I have the 10-Q open and I'm trying to understand this whole borrowers defense to repayment and the legal or the legal fee in settlement in the quarter. What's going on there, just maybe a little color and then I'll read the 10-Q more carefully.

Sure. And by the way, we do encourage you to read that. As we disclosed in our 10-Q, we've been notified that the department there were several 1000 of these borrower defense claims and by the way, it covered a time period of decades. And obviously a significant number of those even from schools that have been taught out and closed for some time. So obviously, that's no idea how long those have been there. But again, one of the things that's important, that's why obviously read the 10-Q, each one of these you have to have a response regardless of how they may seem to be not a very valid claim but again you cannot not respond, you have to and so that's why there's legal fees associated with that. But again, we're looking forward to making sure we get all the information, those individual responses to those. And yes, so that's the process that you have to follow.

Alright. So, just a little clarification. Were the majority at schools that have been closed or were there claims at AIU and CTU as well?

Again, just refer to the, just look at the 10-Q because as we as these come in you analyze them and I don't really have that information at this point, Alex.

Okay, fair enough. I'll leave it at that for now and I'll get back in the queue.

Okay. Thanks, Alex.

Thank you.

Thank you. [Operator Instructions] Your next question comes from Greg Pendy. Please go ahead.

Hi, guys. Thanks for taking my questions. Just wanted to --.

Hi, Greg.

Hi. In light of the fact that we are in a heightened investment year I guess we can call it, just wanted to understand maybe a little bit of clarity on where some of the dollars are going and kind of how you're thinking about the payback and just things usually don't end on a calendar year. So, I mean how should we be thinking about this, is this going to go throughout the fourth quarter possibly. Is there some spend that might trickle into next year or is this something that might be winding down in November. Just trying to get a sense of where the heightened investment is.

Sure. Well obviously, we feel very optimistic based on the inquiries and the interest in our programs. But as we've said on prior calls as well that our ability to add to the breadth and depth of our programs is very important. It what again was very appealing with DigitalCrafts. Obviously, as we said we're looking at other things that add, will continue to add to that. Some of them, it's easier to bring to closure or to close on sooner or rather later. It's just hard to say how much of that will be this year or will fall into next year but obviously as we have it at this pace, we'll make sure that we give you the information as soon as we have it. But basically it's about it.

Okay, great. And then just again, I know it's always kind of out there in the past, I know. Anything on the front on maybe closing the spread in terms of operating profitability of AIU and CTU. I mean is there, is it still just a question of scale?

Well, I think scale being the biggest one but obviously, we need to continue to watch where the demand in our particular industry goes and if there's opportunities as it was with Trident to add some breadth and depth there. But we may find that there's also some opportunities for CTU as well. So, we would want to invest there. But I do think scale is still the largest, we're excluding some external issues that you may face that are based on demand that we just it's hard to predict that.

But I guess maybe now that you have a good picture of what AIU looks like with Trident, I mean there's nothing structurally significantly different from AIU versus CTU. Is that fair to say?

Yes, that's fair to say. You have obviously your accreditation is similar, you're positioned in the market in a similar way. There is still some difference in the number of programs but as we continue to add those programs at AIU, again, they become closer. But again similar attributes with, there aren't really any big change differences in the attributes of the two.

Okay, great. That's helpful. Thanks, a lot.

Thank you, Greg.

Thank you.

Thank you. At this stage, there are no questions in the queue. [Operator Instructions] It appears there are no further questions at this time. I will now pass back for any closing remarks.

Well, thank you again for joining us for the quarter. We look forward to speaking again next quarter. Thank you.

Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.