Lincoln Educational Services Corporation (NASDAQ:LINC) Q1 2024 Earnings Call Transcript

Lincoln Educational Services Corporation (NASDAQ:LINC) Q1 2024 Earnings Call Transcript May 6, 2024

Lincoln Educational Services Corporation misses on earnings expectations. Reported EPS is $-0.00706 EPS, expectations were $0.02. LINC 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 day, and thank you for standing by. Welcome to the Lincoln Education Services 2024 First Quarter Results Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael Polyviou. Please go ahead.

Michael Polyviou: Thank you, Marvin. Good morning, everyone. Before the market opened today, Lincoln Educational Services issued its news release reporting financial results for the first quarter ended March 31, 2024. The release is available on the Investor Relations portion of the company’s corporate website at www.lincolntech.edu. Joining us today on the call are Scott Shaw, President and CEO; and Brian Meyers, Chief Financial Officer. Today’s call is being recorded and is being broadcast live on the company’s website, and a replay of the call will be archived also on the company’s website. Statements made by Lincoln’s management on today’s call regarding the company’s business that are not historical facts may be forward-looking statements as term is identified in federal securities laws.

The words may, will, expect, believe, anticipate, project, plan, intend, estimate, and continue as well as similar expressions are intended to identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results. The company cautions you that these statements reflect current expectations about the company’s future performance or events and are subject to a number of uncertainties, risks, and other influences, many of which are beyond the company’s control that may influence the accuracy of the statement and the projections upon which the segment and statements are based. Factors that may affect the company’s results include, but are not limited to, the risks and uncertainties discussed in the Risk Factors section of the annual report on Form 10-K and the quarterly report on Form 10-Q filed with the Securities and Exchange Commission.

Forward-looking statements are based on the information available at the time those statements are made and management’s good faith belief as of the time with respect to future events. All forward-looking statements are qualified in their entirety by this cautionary statement and Lincoln undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise after the date thereof. [Operator Instructions] Now I would like to hand the call over to Scott Shaw, President and CEO of Lincoln Educational Services. Scott, please go ahead.

Scott Shaw: Thank you, Michael, and good morning, everyone. We’ve had an exceptionally strong start to 2024. And at this point, we see our momentum continuing through the remainder of the year. Lincoln continues to invest in transformative strategies that are driving our growth. At the same time, we are fully capitalizing on the distinct trend in America to question the value and cost of a four year college degree, while the nation skill gap continues to stifle growth and opportunities. Our focus on offering innovative, efficient student curriculums is enabling a growing number of graduates to enter rewarding in-demand careers is also attracting additional corporate partners and broadening our relationship with existing partners.

During the first quarter, this focus led to 15.3% student start growth, nearly 20% revenue growth and the doubling of adjusted net income. Our solid performance, which is even more impressive as it is largely generated from existing programs in campuses is enabling us to increase the full year guidance for revenue, adjusted EBITDA, and adjusted net income. As we’ve discussed during previous calls and during our recent Investor Day, our highly scalable hybrid instructional platform, which we’ve branded Lincoln 10.0 is a cornerstone to our success. We’ve discussed how Lincoln 10.0 combines hands-on learning at campus facilities with a greater component of classroom work delivered through online instruction. The model is enabling our students to work part time or manage other commitments while pursuing their Lincoln Education and is specifically designed to help a higher percentage of students to graduate.

At the same time, the platform is creating instructional efficiencies and increasing productivity. During the quarter, we began to generate material operating leverage through the expanding deployment of 10.0. We achieved more than 200 basis points of improvement in our direct instructional cost as a percent of revenue. When completed by the end of this year, Lincoln 10.0 will be used in teaching approximately 65% of our classes and we expect to generate increasing operating leverage as the year progresses and into 2025. We believe Lincoln 10.0 is playing a major role in a student’s decision to enroll at Lincoln. The platform reduces the time to complete many of our curriculums, speeding our graduates to begin their careers. This enhanced training productivity is also attractive to our corporate partners who remain constrained by the lack of skilled employees.

The platform has fundamentally changed how we teach our students and has positioned the company for the future as we implement our significant expansion plans. Replicating high in-demand programs at our existing campuses is one of our key growth strategies, and we remain on schedule to add eight more of these programs by the first half of 2025. We continue to expect that each of these programs will generate approximately $1 million of profitability within three years of opening. During the quarter, we welcomed the first class at our newest campus in East Point, Georgia. This new facility is the first result of our strategy to open one new campus per year and offers hands-on training in the automotive and skilled trades fields. As we showcased during our first Investor Day on March 19, the campus has 56,000 square feet of training space, including 15 automotive service spaces and up to 60 welding booths, labs, classrooms, and work areas, and we believe it is unique among trade schools by capitalizing on the best ideas from all of our campuses while elevating the student and teaching experience with its sleek modern design.

The labs and shops have the latest technology with lots of opportunities for hands-on learning. As I noted during our last call in March, the campus is the first school in the nation to incorporate best-in-class Electude training aids into our automotive program. To date, student starts enrollment at East Point have been above plan, which is boosting our confidence in our plan to add one new campus per year over the next four years. Late last year, we announced the second greenfield site, which is in Houston, Texas. Over the past four months, we have completed the plans for this new facility and will begin to build out shortly. We remain on schedule to welcome our first classes at this campus, which is our second in Texas in the second quarter of 2025.

This new campus will feature a training center of approximately 100,000 square feet and offer career opportunities in the auto, diesel, welding, HVAC, and electrical fields. In addition to new campuses in Atlanta and Houston, we are relocating existing campuses in Nashville and Philadelphia to new locations that facilitate existing program expansion in our replication strategy. Over the next two years, as we layer on new campus openings as well as the program replication strategy, we consistently expand our opportunities to increase overall student starts, while remaining focused on maintaining the impressive organic start growth at existing programs. During the quarter, we continued to fine-tune our marketing programs, which have certainly contributed to our start and revenue growth.

One new component of our outreach efforts involves joining forces with employers, government agencies, unions, and community colleges to increase awareness of the opportunities available through skilled trade careers. After participating in the successful statewide career education fair in the State of Connecticut, we helped establish a similar event in the state of Maryland. Just last week, we joined forces with several of our corporate partners, the Maryland Department of Labor and other contributors to sponsor the Maryland Career Quest that featured a keynote address by Maryland Lieutenant Governor, Aruna Miller. The event attracted over 1,200 high school students, veterans of the armed forces and adult career changes from the Baltimore and Washington, D.C. metro areas.

Additionally, with the expanding interest in skilled trades, we are raising our profile by being a resource to the media. For instance, I was recently interviewed by Stuart Varney on Fox News on the nation’s skills gap, strategies to fill it and the rewarding career opportunities available in the skilled trades. Before I turn the call over to Brian for a review of our financial progress during the quarter, I’d like to spend a few moments reviewing a new opportunity that we have secured with the Container Maintenance Corporation. We view this agreement as strategically critical for Lincoln, given its term and value, which over the five years is expected to be approximately $6 million. What is different about this contract is that none of our students are involved.

Instead, we are leveraging our curriculum and training capabilities to upskill their employers — sorry, their employees at their facilities. While we have enormous opportunities with our campus focused growth strategies, we believe that we have additional growth opportunities by providing workforce trending to companies across the country, whether we have a campus in their area or not. We are currently pursuing additional contracts with other employers. Meanwhile, we continue to expand our existing corporate partnerships. Most notable is our relationship with Hyundai Genesis, which now is available at all of our auto technician training campuses, and we are in active discussions with several other potential corporate partners in a variety of industries.

Finally, we have several events scheduled over the coming months to educate potential investors about the enhanced valuation potential offered through our shares. While we will be issuing news releases for each conference appearance, including the B. Riley, Lytham Partners, and Sidoti Conferences, we also have a campus tour on May 20 in Dallas, and we also have non-deal roadshows scheduled with Lake Street in Minneapolis on June 18 and with Barrington on June 20 and 21 in Milwaukee and Chicago. By all measures, Lincoln is on track to have an excellent year. We have transformed our company into an exceptional provider of educational services that meet the need of Americas corporations as well as America’s workforce. Our focus is leading to impressive growth while we have set in place several initiatives to expand our company.

As a result, we are positioned to build on the solid first quarter performance, both next quarter and for the foreseeable future. And importantly, our balance sheet remains strong, so we can achieve our growth without diluting shareholders. Now I’d like to turn the call over to Brian Meyers, so he can review some of our recent financial highlights as well as provide our updated and increased guidance. Brian?

Brian Meyers: Thank you, Scott, and good morning, everyone. Thank you for joining us today. I’m pleased to provide an overview of our first quarter 2024 financial results and to discuss our updated outlook for the remainder of the year. As Scott mentioned, our performance in Q1 was strong, surpassing our internal expectations. We experienced impressive growth in both revenue and student starts with revenue increasing nearly 20% and student starts 15%. This illustrates the momentum we are generating from our core campuses. To further fuel our growth, we are actively working on the build-out of seven new programs with six expected to be rolled out by year-end. In addition, we have identified two additional programs to be replicated next year.

We are also making progress with the build-out of our two campus relocations in Nashville and Levittown, as well a new campus in Houston. By year-end, we expect to invest approximately $50 million in CapEx for these two locations as part of our estimated total capital spending of $65 million to $70 million this year. Our investments in new campus and campus relocation for state-of-the-art facilities position us well for significant growth over the next five years. As we have outlined in our Investor Day presentation in March upon successful completion of our announced growth initiative, we have — we project to achieve revenue of approximately $550 million and adjusted EBITDA of $90 million by 2027. In terms of Q1 financial performance, revenue grew 20% to $103.4 million, primarily driven by an increase of 12% in average student population.

The growth resulted from a higher beginning population as we started 2024 with approximately 1,100 more students than in the prior year, coupled with our 15% stock growth. Thanks to the strong performance, we finished March with almost 1,400 additional students positioning us for continued growth this year. Our East Point, Georgia campus, which is having its grand opening event this Thursday, commences first class in March. While these points contribution of 29 students start and revenue of $90,000 was negligible for the quarter. The campus is generating strong student interest, enrollments and starts that is currently trending above our internal expectations. Before we dive into operating expenses, I want to know for comparability purposes, this discussion will exclude: One, East Point campus; two, preopening quest of new and relocating campuses; three, other non-recurring expenses and for the transitional segment.

Further details of these items are available on non-GAAP disclosures of our Q1’s earnings release. After adjusting for these items, total operating expenses amounted to approximately $100 million in line with our expectations upon factoring the additional expenses tied directly to our highest student population. During the quarter, we saw notable efficiencies in instructional expenses and marketing investments. Instructional expenses decreased as a percentage of revenue due to our transition to a hybrid learning model, which has begun to deliver efficiencies. By year-end, we expect about 65% of our population to be toured under the hybrid model. Marketing investments increased. However, we are seeing a solid return as evidenced by our 15% start growth while keeping our quest per start flat.

Our first quarter adjusted EBITDA results exceed our internal plan at approximately $6.5 million, almost tripling the previous year’s $2.2 million. Results were above our plan. As a result, we are raising our outlook for the remainder of the year. Our balance sheet remains robust. During the quarter, we strengthened our liquidity to $100 million, through the execution of a new $40 million credit facility with Fifth Third Bank. While we do not anticipate to draw on the credit facility in the near term, the facility further enhances our financial strength and stability, providing us with the additional flexibility to produce — to pursue growth opportunities, including additional new campuses. We finished the quarter with almost $70 million in cash and continue to be debt free, resulting in working capital of nearly $60 million.

Looking ahead to the remainder of 2024, based on our strong Q1 results and current trends, we are addressing our outlook upward for revenue, adjusted EBITDA and adjusted net income and as follows: revenue ranging between $418 million to $428 million; adjusted EBITDA in the range with $37 million to $32 million; adjusted net income ranging between $12 million to $17 million. The outlook for student start growth of 7% to 12% and capital expenditures in the range of $65 million to $70 million remain unchanged. As a reminder, our full year financial guidance for adjusted EBITDA and adjusted net income excludes the impact of the East Point campus, preopening quests related to new and relocated campuses, program expansions and noncash stock-based compensation.

In conclusion, I want to express our gratitude to our entire team, including faculty and students for their exceptional contributions. We remain committed to delivering value to our stakeholders and look forward to updating you on our progress throughout 2024. Now I’ll turn the call back over to the operator for any questions. Operator?

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Q&A Session

Operator: Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from the line of Alex Paris of Barrington Research. Your line is now open.

Alexander Paris: Good morning, everybody.

Scott Shaw: Good morning, Alex.

Brian Meyers: Good morning.

Alexander Paris: Just wanted to say congratulations on the strong start to the year and the higher guidance. I’m going to focus my one question on Lincoln 10.0 and its effect on starts. The Lincoln 10.0 hybrid initiative is beginning to yield, not just starts but also operating leverage. I think the contribution margin to adjusted EBITDA was about 28% — 27% in the quarter if my math is right. But in addition, you spent additional dollars on marketing spend, although your cost per start was flat. I guess my question is two parts, maybe a little additional color on Lincoln 10.0 and its effect on Q1 and the rest of the year? And then what should we expect in terms of marketing expense over the balance of the year? Thanks.

Scott Shaw: Sure. Yeah. I appreciate the question. So we’re definitely seeing strong growth across our programs and it’s probably due to many things, not just Lincoln 10.0. But certainly, we know that students want greater flexibility, everyone’s used to doing something online these days and we know that the Lincoln 10.0 program and its format is being well received and is helpful. But I also have to imagine, we’re being benefited just from so much of the discussion that’s taking place out there what is the value of college and should my child now go to college. Just having more people have that conversation and think about the skilled trades, I believe, is also benefiting us. So there’s probably a number of factors out there.

And then as far as spend on marketing, we do expect to spend more on marketing, similar to what we’ve spent in the first quarter, probably a little bit less, but we do see great opportunity out there. And as long as you mentioned, our cost per start is not increasing, we know that we’re getting a good return on those additional dollars.

Operator: Thank you. One moment for next question. Our next question comes from the line of Steven Frankel of Rosenblatt Securities. Your line is now open.

Steven Frankel: Good morning. Scott, could you give us some insight into how quickly we’ll see Lincoln 10.0 drive up graduation rate. Is that something that will be material to this year or more likely to have an impact with the full year rollout in 2025?

Scott Shaw: Well, we’ve been benefiting it from it since we started rolling it out, frankly, about 15 months ago. So we’ve been gradually seeing our retention, our graduation rates improve. I don’t anticipate them, frankly, improving dramatically more than where we are today. We’re hovering based off of our internal tracking at close to 70%, which is the target we’ve set out for ourselves. But what we are seeing is a slight improvement, especially in our evening program because the Lincoln 10.0, curriculum is delivered in a more accelerated fashion. And so therefore, we’re getting more graduates in our evening program that we had before. So I expect to see incremental increases, but I don’t see anything dramatic happening. But we’re very pleased with this 70% level, and we will continue to move that forward.

Steven Frankel: Great. Thank you.

Scott Shaw: Yeah.

Operator: Thank you. One moment for next question. [Operator Instructions] Our next question comes from the line of Eric Martinuzzi of Lake Street Capital Markets. Your line is now open.

Eric Martinuzzi: Yeah. I know you didn’t give explicit guidance on the Q2 revenue outlook. You just commented on the year. But seasonality wise, I was modeling Q2 to be roughly flat with Q1. Given the outperformance in Q1, is that still a safe assumption?

Brian Meyers: Yeah. It could be slightly — if you look our seasonality, it will flow about the same. So it will be roughly flat with Q1.

Eric Martinuzzi: Okay. All right. And then a new wrinkle for me here, the news that you guys announced with the new corporate partner, the Container — the Container Maintenance Corporation. Just curious to know the impetus here. Did they approach you? Did you approach them? And the fact that it’s not going to be done at your campuses, what — how are we pulling this off? Are they investing in training facilities themselves or is this still TBD?