American Public Education's (APEI) CEO Wallace Boston on Q2 2017 Results – Earnings Call Transcript

American Public Education, Inc. (NASDAQ:APEI)

Q2 2017 Earnings Conference Call

August 8, 2017 5:00 PM ET


Chris Symanoskie – Vice President, Investor Relations

Wallace Boston – President and Chief Executive Officer

Rick Sunderland – Executive Vice President and Chief Financial Officer


Corey Greendale – First Analysis


Good afternoon, ladies and gentlemen. And welcome to the Q2, 2017 American Public Education Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session. And instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I’d now like to turn the conference over to your host Chris Symanoskie, Vice President of Investor Relations. You may proceed.

Chris Symanoskie

Thank you, operator. Good evening and welcome to the American Public Education earnings conference call for the second quarter of 2017. Please note that statements made in this conference call regarding American Public Education or its subsidiaries that are not historical facts are 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, expected registrations and enrollments, expected revenues and expected earnings and plans with respect to recent and future initiatives, investments and partnerships. 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 described in the risk factors section and elsewhere in the company’s annual report on Form 10-K filed with the SEC, quarterly report on Form 10-Q filed with the SEC and 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 Dr. Wallace Boston, our President and CEO and Rick Sunderland, our Executive Vice President and Chief Financial Officer.

Now at this time, I’ll turn the call over to Dr. Boston.

Wallace Boston

Thanks, Chris and good evening, everyone. Starting with Slide 2, although we continue to experience year-over-year declines in net course registrations at APUS, we are pleased that the rate of decline lessened in the second quarter of 2017, compared to the first quarter and prior year period. In the second quarter, total net course registration at APUS declined 6% compared to the prior year period. Although net course registrations by new students declined 9% year-over-year. Net course registrations by returning students decreased 6% compared to the prior year period. We believe there is a difference in the rate of decline of registrations by new students and that of returning students relate at least in part to improvement and persistent and the quality mix of students.

The decline in net course registrations by new students to APUS was largely driven by a 29% year-over-year decline in net course registrations by new students utilizing Federal Student Aid or FSA. This decline was partially offset by 2% year-over-year increase in net course registrations by new students utilizing cash and other sources. We believe that this change was a result of increased activity by students from our strategic and corporate partners. In addition, net course registrations by new students utilizing military tuition assistance or TA and veteran benefits or VA were approximately flat year-over-year. Our focus on academic quality and our progress in attracting students with greater college readiness is evidenced by the continued improvement and persistent for APUS. For the three months ending May 31, 2017 the most recent available information, a first course path and completion rate of undergraduate students using Federal Student Aid or FSA of US increased approximately 19% compared to the same period last year. We are pleased that many of the course and retention in this year we’ve launched over the last few years appeared to be improving student success and the overall quality of our offerings.

For the three months ended June 30, 2017 or the spring term of 2017, total enrollment of Hondros Core Nursing or HCN declined approximately 3% year-over-year. However, new student enrollment increased approximately 31% compared to the prior year period. On a same campus basis excluding Toledo, new student enrollment increased 6% year-over-year on the spring term and 17% year-over-year in the summer term of 2017.

Although HCN continues to be confronted with certain regulatory and compliance risk which are more fully described in APEI’s 10-Q filed earlier today, we are pleased by the turnaround and student enrollment at HCN.

Moving on to Slide 3, as we discussed last quarter, APUS is expanding certain initiatives and deploying new strategies as part of our overall approach to improving conversion rates and increasing enrollment of new college ready students. In addition to launching new lead scoring of predicted modeling capabilities, we further adjusted our marketing expenditures in favor of the channel partners we believe are becoming more productive and more efficient at reaching our optimal online target audiences. As a result of our recent experience, we authorized $1 million in additional marketing spend to further test our more promising channels during the third quarter of 2017.

While assessing this pilot we will continue to develop a more robust and personalized engagement model for incoming students and reengineer our enrollment management processes to better integrate front end systems and adjust processes to facilitate more efficient student onboarding in customer service. This of course is in addition to expanding our academic quality credentials. The success of which is evidenced by the recognition of key stakeholders and regulatory body. For example, in July of 2017, the Council on Education for Public Health or CEPH notified APUS that its board of councilors acted to accredit our Masters of Public Health program for a five year term. APUS is the first fully online institution to achieve this grand of accreditation.

Our commitment to those who serve has resulted in AMU retaining its position as a number one provider of higher education to act of duty military in fiscal year 2016 according to Military Times. In fact, we believe AMU maintain an approximately 17% market share in year 2016 despite fewer students utilizing TA overall. Our commitment also translated to AMU moving up in ranking to become the number four provider of higher education to veterans. AMU is the only fully online institution in the Top 20 schools serving veterans according to the Military Times. This market positioning also speaks volumes about student satisfaction and our strong reputation with military and military affiliate communities.

In closing, the team in Hondros College of Nursing made great stride with respect to improving the institutions curriculum, opening the new Toledo campus and increasing student enrollment, among their goals going forward is to continue improving student success whereby building an even stronger reputation within the nursing healthcare communities of Ohio. While the path to enrollment stabilization at APUS maybe uneven at times, we believe our initiatives continue to increase student persistent, lower bad debt expense and improve the quality of our courses. At the same time, we’ve invested in degree programs including most recently applied doctoral program to meet the need for higher level research in critical and growing professions. We believe doctoral program will enhance the institution’s reputation and further differentiate APUS as an institution of higher learning.

At this time, I’ll turn the call over to our CFO, Rick Sunderland. Rick?

Rick Sunderland

Thank you Wallace. Going on to Slide 4. American Public Education’s second quarter 2017 consolidated financial results include a 5.9% decline in revenue to $72.2 million, compared to $76.7 million in the prior year period. The decrease during the period is attributable to 7.5% decrease in revenue in our APEI segment, partially offset by 9.4% increase in revenue in our Hondros segment when compared to the prior year.

In the second quarter, our APEI segment revenue decreased to $64.3 million compared to $69.5 million in the prior year period. Decline in APEI segment revenue is primarily attributable to a decrease in net course registrations. Hondros segment revenue increased to $7.9 million in the second quarter, compared to $7.2 million in the same period of 2016. The increase in Hondros segment revenue was primarily due to an increase in revenue per student that resulted from a change in program mix and the impact of the Toledo campus opening where new students are primarily first time students who are not eligible for the alumni achievement grant which is the equivalent of up to 6% of total tuition in the ADN program.

On a consolidated basis, cost and expenses decreased 0.3% to $65.9 million compared to $66.1 million in the prior year period. For the second quarter, consolidated instructional costs and services expense or ICS as a percentage of revenue increased to 41.3% compared to 37.7% in the prior year. Our ICS expenses for the three months ended June 30, 2017, were $29.8 million representing an increase of 3.2% from $28.9 million for the three months ended June 30, 2016. The increase is a primarily result of increases in employee compensation expenses and classroom subscription services expense, partially offset by decreases in instructional material expense in our APEI segment, as well as increases in employee compensation cost due to staffing of Hondros’ new Toledo campus. The increase as a percentage of revenue is due to ICS expenses increasing during a period of this decrease in consolidated revenue.

Selling and promotional expense or S&P as a percentage of revenue decreased to 19.4% of revenue compared to 19.5% in the prior year period. Year-over-year, S&P costs decreased 6.5% to $14 million compared to $15 million in the prior year. The decrease as a percentage of revenue was due to our selling and promotional expenses decreasing at a rate greater than the decrease in consolidated revenue.

General and administrative expense or G&A as a percentage of revenue increased to 23.1% from 22% in the prior year period. Our G&A expenses decreased 1.6% to $16.6 million compared to $16.9 million in the prior year. The increase as a percentage of revenue was due to our consolidated revenue decreasing at a rate greater than the decrease in our general and administrative expenses. Bad debt expense for the three months ended June 30, 2017, was $0.9 million or 1.3% of revenue compared to $1.8 million or 2.3% of revenue in the prior year period. The decrease in bad debt expense was primarily due to changes in student mix, changes in admission and verification and other processes.

In the second quarter of 2017, we reported income from operations before interest income and income taxes of $6.3 million compared to $10.7 million in the prior year period. Our effective tax rate during the quarter was 39.9%. In the second quarter, we reported net income of $3.8 million or $0.23 per diluted share compared to net income of $6.6 million or $0.41 per diluted share in the prior year period.

Total cash and cash equivalents as of June 30, 2017, were approximately $157.1 million compared to $124.1 million as of June 30, 2016, with no long-term debt. Capital expenditures were approximately $3.8 million for the six months ended June 30, 2017, compared to $6.9 million in the prior year period. Capitalized program development cost were approximately $1.9 million for the six months ended June 30, 2017, compared to $0.8 million in the prior year period. Depreciation and amortization was $9.5 million for the six months ended June 30, 2017, compared to $9.7 million for the same period of 2016.

Going on to Slide 5, our outlook for the third quarter of 2017 is as follows. APUS net course registrations by new students are expected to decrease between minus 18% and minus 14% year-over-year. Total net course registrations are expected to decrease between minus 11% and minus 8% year-over-year. We would like to point out that these expected declines are in part due to the fact that there is one less week of open registration in the third quarter of 2017 as compared to the third quarter of 2016. And now we fall in the seasonally important month of September. We estimate this adversely impacts new student registrations by as much as 4% year-over-year. Furthermore, for September, after three consecutive months of year-over-year increases, we are forecasting a decrease in net course registrations by new students utilizing TA. Given that DoD’s fiscal year ends on September 30, we believe there is a greater possibility of volatility in TA registrations in the months of September and October as TA administrators and service members adjust for TA availability under various budgetary conditions.

For its summer term, which is the three months ended September 30, 2017, new student enrollment at Hondros increased 58% and total student enrollment increased by 11% year-over-year. Excluding the Toledo campus which opened in January 2017 on a same campus basis, new student enrollment increased approximately 17% year-over-year. As Wallace indicated, we are pleased to see strong growth in new and total student enrollment at Hondros College of Nursing. For the third quarter of 2017, we anticipate consolidated revenue to decrease between minus 5% and minus 2% year-over-year.

Net income for the third quarter of 2017 is expected to be in the range of $0.18 to $0.23 per fully diluted share. APUS began accepting applications for Applied Doctoral programs in Strategic Intelligence and Global Security with the first cohorts beginning in January of 2018. We expect to incur related startup cost ranging from approximately $0.8 million to $1.1 million during the second half of 2017.

In our last earnings call we outlined the ongoing steps we are taking to improve enrollment at APUS. As a result, in the third quarter we made the decision to allocate an additional $1 million of marketing spend to pilot initiative with certain channel partners. At the same time, we continue to be encouraged by increases in student persistent at APUS, and we are optimistic about the turnaround in new and total student enrollment at Hondros College of Nursing.

Now we would like to take questions from the audience. Operator, please open the line for questions.

Question-and-Answer Session


[Operator Instructions]

Your first question comes from the line of Corey Greendale from First Analysis. Your line is open.

Corey Greendale

Hi, good afternoon. First question just the last comment Rick about the $1 million in marketing expense. Can you help us the implications for that for modeling, does that suggest like you don’t see traditional seasonal pattern so the dollars, marketing dollars are more like Q2 in Q3 or help us there.

Rick Sunderland

Yes, Corey, the way I would look at that is, we typically report in a fairly tight quarter related to S&P as a percent of revenue. So I don’t know which you are modeling currently but what we are saying at essentially $1 million to that we’ve decided up the spend because we see some traction in certain channels and so we are going to pressure test those to see what kind results we get.

Corey Greendale

Okay. And then just looking at kind of the different factors here particularly on the TA side. Does the reset of fiscal year, the government fiscal year, is that help or hurt or remains to be seen? So like Q2 — is there a reason to think things are getting better in Q4?

Wallace Boston

Corey, this is Wallace. I think it just depends on how they allocate their budgets. We’ve had years where by August certain basis they’ve run out their allocation TA funds and so it increases the demand in October. We’ve had years where there have been plenty of funds, they are making announcement, people register through September and then they delay the allocation of funds in October. So delays are starts in October, so typically September and October are two most volatile and unpredictable months for TA but not so much for the other payer categories.

Corey Greendale

Okay. And one other modeling question which is given the enrollment guidance you provided to get to the revenue guidance, you need to assume pretty significant either even more significant increase in revenue per student at Hondros that we’ve been seeing or higher revenue per student at APUS. Can you just help with assumptions on that variable?

Rick Sunderland

So, right so Corey that’s going to come back to us reporting registration versus normalized registrations which is how we recognize revenue. And you see some variability when you are looking at the registration numbers versus the revenue. So for example, going from 1Q to 2Q and you just due to division on registrations, the revenue per registration went from 785 to 836. But on a normalized basis it went from 817 to 813. So I haven’t extended that math out to the third quarter but likely what you are seeing is simply the impact of — when I say the relationship between those two or the lack of relationship between those two. I wouldn’t — my point is I wouldn’t to anything from it in terms of significant movement in revenue per registration, at APUS we are not seeing that.

Wallace Boston

You will see that in the first quarter of 2018 because of doctoral programs where we charge higher amount per credit hour. But you are not going to see it that we know of unless there are just some add change in mix of we are not aware of.

Rick Sunderland

Well, so the mix change does affect it because there is a military grant back to these military students. So the non military rate is 6% higher or 8% higher than the military rate. So you’ve been studying our mix change over time, the mix change away from FSA to TA and VA would have the effect of reducing our revenue per registration over time on a normalized basis.


And I am showing no further questions at this time. I’d now like to turn the conference back to Mr. Chris Symanoskie for closing comments.

Chris Symanoskie

Great. Thank you. That will conclude our call for today. We wish to thank you for listening and for your interest in American Public Education. Have a great evening.


Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all now disconnect.

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