American Public Education, Inc. (NASDAQ:APEI) Q4 2023 Earnings Call Transcript

American Public Education, Inc. (NASDAQ:APEI) Q4 2023 Earnings Call Transcript March 5, 2024

American Public Education, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Jeannie, and I will be your conference operator today. I would like to welcome you to the APEI Reports Fourth Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Chris Symanoskie, Investor Relations. You may begin your conference.

Chris Symanoskie : Great. Thank you, operator. Good afternoon, everyone. Welcome to American Public Education’s conference call to discuss fourth quarter 2023 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 in the Events & Presentations section of APEI’s website. Statements made during this conference call and in 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 such as anticipate, believe, seek, could, estimate, expect, can, may, plan, should, will, would and similar or opposite work. Forward-looking statements include, without limitation, statements regarding expectations for registrations and enrollments, revenue, earnings and adjusted 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 future competition and demand and cost-saving 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 other statements, the company’s dependence on the effectiveness of its ability to attract students who persist and are likely to succeed, the ability to effectively market programs or expand in new markets, the reduction elimination, suspension, or disruption of tuition assistance, changing market demand, economic and market conditions, the ability to meet regulatory and creditor requirements and the impacts thereof; challenges with acquisitions, the company’s ability to meet cost savings goals, matters related to debt and preferred stock, and risks described in today’s presentation, today’s press release, APEI’s Form 10-K for 2023 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 today’s presentation and in the earnings release. Management believes that the presentation of non-GAAP financial information provides useful supplemental information to investors regarding its results of operations and should only be considered in addition to and not a substitute for or superior to any measure of financial performance prepared in accordance with GAAP. Now I’d like to turn the call over to APEI’s CEO, Angela Selden. Angie, please go ahead.

Angela Selden : Thank you, Chris. Good afternoon, and thank you for joining American Public Education’s fourth quarter 2023 earnings call. Today, I am pleased to share details about three key themes. First, APEI has outperformed fourth quarter 2023 guidance on all financial metrics, with better-than-expected performance from American Public University System, Rasmussen University and Hondros College of Nursing. Second, Rasmussen and Hondros both have meaningfully improved pre-licensure NCLEX student outcomes for Q4 and full year 2023. Third, we are initiating full year revenue and adjusted EBITDA guidance for 2024, a reflection of our confidence in the outlook for 2024 and with investment areas that prioritize growth, academic quality and student success.

Before I provide more details on those three key themes, I would like to first recognize the extraordinary efforts of our faculty and staff across each of our education units and at APEI. They are delivering on our vision of transforming lives, advancing careers and improving communities. I am particularly proud of our entire team’s ability to respond to the year’s difficult challenges and their relentless efforts to improve student outcomes. These efforts have resulted in remarkable improvements in 2023 and set the course for continued growth in 2024 and beyond. Now turning our attention to fourth quarter 2023 results, APEI’s financial and operating performance exceeded guidance on all metrics. APEI’s revenue exceeded the top end of our guidance range, reaching $152.8 million and adjusted EBITDA exceeding our guidance by more than 50%, reaching $25.7 million, which is $8.8 million above the high end of the range and marking the second consecutive quarter of meaningful adjusted EBITDA outperformance.

I am particularly proud of how our education units have contributed to the outperformance with APUS achieving record EBITDA margins and both Rasmussen and Hondros delivering positive EBITDA results. Earnings per share also saw significant growth, rising from a loss of $0.35 in the prior year period to a gain of $0.64 per diluted share in the fourth quarter. This 4Q 2023 financial and operating performance also reflects our continuous improvement efforts, driven by operational changes we implemented throughout 2023. These changes include enhancing our marketing efficiency across all EUs, rightsizing of the cost structure to our revenue base, and in particular within Rasmussen and successfully executing on the APEI shared services transformation that we began a year ago.

Now let’s turn our attention to APEI’s education units, starting with APUS. In 4Q 2023, overall net course registrations increased 4% year-over-year to 90,700 registrations, which was at the top of our guidance range. APUS’ strength with the military resulted in active duty registrations increasing by 5%, while veteran registration show continued momentum with 13% year-over-year growth, a continued testament to the strong military franchise that AMU has built. Non-military registrations continue to be soft in both the competitive labor and higher ed markets for those students. The 4% increase in registrations in the quarter, combined with the positive impact of pricing actions earlier in 2023, partially offset by the mix shift to lower revenue military enrollment resulted in an 8% increase in revenue at APUS.

However, this strong revenue performance coupled with cost containment and lower marketing spend, resulted once again in strong margin improvement in the fourth quarter with EBITDA increasing to $27.7 million from $20.6 million just a year ago. This resulted in a 35% margin for the quarter as compared with 28% in the prior year period. Looking ahead to the first quarter of 2024, we expect total registrations at APUS to again increase year-over-year, but at a slightly slower pace than 2023’s very strong performance. I am proud to report that last month, AMU was named the 2024 Institution of the Year by the Council of College and Military Educators, CCME for its dedication to educating active duty service members and their families. AMU was selected from over 2,000 institutions.

This is the second time in 12 years that AMU has been honored with this award. From a regulatory perspective, APUS met the Department of Ed’s 90/10 rules for 2023 with a ratio of 89%. As a reminder, 2023 was the first year that military tuition assistance and veterans education funding were included in the 90 portion of the calculation. Turning our attention to Rasmussen. The team delivered in 4Q 2023, the best bottom line performance in a year with positive EBITDA of $409,000 even while enrollments decreased 10% in the quarter. Additionally, on-ground nursing and health ed programs showed strong growth, including the BSN program up over 20%. Rasmussen enrollments are finalized for the first quarter of 2024, and overall enrollment decreased just 6% as compared with double-digit declines for each of the last four quarters.

Online enrollments were slightly positive, while on-ground healthcare enrollments declined 11%, driven primarily by declines of Rasmussen’s ADN program. Please note that to more closely align our public reporting with how Rasmussen has been operating the university internally, since the reorganization in late 2022, we will discontinue our public reporting of nursing versus non-nursing effective next quarter and shift to campus healthcare versus online reporting instead. For compatibility, we’ve included a table in the appendix of our 4Q 2023 earnings presentation. As for Rasmussen 4Q 2023 NCLEX results, based on final scores reported for all states, except Wisconsin, which has not yet reported but where Rasmussen expects all four programs to pass, Rasmussen on-ground pre-licensure nursing programs achieved or surpassed the respective state thresholds for 26 of 29 programs or 90% of all programs in the fourth quarter 2023.

This was up from about 80% in the third quarter and considerably up from 60% a year ago. For the entire year, 2023 measurement period, 20 of 29 programs or about 70% past which includes the preliminary results for Wisconsin, and that is over 20 points higher than a year earlier. Importantly, the trend has improved steadily each quarter since 1Q 2023. Even as Rasmussen has delivered much better scores over the past year, Rasmussen’s Bloomington, Minnesota ADN program has continued to perform below state standards. As a result, Rasmussen has taken the difficult decision to voluntarily close the ADN program at this campus effective in 1Q 2024 and has received approval from the Minnesota Board of Nursing to teach out this program by the end of 2Q 2024.

Rasmussen had already stopped enrolling new students in the Bloomington ADN program as of the last quarter and we expect minimal impact on enrollments and revenue given that fewer than 50 students will still be in the program upon closing. While this has been a difficult decision to make, Rasmussen remains committed to offering strong nursing programs in the Twin Cities. As such, Rasmussen will focus on attracting BSN students to that location instead, where Rasmussen has reported an over 90% NCLEX pass rate for BSN in the most recent quarter. This pivot to BSN also reflects the high demand for BSN nurses in the Twin Cities health care market relative to ADN nurses. Rasmussen expects for the growth in its non ADM Health Ed campus-based program, and the institution’s more targeted programmatic marketing efforts are helping to drive improved enrollment in these areas by streamlining processes for identifying and attracting new students.

At Hondros, it delivered record enrollment of 3,300 students in the first quarter of 2024, surpassing 3,000 enrolled students for the second consecutive quarter. Demand remains strong for its PN and ADN nursing program with the new Detroit campus continuing to perform very well. Legacy campuses, including Indianapolis, while still operating with enrollment caps as a new program, also contributed to growth. This robust enrollment growth has driven a strong top line, with revenue growing 25% in the fourth quarter of 2023 and 21% for the full year, 2023. During 2023, Hondros implemented a modest price increase in the second quarter, reduced headcount to optimize operating costs, and delivered positive EBITDA of $1.1 million in the fourth quarter compared to a loss of $700,000 in the prior year period.

This represented a 7% margin. And with that strong fourth quarter performance, Hondros delivered positive adjusted EBITDA for the year of $400,000, as compared to a loss last year. Hondros maintained its track record of achieving high NCLEX scores in its PN program in 2023. And for the first time, since 2014 has also reached the passing criterion for its RN program in Ohio. This achievement sets the stage for Hondros to have the opportunity to expand its ADN RN program, Indianapolis and Detroit where that program is not currently offered. Additionally, in 2024, Hondros plans to begin offering a medical assisting program at all Hondros Ohio campuses. This will increase utilization of both these locations and prospective student leads and will lead to increased access to healthcare education for the local community population, which will also improve profitability.

I would now like to turn our attention briefly to 2024. We are pleased to provide full year 2024 guidance for revenue and adjusted EBITDA. For revenue, we expect a range of $610 million to $620 million, and for adjusted EBITDA, we expect a range of $55 million to $65 million. In 2024, we are investing in several initiatives that we believe will strengthen our market position, set the stage for improved student experience and success and will lead to additional growth. These areas include APS, which is both investing in curriculum modernization to improve the student experience and satisfaction and has announced the first time – first time faculty wage increase in 14 years. Hondros is relocating two campuses and has plans to add programs to increase access and to better meet the needs of its students and health partners in the local communities.

APEI, which is modernizing and optimizing our enterprise technology platform to experience includes the technology transition for Rasmussen from colleges and the upgrade of the training platform at USA In closing, it remains my top priority to attract and retain strong leaders across APEI and our education units to drive operational enhancements and to foster a culture of excellence and trust among our internal and external stakeholders to uphold the educational promises we make to over 107,000 students each year. Before turning the call over to Rick Sunderland, our CFO, I’d like to summarize by saying, while challenges remain and our efforts to address them are ongoing, our 1Q 2024 guidance coupled with the fourth quarter’s outperformance, signifies the return to year-over-year growth and profitability and improved visibility, tangible proof points, whether enrollment trends, profitability metrics or NCLEX scores reflects the steps we have taken to strengthen our schools and the overall enterprise.

Having exceeded our revenue and adjusted EBITDA outlook for each of the last two quarters, we are well-positioned as we enter 2024. Our entire APEI team recognizes the significance of the challenges we have faced and are energized by how we have come together to strengthen our organization to prepare for the next phase of our journey. As we begin 2024, we do so from a position of stability with a large and growing addressable market, a committed leadership team, a distinctive value proposition and a well-established franchise among service-minded adult learners. With that, let me turn the call over to APEI’s CFO, Rick Sunderland.

Rick Sunderland: Thank you, Angie. Looking at our fourth quarter 2023 financial results, total revenue for the quarter was $152.8 million, up $0.4 million or 0.2% from the prior year period and better than our fourth quarter guidance. Fourth quarter revenue growth was driven by increased revenue at APUS and Hondros, partially offset by revenue declines at Rasmussen and Graduate School. For the quarter, adjusted EBITDA was also above our previously issued guidance due in part to lower-than-expected advertising costs in the quarter at APUS and Rasmussen and lower-than-expected compensation costs. For the quarter, adjusted EBITDA was $25.7 million compared to $15.4 million in the prior year period. The current quarter results represent an adjusted EBITDA margin of 16.8% compared to 10.1% in the prior year quarter, reflecting the modest revenue growth in the quarter, combined with lower advertising and marketing costs and lower compensation costs due to the third quarter reduction in force.

Compared to the prior year quarter, in total, advertising and marketing costs decreased $10.7 million year-over-year. Our diluted EPS in the fourth quarter was $0.64, a significant improvement from the loss of $0.35 in the prior year period and again exceeding fourth quarter guidance. At APUS, revenue was $79.4 million in the fourth quarter, up 8.1% as compared to the prior year due to continued growth in net course registrations from students utilizing TA and VA education funding and the impact of tuition and fee increases implemented in the second and third quarters of 2023. APUS continued to achieve more with less. For the quarter, net course registrations increased 4% on lower advertising and marketing costs of $1.8 million compared to the prior year.

For the year 2023, advertising and marketing costs was $6.8 million, lower than the prior year. APUS EBITDA for the fourth quarter was $27.7 million compared to $20.6 million in the prior year, an increase of 34% year-over-year. APUS EBITDA margin for the quarter increased to 35% compared to 28.1% in the prior year period. At Rasmussen, fourth quarter revenue was $52.6 million, a decrease of 13.4% compared to the prior year due to lower enrollment during the quarter. However, the rate of revenue decline improved in the fourth quarter as compared to the third quarter decline of 15.4%. Rasmussen’s EBITDA turned positive in the quarter and was $0.4 million compared to an EBITDA loss in the prior year period. Fourth quarter EBITDA benefited from lower advertising expense and labor savings from the previous reduction in force.

For the quarter, advertising and marketing spend was $4.5 million lower than the prior year quarter. For the year 2023, advertising expense was $11.1 million lower than the prior year. At Hondros, revenue was $15.8 million for the fourth quarter, up 24.9% as compared to the prior year, due to continued growth in enrollments. For the quarter, Hondros total enrollment grew 19.2% to approximately 3,100 students, the highest enrollment ever. For the quarter, Hondros achieved positive EBITDA of $1.1 million compared to an EBITDA loss of $0.7 million in the prior year quarter. Graduate School, included in Corporate and Other, experienced a 10% decline in revenue to $5.1 million, primarily due to lower enrollments in the quarter. Graduate School enrollments continue to be negatively impacted by the continuing federal agency funding uncertainty over federal funding, either through continuing resolutions or the passing of annual funding legislation.

For the quarter, Graduate Schools EBITDA loss was $1.1 million compared to an EBITDA profit of $0.1 million in the prior year period. At December 31, 2023, cash, cash equivalents and restricted cash was $144.3 million, an increase of $14.9 million from year-end 2022. Restricted cash at December 31 was approximately $27.7 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. For the year 2023, cash flow from operations was $45.5 million, an increase of $16.3 million or plus 55.8% as compared to the prior year. The increase in cash and cash flow was primarily due to higher revenue and operating income at APUS, increased payments received from the Army, including payments related to prior periods prior to 2023 and the timing of other receipts and payments, partially offset by our investment in capital expenditures, payment of preferred dividends, repurchases of common stock and the change in billing approach in the fourth quarter for TA and APUS.

Principal on API’s term loan at December 31 is unchanged from the prior year end at approximately $99 million, with unrestricted cash at approximately $117 million, API continues to be net cash positive. Additionally, there are no borrowings under API’s $20 million revolving credit facility, which remains fully available. During the fourth quarter, we repurchased 1.7 million of our common stock, bringing our repurchases in 2023 to 1.5 million shares for $9.7 million or an average price of approximately $6.40. In addition, we repurchased an additional 251,000 shares in the first quarter of 2023 for $2.8 million. So over the past year, we’ve repurchased an aggregate of 1.76 million shares for $12.5 million at an average price of approximately $7.08.

Turning now to the first quarter 2024 outlook. APUS net course registrations are expected to be between 97,000 and 99,000 registrations, an increase of between 1% and 3% over the prior year period. At Rasmussen and Hondros, first quarter student enrollments are actual because of the quarterly starts to these schools. At Rasmussen, first quarter total on-ground enrollment decreased 11% and to approximately 6,300 students, while total online student enrollment increased 1% year-over-year to approximately 7,200 students for an aggregate enrollment decline of approximately 6% year-over-year to approximately 13,500 students. At Hondros, first quarter total student enrollment increased 22% year-over-year to approximately 3,300 students, the highest enrollment ever at Hondros.

In the first quarter of 2024, consolidated revenue is expected to be between $151 million to $153 million. The company expects net loss to common shareholders to be between $4.4 million and $3.0 million, or a loss between $0.25 and $0.17 per diluted share. Adjusted EBITDA is expected to be between $8 million and $10 million for the first quarter of 2024. For the full year 2024, we anticipate consolidated full year revenue of between $610 million and $620 million and adjusted EBITDA of between $55 million and $65 million. With that, operator, we would like to open the line for questions.

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Q&A Session

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

Jasper Bibb : Hey, good evening. Nice results here. I guess the obvious question is you did a really strong 17% EBITDA margin in the fourth quarter. And I guess that’s always kind of a seasonally strong margin in the fourth quarter, but the guide implies a 10% margin or so. So I guess you mentioned the growth investments earlier, but how do we bridge the 4Q margin exit rates where you’re guiding in 2024?

Rick Sunderland : Well, Jasper, the fourth quarter is seasonally strong by giving an indication of adjusted EBITDA for the year, you can see sort of an increase year-over-year of that margin. But we’ve — we’re investing in a number of initiatives, which Angie outlined in her remarks. Importantly, course improvement, faculty salaries and technology. I think those are the three primary areas of investment, and they’re all going to lead to improved student experience and improved student outcomes. Angie, would like to comment further?

Angela Selden : I would just say bridging, which would be looking back at 4Q of 2023, Jasper, a couple of things just to highlight. First, we were able to conserve our marketing spend and spent about $3 million less than we had expected. At the same time, we had been accruing a somewhat larger bonus accrual than what we ended up spending for the year. So that saves some money, and obviously, resulted in a higher performance in the fourth quarter than we had originally forecasted. And we had some revenue outperformance at APUS above what we had expected and lower expenses at Hondros. So all of those things added up to a very favorable 4Q 2023 that was above what we had guided to before.

Jasper Bibb : Got it. Would there be any way to frame the size of those growth investments in like an absolute dollar perspective versus, I guess, what would be considered normal or what you’re spending in those categories in 2023?

Steve Somers : Yes. Hi, Jesper, it’s Steve. I think at this point, right, from a guidance standpoint, the metrics we’re comfortable providing our revenue and adjusted EBITDA and obviously, CapEx. We’re not prepared at this time to kind of dig into that level of detail and bridge from 2023 to 2024, right? And it will also depend on some of the timing of when that happens. So there’s a range that we’ve got internally, but I think that that’s captured in the overall guidance range that we provided for adjusted EBITDA.

Jasper Bibb: Fair enough. I figured how to ask. Maybe next one for me. It looked like the receivables balance picked up quite a bit in the fourth quarter with some of the billing changes at Army. Would you expect those DSOs to normalize down in the first half of 2024, and I guess, longer term, how do you plan to manage that? I think it’s $26 million in receivables from Army for 2022 and 2023 in light of 90/10 compliance? Thanks.

Rick Sunderland: Well, Jasper, we talked about a change in our billing policy effective January 1. We will see normalization in receivables. You’ll see a decline from the year-end number. I don’t think you’ll see a return to where we were at June 30th, simply because we’ve changed the timing of how we bill the military.

Jasper Bibb: Okay. Understood. And I guess maybe at the segment level and it doesn’t have to be like particularly specific, but just any color on how you’re thinking about segment margins for your main three segments in 2024?

Rick Sunderland: Yeah, Jasper. I think the way to think about the various segments, we’re not providing segment level detail, but we expect that we’ll see improvement in Hondros Graduate School and Rasmussen APUS’ is relatively flat, and that reflects some of the investments that Angie just talked about in terms of technology and curriculum and quality improvement. So I think you should also think from a sequential flow or a quarterly flow perspective that our quarters will follow a similar pattern as to what we delivered in 2023.

Jasper Bibb: That’s really helpful. Thanks guys.

Operator: Your next question comes from the line of Stephen Sheldon with William Blair. Your line is open.

Matt Filek: Hey team, you have Matt Filek on for Stephen Sheldon. Thank you for taking my questions. I wanted to start with one on NCLEX pass rates. I was wondering if you could talk about what the main driver of the improving first time NCLEX pass rates has been given you have a variety of initiatives underway there? And then as a second part to that, could you also talk about what campuses may still be facing enrollment caps due to underperforming NCLEX scores, whether those be self-imposed or from the nursing boards?

Angela Selden: Thanks for the questions. The first I will answer by saying, if you recall earlier last year, we did hire new leadership in our nursing program, Abrasion and what Dr. Pelisco [ph] has implemented includes a strengthened faculty, onboarding and training to provide more visibility to helping students have awareness around the importance of NCLEX exams early in the curriculum. The second was that we invested at Rasmussen in student success coaches to help strengthen the NCLEX preparation that was present at the campuses already. We implemented assessments during the middle and end of the program to help give students remediation strategies, identify areas of focus and help them really pinpoint the areas that they needed to pay attention to as they prepare for the NCLEX exam.

And certainly, the changes to the overall NCLEX exam to next-gen has seen the NCLEX scores increase across the nation. The second part of your question is which campuses are affected by enrollment cap. As we’ve mentioned previously, Kansas has caps, but those are not related to NCLEX scores or anything that we’ve imposed. It’s simply a programmatic level cap, which we intend to explore in 2024. Illinois has a cap that had historically been present as a result of more about the accreditation of the full accreditation of the program than the NCLEX scores themselves recently, and we talked about this in our last call, the Illinois legislature Board of Nursing have removed the temporary approval and Rasmussen has been granted the accreditation for its program in Illinois.