American Public Education, Inc. (NASDAQ:APEI) Q2 2023 Earnings Call Transcript

American Public Education, Inc. (NASDAQ:APEI) Q2 2023 Earnings Call Transcript August 12, 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: Rasmussen online enrollments are up year-over-year for the fourth consecutive quarter, while non-nursing enrollments posted their first positive growth quarter since 1Q 2019. For the 15 Rasmussen campuses with ADN programs where we receive quarterly NCLEX results, 14 posted meaningful improvements in 2Q 2023. In addition, Rasmussen campuses have continued to diversify from their historical reliance on the ADN/RN program for the majority of student enrollments and particularly in the markets where enrollments are capped.

By enrolling students in other approved nursing and allied health programs, 3Q 2023 enrollment resulted in a 14% increase in new students in those programs as compared to the prior year period. In August, to better align with the current revenue profile of the business, we started rightsizing the cost structure of both Rasmussen and the entire APEI enterprise. These actions are expected to reduce run rate expenses by $12.4 million per year and will result in approximately $2.8 million of pretax cash expenses associated with employee severance costs in Q3 and an in-year 2023 benefit of $2.1 million net of the severance. Additionally, beginning in the third quarter, we plan to reduce certain nonlabor costs by approximately $800,000 to $1.1 million on an annualized basis.

In connection with these cost savings initiatives, our APEI Board of Directors is also taking certain steps to reduce our overall governance structure costs, including making no changes to the APEI Board compensation structure for 2023, which is the third consecutive year of no change, and taking steps to reduce the size of our Board. Two of our longest-standing Board members, Jean Halle and Dr. Barbara Kurshan, are not going to stand for reelection at our next annual meeting, and our Board intends to reduce the size of the Board at that time rather than filling the vacancies. Finally, our liquidity and capital position remains strong as we continue to generate free cash flow, which has enhanced our liquidity position to $113 million of unrestricted cash at the end of 2Q 2023 and a $0 net debt position.

Now I’d like to provide more details regarding our education units starting with APUS. Our APUS team is driving net course registration growth and overall margin expansion due to a modest price increase and improved marketing efficiencies. Overall, net course registrations were up 5.7% during 2Q 2023 compared to the prior year period, including up 8% in active duty military and nearly 10% in the veterans channel. The APUS team is focused on continuing to grow the veterans channel while also executing on plans to grow in the nonmilitary channel. As previously mentioned, APUS instituted tuition and fee increases for its nonmilitary and veteran students in April of 2023. Even with these tuition fee increases, we believe that APUS’ tuition and fees remain lower than the average in-state cost at public universities and our programs offer exceptional return on higher education investment for our students.

The modest select increases in tuition combined with a tighter focus on marketing spend and other costs allowed APUS to increase its EBITDA margin by 600 basis points to 28% from 22% just a year ago and up from 25% in the first quarter of 2023. We expect continued year-over-year margin expansion at APUS for the balance of 2023. Going forward, we expect APUS net course registrations to be in the range of plus 6% to plus 8% in 3Q 2023 compared to the prior year period. Turning to Hondros. 2Q 2023 enrollment was approximately 3,000 students, an increase of more than 22% compared to the prior year period. 65% of Hondros’ enrollment is in its PN program as Hondros offers a laddered PN to ADN curriculum in Ohio, and Hondros is currently licensed to offer only PN in our Indianapolis and Detroit campuses.

Our expansion into Michigan continues to be a huge success, with over 100 new starts in the summer of 2023, which brings the total number of enrolled students to over 275 as of the third quarter. This growth and demand are almost entirely grassroots driven, resulting in low marketing costs through the first 3 quarters of 2023. We expect in future quarters for those costs to normalize as the market matures. Similar to progress on the NCLEX-RN results at Rasmussen, I’m also pleased to share that we have seen meaningful improvements in the first time NCLEX pass rates for our ADN/RN program at Hondros on a year-over-year basis. Our PN programs continue to surpass the necessary benchmarks in Ohio, and our 2023 pass rates exceed the benchmarks in Indiana.

As of yet, there are no graduates in Detroit, so no scores yet to share. Strong continued enrollment growth has also allowed an expansion of margin from minus 10% to positive 1% and slightly positive EBITDA in 2Q 2023. Hondros’ 3Q 2023 enrollment is 2,800 students, an increase of 17% compared to the prior year period and does reflect some disruptive effects of the move of the Dayton campus. This represents 14 consecutive quarters of year-over-year enrollment growth. And with a focus on reducing operating costs, we expect continued revenue growth and year-over-year margin expansion through the end of the year at Hondros. At Graduate School it continues to deliver improvements to both the top and bottom line. Revenue increased 70% from the prior year period to $7.5 million, while EBITDA increased almost $2.5 million to positive $1 million in the quarter compared with the prior year period.

Graduate School is highly seasonal, with the second and third quarters performing the strongest. We expect solid revenue growth and margin expansion on a full year basis in 2023. Turning again to Rasmussen. With the hiring of permanent leadership during the first half of 2023, initiatives to return Rasmussen to growth and profitability are gaining traction. As a reminder, at the end of 2022, we reorganized the business into two divisions: Rasmussen Online and Rasmussen Campuses. This was done to provide more visibility to the sustainable growth and profitability initiatives for the fully online programs and the campus-based nursing and allied health programs. It was also done to dedicate more resources to improving student educational experiences, specifically for the campus-based nursing programs through our Center for Educational Readiness to improve student mastery and increase NCLEX first-time pass rates.

And finally, we did the reorganization into two divisions to reduce operating costs. In 3Q 2023, total new student starts are positive year-over-year at Rasmussen, driven by improved marketing to increase enrollment. Rasmussen Online student enrollment has increased on a year-over-year basis for the fourth consecutive quarter. And additionally, Rasmussen saw a 14% increase in new student starts in third quarter 2023 in campus-based non-ADN nursing and allied health programs. Due to tightened admissions policies across all campuses, and enrollment caps in Illinois and the Twin Cities, we are still experiencing declining enrollment for Rasmussen’s campus-based ADN nursing programs. Next, as I shared a few minutes ago, NCLEX scores meaningfully improved in 2Q 2023.

Starting first with Minnesota, all four Twin Cities ADN campuses improved on a year-over-year basis and the remaining three outstate programs surpassed the state threshold. Our two Kansas campuses have also seen strong NCLEX results for both the ADN and BSN programs, both exceeding the state standards. In Florida, three of five campuses met the state standard. And in Illinois, while the campuses fell short of the state benchmark, we saw a significant improvement. We continue to provide all students with the resources both on-campus and remotely to properly prepare for their respective NCLEX exam through our Center for Nursing Excellence. Before turning the call over to Rick Sunderland to review our second quarter results and third quarter outlook in more detail, I’d like to comment more broadly on our outlook regarding Rasmussen, specifically in nursing education generally.

We continue to believe, both based on strong secular trends and Hondros’ enrollment momentum, that pre-licensure nursing education remains a promising long-term market for enrollment growth. Those secular trends for nursing education include a projected chronic shortage of nurses in the United States, with close to 250,000 annual openings over the next decade. This shortage was exacerbated by the stresses placed on the nursing community due to the pandemic, which has precipitated more exits and early retirements from the nursing field. With 22 campuses focused on educating new nurses, we believe Rasmussen remains positioned to help address this chronic need and educate more new nurses to join the workforce. We are optimistic about Rasmussen’s role in the nursing and allied health ecosystem, and we remain committed to its mission to students, faculty and staff.

With that, let me hand the call over to our CFO, Rick Sunderland.

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: APUS total net course registrations are expected to be in the range of plus 6% to plus 8% or a registration range of 90,500 registrations to 92,500 registrations. At Rasmussen and Hondros, third quarter student enrollments are actual because of the quarterly starts at these schools. At Rasmussen, third quarter total non-nursing enrollment increased 5% to approximately 7,700 students, while total nursing student enrollment decreased 25% year-over-year to approximately 5,700 students for an aggregate Rasmussen enrollment decline of approximately 10% year-over-year to approximately 13,500 students.

At Hondros, third quarter total student enrollment increased by 17% year-over-year to approximately 2,800 students. In the third quarter of 2023, consolidated revenue is expected to be between $148.3 million to $150.3 million. The company expects the net loss to common shareholders to be between a loss of $5.7 million and a loss of $4.3 million and the loss per diluted share of a loss of $0.32 to a loss of $0.24 per diluted share. Adjusted EBITDA is expected to be between $8.4 million and $10.4 million for the third quarter of 2023. With that, operator, we would like to open the line for questions.

Q&A Session

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: One, what we call the Center for Educational Readiness. And that was really making sure that the necessary faculty and clinicals were available at the time the students needed them to complete their hands-on learning experience. And then the second was to operationalize our Center for Nursing Excellence, which really takes each student one by one, identifies where their learning gaps are and purpose-build learning experiences, either remediation tools or remediation course work, one-on-one tutoring, whatever it takes to help those students be able to overcome those shortcomings in their learning experience.

And so we think having focused on both the overall learning environment and experience, creating a better learning environment through more predictable clinicals. And at the same time, tailoring the remediation experience for the students has led to those improvements.

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.