Earnings Transcript for APEI - Q2 Fiscal Year 2023

Operator: Ladies and gentlemen, thank you for standing by. My name is Saurav, and I'll be your conference operator today. At this time, I would like to welcome everyone to the American Public Education, Inc. Reports Second Quarter 2020 Results Conference Call. [Operator Instructions] I would now like to turn the call over to Ryan Koren, AVP of Investor Relations and Corporate Development. You may now go ahead.

Ryan Koren: Thank you, and good afternoon, everyone. Welcome to American Public Education's conference call to discuss second 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 the call today 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 or opposite words. Forward-looking statements include, without limitation, statements regarding expectations for registrations and enrollments, revenue, earnings and EBITDA and other earnings guidance; initiatives to improve NCLEX pass rates and reposition Rasmussen University for growth and other company initiatives, including with respect to leadership changes, future competition and demand and our cost savings efforts. 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 include, among others, our dependence on the effectiveness of our ability to attract students who persist and are likely to succeed; our inability to effectively market for our programs or expand into new markets; the reduction, elimination, suspension or disruption of tuition assistance; changing market demands; economic and market conditions; our inability to meet regulatory and creditor requirements and the impacts thereof; challenges with acquisitions; our inability to meet our cost savings goals; risks related to our debt and preferred stock; and risks described in our presentation, today's press release, our Form 10-K for 2022, our Form 10-Q filed 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 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 would now like to turn the call over to our CEO, Angela Selden. Angie, please go ahead.

Angela Selden: Thank you, Ryan. Good afternoon, and thank you for joining our call to discuss our second quarter 2023 results for American Public Education. APEI continues to deliver on the financial guidance provided during our 2023 earnings calls. In the second quarter of 2023, we delivered revenue of $147.2 million, which is at the top of the guidance range, and adjusted EBITDA of $8.8 million, which is 38% above the high end of the guidance range. This is the result of strong continued enrollment growth at American Public University System, Hondros College of Nursing, Rasmussen University Online and Graduate School USA. These trends are continuing into the third quarter, and we are confident in our ability throughout the remainder of 2023 to drive year-over-year revenue and EBITDA growth as well as margin expansion across these three education units and Rasmussen Online. We acknowledge that the acquisition of Rasmussen has not met our expectations. We believe we have isolated the overall causes of the challenges, including post-COVID market and operational headwinds in pre-licensure ADN nursing and simultaneously experiencing a significant exit of its senior leadership team. Despite these setbacks, we continue to believe that there is considerable value in the Rasmussen business. With new leadership in place since mid-April, we see Rasmussen's improvement initiatives gaining traction. However, as that new team evaluated the near-term business momentum, they made adjustments to the timing and velocity of Rasmussen's recovery, which contributed to a noncash impairment charge, which Rick Sunderland will discuss in more detail. Not including the impact of these noncash charges, net income available to common and diluted earnings per share was better than the high end of our guidance range. Here are some of the highlights from Rasmussen's improvement initiatives

Richard Sunderland: Thank you, Angie. Looking at second quarter 2023 financial results. Total revenue for the second quarter was $147.2 million, down 2% from the prior year period due to an $11.9 million or 19% decline in revenue at Rasmussen, partially offset by increases in revenue at each of the three other education units. At APUS, revenue was approximately $74 million for the second quarter, up $3.7 million or 5.2% compared to the prior year, due primarily to continued growth in net course registrations for military students utilizing TA and the impact of our tuition increase for nonmilitary students. This registration growth was achieved on a lower advertising spend. Advertising spend for the quarter was approximately $1.1 million lower than the prior year. Year-to-date, advertising spend is approximately $2.7 million lower than the prior year period. APUS EBITDA for the quarter was $20.2 million compared to $15.2 million in the prior year, an increase of $5 million or 33%. EBITDA margin for the quarter was 28% compared to 22% in the prior year. In the second quarter, Rasmussen revenue was approximately $52 million, a decrease of $11.9 million or 19%. This decline was primarily due to a 12% decrease in total enrollment and the continued change in student mix to more online students, which generally pay lower tuition than Rasmussen's on-ground nursing students, partially offset by tuition increases in certain programs which took effect in January 2023 to help offset increased costs. Excluding the impairment in both periods, Rasmussen EBITDA for the quarter was an EBITDA loss of $7.1 million compared to positive EBITDA of $4.5 million in the prior year quarter, a decrease of $11.6 million. EBITDA margin for the quarter was negative 14% compared to positive 7% in the prior year. The reduction in EBITDA and EBITDA margin is due to the high fixed cost structure of Rasmussen's campus-based operations coupled with the decline in enrollment and revenue. In addition to the labor cost reduction initiatives described by Angie, at APEI, we plan additional nonlabor-related cost reductions of approximately $0.8 million to $1.1 million for the remainder of the year and remain focused on improving profitability at Rasmussen in the coming quarters. At Hondros, second quarter 2023 revenue was approximately $14 million, an increase of $2.8 million or 24% compared to the prior year period, driven by higher total enrollment at higher tuition levels. Similar to Rasmussen, Hondros implemented a 5% increase in tuition and fees, which took effect in the second quarter to help offset increased costs. With this increased revenue and improving scale, Hondros was able to deliver positive EBITDA for the second quarter, an improvement over the EBITDA loss in the second quarter 2022. Graduate School revenue included in Corporate and Other was $7.3 million for the second quarter 2023, up $3.1 million or 72% compared to the prior year. Overall, on a consolidated basis, APEI adjusted EBITDA was $8.8 million for the quarter compared to $14.5 million in the prior year period. The current quarter results represent an adjusted EBITDA margin of 6% compared to 10% in the prior year quarter. Net loss per diluted share for the current quarter was a loss of $2.93 compared to a loss per diluted share of $5.82 in the prior year period. Second quarter cost of expenses include a noncash impairment charge of $64 million to reduce the carrying value of RU segment goodwill and intangible assets and to reflect the corresponding tax impact. This compares to a $145 million noncash impairment charge in the prior year period. Given the calculations consideration of time value of money and Ras performance this year, the impairment reflects the delayed recovery and return to profitability at Rasmussen. Importantly, our model recognizes the essential work now underway to expand the program's operated campuses and to deliver cost containment initiatives to rightsize the institution. When adjusting for the impact of these noncash charges at Rasmussen, net loss per diluted share for the current quarter was approximately a loss of $0.25 and per diluted share, which was better than the high end of our guidance range. Total cash and cash equivalents at June 30, 2023, was $139 million, an increase of $9.9 million from year-end 2022. Restricted cash at June 30 was approximately $27 million and continues to be almost entirely comprised of a restricted certificate of deposit that secures a letter of credit for Rasmussen with the Department of Education. The increase in cash was due primarily to payments from Army received during the first six months, which showed approximately $42 million, of which $20.9 million related to periods prior to 2023, offset partially by the use of cash at Rasmussen and Hondros and to other changes in working capital. APEI's remaining principal on the term loan is approximately $99 million at June 30. With unrestricted cash of approximately $113 million, net debt remains at zero. Additionally, there are no borrowings under APEI's $20 million revolving credit facility, which remains fully available at this time. Turning now to the third quarter 2023 outlook. APEI's outlook for the third quarter of 2023 is as follows

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

Jasper Bibb: Hey, good afternoon every one. Just wanted to follow up on the impairment charge. So I think earlier you mentioned that the new Rasmussen leadership might be thinking that the recovery there is going to be longer than previously anticipated. How should investors think about, I guess, your updated time line to return Rasmussen to enrollment growth and profitability?

Richard Sunderland: We see positive momentum in enrollment, particularly at Rasmussen Online, moving the overall enrollment trend to positive.

Jasper Bibb: Okay. And then -- but as a whole, including the Nursing business, do you have any kind of time line for when the decline there might start to level off or -- because I think that's probably the main contributor as far as an operating leverage perspective.

Angela Selden: Jasper, it's Angie. Thanks for the question. We, as you probably saw in the PowerPoint materials, have seen a quarter-over-quarter sequential improvement in the enrollment as a percentage of the prior year period. And so we -- while we can't say one data point makes a trend, we do believe that there is stabilization in the Rasmussen business. As Rick mentioned, we have seen not only a fourth quarter now of our online enrollment growth being positive, but also a 14% increase in the non-ADN nursing starts. And that is really a deliberate strategy on the Rasmussen team's part to direct marketing dollars towards campus-based programs that are available to enroll students in and allow us to continue to fill the campuses and drive profitability from the campuses without having to exclusively rely on the ADN/RN program as was the case in the past. So we can't yet put a pin on when we see the nursing enrollment at Rasmussen flatten out and become positive, but we do see really important signals enrollment momentum across those other categories and really importantly, the improvement in our NCLEX pass -- first-time pass rates, which will also signal to prospective students the strength of the Rasmussen, both ADN as well as LPN and BSN nursing programs.

Jasper Bibb: Okay. And then just on the third quarter guidance, like how should we think about the underlying margin assumptions for the main portfolio schools there? You cited the really strong margins in APUS this quarter. Is that going to be the primary driver of, I guess, the upside that was there?

Richard Sunderland: Yes, that's exactly right, Jasper.

Jasper Bibb: Okay. And then just one more on Rasmussen. On the note in the 10-Q about the Bloomington accreditation review. How should we think about the time line there to resolve that and what that could mean for the Rasmussen segment?

Angela Selden: Specifically, the Rasmussen leadership team is engaging with those different regulatory and licensing bodies in the state of Minnesota. And we believe that we will be able to continue the dialogue with those different governing bodies to be able to come to a resolution that we believe will allow us, not only to continue to grow the BSN program, which has really tremendous NCLEX pass rates, but also to continue to moderate the enrollments in the Twin Cities campuses around the ADN program, which has been the primary focus of the -- of those governing bodies' attention to the results from our ADN program. So it's limited to the four Twin Cities campuses, which already have quarterly enrollment caps that we have already seen a really meaningful part of enrollment decline taking place because of the enrollment caps that we have imposed on those campuses over the last four quarters.

Jasper Bibb: Right. That makes sense. Last question for me. Any update on APUS and compliance with the revised 90/10 threshold there for this fiscal year?

Richard Sunderland: Yes. Jasper, it's Rick. Yes, we've talked about this over several calls and everyone is aware that the change in the role in January, adding TA/VA moved APUS closer to the 90% threshold. We continue to work the initiatives that we've previously discussed, B2B employee reimbursement. I don't know if we've talked about international as a particular initiative, but we have some beginnings in that arena also. All designed to improve the 10% ratio.

Jasper Bibb: Okay. Appreciate the detail there. Thanks for taking the questions.

Operator: Thank you. Your next question comes from the line of Alex Paris with Barrington Research. Your line is now open.

Alexander Paris: Hi, guys. Thanks for taking my question. I have a couple, but sort of in reverse order. In your response to the 90/10 question just asked. I haven't looked at your Q yet, but what was the 90/10 of APUS in 2022 under the previous methodology? I think you probably disclosed that in the 10-Q, right?

Richard Sunderland: It was in the 10-K, Alex. You're talking about the prior year? Yes, a different basis, it was at 38%.

Alexander Paris: Okay. And roughly, what percentage of students at APUS are military or veteran?

Richard Sunderland: Well, you can look at the concentration note in the financials. Of course, that's on an accrual basis, and the 90/10 calculation is done on a cash basis. I think, Alex, we routinely say that for new students, they self-identify as active duty military, it's something like 65%.

Alexander Paris: And what's your -- so under the new methodology, that will be for fiscal years completed in 2023. So next year's 10-K will have a different basis for calculating that. Are you comfortable, given your exposure, given your initiatives that you'll come in underneath those targets?

Richard Sunderland: We have a good team at APUS, Alex, who know how to work the various channels, including the channels that deliver on the 10% side of the equation.

Alexander Paris: Great. And is there any value to like bringing in Graduate School USA underneath APUS to give you more 10 revenue for that calculation? Is that something you could do or would consider doing?

Richard Sunderland: Alex, we certainly looked at that. Graduate School is a training company, adult learning company that provides courses to the federal workforce. And so those most typically end up being federal dollars. And when you look at the new rules, the definitions are very broad as to what constitutes a federal dollar, thus, placing those dollars in the 90 side of the calculation.

Alexander Paris: Got you. All right. That's a good answer. Moving to my primary question though, I want to congratulate you on the improving NCLEX scores, particularly in the Twin Cities and Illinois, where the issue was most profound. What have you done there to improve NCLEX scores over the year-to-date period or over the last 12 months?

Angela Selden: Alex, it's Angie. I'll start and then happy to open it up to others. As we discussed two calls ago, we launched two specific initiatives

Alexander Paris: Great. That’s helpful. I guess that the only – those are my question for now. Thank you very much and I’ll get back in the queue.

Richard Sunderland: Thank you, Alex.

Operator: There are no further questions at this time. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.