Aspen Group, Inc. (NASDAQ:ASPU) Q2 2023 Earnings Call Transcript

Aspen Group, Inc. (NASDAQ:ASPU) Q2 2023 Earnings Call Transcript December 13, 2022

Operator: Good afternoon. Welcome to Aspen Group’s Fiscal Year 2023 Second Quarter Earnings Call. Please note that the company’s remarks made during this call including answers to questions include forward-looking statements, which are subject to various risks and uncertainties. These statements include our restructuring initiatives, including efforts to reduce our expenditures and the anticipated results and benefits of these efforts; our plans to subsequently increase marketing spend rate and the impact that is expected to have on in timing of achieving our year-over-year enrollment growth; our plan to maintain an approximately breakeven adjusted EBITDA; the continued strong demand for the MSN-FNP program; our search for candidates for potential AR facility; and the intended use of proceeds from any loan transaction that may result; anticipated future revenue from the teach-out of our pre-licensure campuses; our future growth and growth strategy; our fiscal 2023 guidance and our liquidity.

Actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. A discussion of risks and uncertainties related to Aspen Group’s business is contained in its filings with the Securities and Exchange Commission including the Form 10-K for the fiscal year ended April 30, 2022 and in the press release issued this afternoon. Aspen Group disclaims any obligation to update any forward-looking statement as a result of future developments. Also, I’d like to remind you that during this conference call, the company will discuss EBITDA and adjusted EBITDA, which are non-GAAP financial measures and talking about the company’s performance. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the earnings release issued by the company today.

Please note that the earnings release is available on Aspen Group’s website aspu.com on the IR calendar page, under News and Events. A transcript of this conference call will be available for 1 year on the company’s website. Please note that the earnings slides are available on Aspen Group’s website aspu.com on the Presentations page under Company Info. Now, I will turn the call over to Michael Mathews, Aspen Group’s Chairman and Chief Executive Officer.

Michael Mathews: Good afternoon and thank you for joining our call today. We are encouraged by our second quarter results, which reflect the impact of the actions we have taken to reduce marketing and general and administrative spend as part of the restructuring initiative that we launched in the prior quarter. Gross margin improved by 900 basis points on lower revenue. And we narrowed our net loss and delivered positive adjusted EBITDA. USU’s revenue grew 9% on continued strong demand for the MSN-FNP program as that program continues to account for 83% of USU’s total student body. This growth helped to offset the expected decline in AU revenue, coming primarily from the combined effects of the teach-out of our BSN pre-licensure program and significantly lower marketing spend.

We set out to right-size the company with the restructuring initiated in the first quarter of fiscal year 2023 and our efforts are delivering results. The savings from the restructuring plan drove a year-over-year increase of approximately a $0.5 million in gross profit, which flowed through the P&L and reduced cash used in operations in the quarter by $2 million compared to a year ago quarter, allowing us to improve adjusted EBITDA to a $0.5 million versus negative $0.7 million last year’s second quarter. For the quarter, cash flow from operations was positive $1 million. And we ended the quarter with unrestricted cash of $2.3 million on par with the cash balance at the end of last quarter. Stabilizing our cash balance is a priority. And we are rigorously managing the company to achieve that.

One last item related to our cash balance. As I discussed last quarter, we engaged Lampert Capital Advisors to assist with securing an accounts receivable financing agreement. Lampert conducted due diligence on our accounts receivable, which they recently completed. Subsequently, they began an outreach program to prospective lenders and we are in the process of identifying potential candidates. Switching now to our operational metrics for Q2, there have been several events in the past calendar year that impacted our enrollment patterns, some due to external factors like increased workloads for nurses, but the two primary events were the enrollment stoppage following the announcement of the teach-out of our pre-licensure program and the significant reduction in our marketing spend levels following the posting last April of an $18.3 million surety bond with the Arizona State Board for Private Postsecondary Education.

On October 31, however, we signed an updated stipulated agreement with the Arizona State Board for Private Postsecondary Education, which reduced the surety bond from $18.3 million to $5.5 million. This has resulted in the insurance company recently agreeing to return $1.5 million of the $5 million of cash that was previously being held as collateral for the larger bond, providing the company with additional cash for operations. As result of the two events just discussed in Q2 of fiscal year 2023, our marketing spend was down by $3.1 million over the prior year quarter and $3.7 million sequentially. Consequently, new student enrollments decreased 46% year-over-year. The downward trend in enrollments has reduced AGI’s active student body by 23% year-over-year, mostly due to AU’s total active student body decrease of 29%.

Photo by Christin Hume on Unsplash

USU’s total active student body decreased by 5% on a year-over-year basis, nursing students continue to comprise 86% of AGI’s total active students at the end of Q2 fiscal 2023. Of the students seeking advanced nursing degrees, 8,269 are RNs, including 5,517 at Aspen University, and 2,752 in USU. In contrast, the remaining 1,123 nursing students at quarter end were enrolled in Aspen University’s BSN pre-licensure program in the Phoenix, Austin, Tampa, Nashville and Atlanta metros. In terms of our future growth plans, with the pending release of the $1.5 million from the insurance company and our expectation that we closed an AR facility during Q4 of fiscal 2023, we intend to return to a marketing spend rate in our fiscal fourth quarter that is anticipated to resume year-over-year enrollment growth by the second half of our upcoming fiscal year 2024.

As we have communicated over the last few quarters, we have revised our business plan to refocus on our traditional post-licensure nursing education business, designed to methodically replace the anticipated loss pre-licensure revenue that winds down at the end of fiscal 2024. Our near-term objectives are twofold. First, we intend to secure an AR facility that will allow us to spend on an annualized basis between $7 million to $9 million on new marketing campaigns that will drive enrollment growth in our USU FNP and Aspen online nursing programs primarily. Second, we plan to manage the company with steadfast commitment to maintain an adjusted EBITDA level in the breakeven to slightly negative range. Given our long history of driving post-licensure nursing enrollments and highly efficient online marketing initiatives, our entire management team is confident we can meet our near-term and medium-term goals.

I will now hand the call over to Matt to cover the details of our second quarter financial results. Please go ahead, Matt.

See also 10 Best EV Charging Stocks To Buy and 10 Stocks Most Affected By Inflation.

Matt LaVay: Thank you, Mike and good afternoon everyone. In my comments on the quarterly results, I will refer to the second quarter that ended on October 31, 2022. Unless otherwise stated, all comparisons are to the prior year’s second quarter ended October 31, 2021. I will begin with a review of our financial results for the 2023 fiscal second quarter, including some detailed commentary on P&L items and additional commentary on the restructuring program initiated late in Q1. I will then conclude with comments on our balance sheet and cash flow. Before I jump into the details, I want to call out three unique elements in this quarter to provide context to the details I will cover. First, as expected, we saw a sequential decrease in our active student body, which is consistent with the marketing spend reduction begun in fiscal Q4 2022 and the stoppage of enrollments in all of our pre-licensure campus locations.

This resulted in a quarterly sequential decline in revenue in both our Aspen University online and pre-licensure programs. Our active student body decreased from 12,048 in Q1 2023 to 10,957 in Q2 2023. Second, as part of the restructuring announced on last quarter’s earnings call, we significantly reduced marketing spend in Q2, which positively impacted our gross margin and adjusted EBITDA. Marketing spend was reduced to $825,000 in the second quarter of fiscal 2023 compared to $4 million in the year ago quarter and $4.5 million in the sequential prior quarter. Third, continued cost controls and the restructuring further reduced ongoing G&A costs versus the prior year second quarter and the sequential prior quarter. Now on to the details. Total revenue was $17.1 million versus $18.9 million in the year ago quarter or a decrease of 10%.

This decrease is attributed to the decrease in marketing spend that was initiated two quarters ago in Q4 fiscal 2022 and the halt to enrollments at our pre-licensure locations. Gross profit and gross margin increased to $10.2 million and 60% respectively versus $9.7 million and 51% respectively for the year ago quarter. The year-over-year gross margin improvement is primarily a function of lower marketing spend, as I discussed in my opening remarks. Instructional costs for the quarter were $5.5 million or 32% of revenue, up from $4.8 million or 26% of revenue in the year ago quarter. Our core student population is increasing due to the progression of pre-licensure double cohorts in our Phoenix locations and the entry of pre-licensure students into the core curriculum in our newer locations.

This in turn increases instructional costs as a percentage of revenue due to the requirement of a higher ratio of instructors to students during the curriculum portion of the pre-licensure program. Additionally, higher USU clinical immersion-related instructional costs were incurred in the quarter due to the growth in the MSN-FNP program. Total marketing and promotional costs for the second quarter were $825,000 or 5% of revenue, down from $4 million or 21% of revenue. The decrease in marketing as a percentage of revenue, results from the planned decrease in marketing spend across all programs. The quarter’s general and administrative costs were $10.9 million or 64% of revenue compared to $11.6 million or 61% of total revenue. The year-over-year decrease in G&A spend is due to both the impact of the restructuring and cost controls designed to reduce G&A spend across all functions, primarily corporate AGI.

Total net loss was $2.3 million or $0.09 per basic and diluted share compared to a net loss of $2.9 million or $0.11 per basic and diluted share. From a unit perspective, Aspen University’s net income for the quarter was $1.1 million compared to $1.3 million. USU’s net income was $1.8 million versus $877,000. Finally, AGI incurred a net loss of $5.2 million compared to a net loss of $5.1 million. Included in the AGI net loss is interest expense of $700,000 compared to $100,000. The Q2 interest expense includes a 1% commitment fee of $200,000 on the undrawn 2022 revolving credit facility, which will not repeat in subsequent quarters. Consolidated EBITDA for the quarter was a loss of $603,000 compared to an EBITDA loss of $1.9 million in the prior year period.

Again, reduced marketing spend and cost control measures in G&A drove the improvement in EBITDA. Second quarter EBITDA compared to the prior year quarter for each of the three units was as follows. Aspen University generated $1.9 million compared to $2 million. USU generated $1.9 million compared to $976,000. AGI had an EBITDA loss of $4.4 million compared to a loss of $4.9 million. The increase in USU EBITDA is mostly attributed to the increased revenue in the unit’s FNP post-licensure degree program, which has the highest concentration of students and the highest LTV. Consolidated adjusted EBITDA was $537,000 compared to a loss of $715,000. From a unit perspective, Aspen University generated adjusted EBITDA of $2.1 million compared to $2.3 million and adjusted EBITDA margin was 20% as compared to 18%.

USU generated adjusted EBITDA of $2.1 million compared to $1.1 million and adjusted EBITDA margin improved significantly to 32% compared to 18%. Finally, AGI Corporate incurred an adjusted EBITDA loss of $3.7 million compared to a loss of $4.1 million. As Mike mentioned, we implemented a restructuring plan late in the first quarter of fiscal 2023, which has already resulted in significant cash benefits for the company. These benefits are apparent in the second quarter results, and we expect additional benefits for the remainder of the fiscal year. There are two key components of the plan. First, we scaled back marketing ad spend to maintenance spend levels of $150,000 per quarter, which resulted in savings of $3.7 million in Q2 versus Q1 and should deliver savings of $3.8 million in Q3.

The Q3 savings estimate is based on a normalized marketing ad spend run rate of about $4 million per quarter. Second, the restructuring included the elimination of approximately 70 positions, mostly within our G&A functions at Aspen University and AGI. As a result, additional restructuring savings of $600,000 were realized in Q2 and $1 million of additional savings are expected in Q3. The Q2 G&A savings were $150,000 less than we initially expected, primarily due to the timing of eliminating positions, which does not impact our forecasted future savings. Total spend reductions were $4.5 million in Q2 and are expected to be $4.9 million in Q3. In summary, these significant spending reductions positioned the company to generate positive cash flow from operations beginning in the second quarter.

Moving to the balance sheet. As of October 31, 2022, our unrestricted cash and cash equivalents were $2.3 million and restricted cash was $6.4 million. As of April 30, 2022, our unrestricted cash and cash equivalents were $6.5 million and restricted cash was $6.4 million. Cash used in operations for the first 6 months of fiscal 2023 was $2.6 million. Importantly, though, cash generated from operations for the second quarter was a positive $1 million. The shift from operating cash flows using cash of $3.6 million in the fiscal first quarter to being a source of cash in the second fiscal quarter was the result of lower discretionary spending on marketing and the benefits of our restructuring plan, which narrowed our net loss. Our second quarter cash generated from operations also includes $418,000 of tenant improvement reimbursements.

A cash flow positive change in working capital also played a role. The positive working capital impact was expected as decreased marketing spend reduced enrollments, which then decreased capital needed to finance growth in student receivables. We also had CapEx spend during the first 6 months of $842,000. Without the continued investment in pre-licensure campus locations, our CapEx spend going forward should approximately €“ should approximate $300,000 to $400,000 on a quarterly basis. As Mike previously mentioned, subsequent to the end of Q2, $1.5 million of restricted cash associated with the surety bond will become unrestricted, providing additional cash for operations. Additionally, the insurance company agreed to terminate the draw restriction on the 2022 revolving credit facility agreements.

When the AR facility closes it will become senior secured. And at that point, we will terminate the 2022 revolving credit facility agreements. With respect to our share count, the weighted average number of common basic shares outstanding at the end of the quarter was 25,282,947 versus 24,957,046. We are not providing guidance at this time. We plan to update our business plan when we close and execute an AR financing agreement. The objective of the AR facility and the related business plan will be to resume marketing spend at a level which allows us to offset the decline in the pre-licensure student body with a growing post-licensure online student body while at the same time achieving operating results of approximately breakeven to slightly negative adjusted EBITDA.

That concludes our prepared remarks. I will now turn the call back to the operator for questions. Operator, please open the call for Q&A.

Q&A Session

Operator: Our first question comes from the line of Eric Martinuzzi with Lake Street. Please proceed with your question.

Eric Martinuzzi: Yes. I wanted to dive into the marketing spend just to get a feel for that. It sounds like it’s all kind of contingent on the AR financing. But just to get the quarters correct here. You said Q1 was $4.5 million of marketing spend, Q2, it dropped down to $825,000 and then your plan for Q3, could you tell me that again?

Michael Mathews: Hey, good afternoon. Eric, it’s Mike. Our plan in Q3, because we’re looking to close the AR facility round about at the end of the third quarter, which is the end of January. So this full quarter is kind of a maintenance spend. So it will be sub $0.5 million spend rate this quarter.

Eric Martinuzzi: Okay. And then the €“ I know we’re pulling back across the board here. But the €“ we had growth in revs at the USU segment level, but our student body actually declined. Can you help me understand that?

Michael Mathews: Well, when we €“ I think in the last couple of quarters, we did mention that we had a little bit of a price increase at USU and a few other of our degree programs. So I think the pricing is what’s helped increase the revenue for USU even though there is a very, very small modest decline of student body year-over-year.

Eric Martinuzzi: Okay. And then what’s the expectation? Is that, that does USU student body continue to decline as we €“ the €“ as the marketing spend is reduced here this quarter?

Michael Mathews: Yes, I think one of the pieces of great news that I would love our analysts and our great shareholders to take away today is that even though we dropped our spend rate quite significantly in the second quarter and as well in the third quarter, and I’ve mentioned historically that we have such strong brands, and we’ve been spending so much in marketing over the last 5 years, 6 years, that about third of our enrollments are organic in nature. In other words, we don’t pay for the ad. So our enrollments, as you guys can see, if you take pre-licensure out of the equation, our enrollments have not declined as much as one might forecast or expect. So we’re hanging in there quite well even though our spend rate went down to a maintenance level. So hopefully, folks are impressed by the results of the enrollments, even though, again, there is not a significant spend rate.

Eric Martinuzzi: I know you’re not giving specific guidance for the third quarter, but seasonally, it’s a softer quarter with the holidays. Should we anticipate any change in that trend? In other words, the January quarter down sequentially from the October quarter?

Matt LaVay: Yes. This is Matt. I’ll take that. So from a revenue standpoint, you can expect to see our results decline modestly from Q2 into Q3 because of the fact that there is a seasonal weakness. And the other factors, we’re continuing to teach out the pre-licensure program. So the effects of both of those will put some pressure downward on revenue. As a result, from a bottom line standpoint, we will still hover around that breakeven adjusted EBITDA, but we will probably dip slightly negative for the next quarter. We will still realize all of the savings that we put in place from the restructuring. So we will have another solid quarter when it comes to G&A savings and the marketing savings, but the revenue declines that will mostly impact the bottom line.