Good afternoon. My name is Christina and I will be your conference operator today. At this time, I would like to welcome everyone to the APEI First Quarter Results Conference Call. I will now turn it over to Mr. Chris Symanoskie, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator. Good evening and welcome to American Public Education’s first quarter 2021 conference call. Materials that accompany today’s conference call are available in the Events and Presentations section of our website. Please note that statements made in this conference call and in the accompanying presentation materials regarding American Public Education, its subsidiaries or Rasmussen University that are not historical facts may be forward-looking statements based on current expectations, assumptions, estimates and projections about American Public Education and the industry. These forward-looking statements are subject to risks and uncertainties that could cause actual future events or results to differ materially from those expressed or implied by such statements. Forward-looking statements may be identified by words such as anticipate, believe, seek, could, estimate, expect, intend, may, plan, should, will, would and similar words or their opposites.

Thank you, Chris. Good evening, everyone. We are very pleased with APEI’s first quarter 2021 results. Both APUS and Hondros College of Nursing demonstrated robust enrollment momentum, resulting in strong financial performance. As highlighted on Slide 3, we reported very strong Q1 ‘21 financial and operating results at both APUS and Hondros. For the sixth consecutive quarter, net course registrations at APUS increased year-over-year, primarily driven by active-duty military students and graduate student enrollments. We also saw momentum from the continued demand for online education due in part to the COVID-19 pandemic. Net course registrations increased 10% year-over-year driven by a 14% year-over-year increase in new net course registrations.

Thank you, Angie. Going on to Slide 4, as Angie noted the net course registration growth at APUS and enrollment growth at Hondros drove strong increases in revenue at both operating units and drove a 19% increase in consolidated revenue. This strong top line performance translated into strong margin expansion for the business, with operating income margin rising to 12% from 3.6% a year ago. Adjusted EBITDA increased 87% to $15.9 million from $8.5 million, while adjusted EBITDA margin improved by 700 basis points to 18% from 11%. In our APEI segment, APUS revenue increased 15% and in our HCN segment, revenue increased 48% compared to the prior year quarter. Cost and expenses for the 3 months ended March 31, 2021, were $77.9 million, an increase of $6.0 million, or 8.3% compared to $71.9 million in the prior year period. The increase in costs and expenses were primarily due to increases in employee compensation costs, advertising costs, information technology costs, and professional fees in our APEI segment, along with increases in employee compensation costs, bad debt expense and instructional materials cost in our HCN segment. Instructional costs and services expenses increased $3.1 million, or 10.6% to $32.3 million and as a percentage of revenue decreased to 36.5% from 39.2% in the prior year period. The increase in instructional costs and services expenses was primarily due to an increase in employee compensation costs in our APEI segment and increases in instructional materials costs and employee compensation costs in our HCN segment.

Thanks, Rick. Now, moving to Page 5. Hondros’ second quarter 2021 enrollment momentum continues, with new student enrollment increasing 37% and total student enrollment increasing 36% to 2,378 students, another record for Hondros. Additionally, beginning in 2Q ‘21, we welcomed the first cohort of students at Hondros’ new Akron, Ohio campus, the seventh Hondros campus. Hondros momentum combined with our pending acquisition of Rasmussen University will help accelerate our growth and create a scale platform in nursing education to address the shortage of registered nurses in the U.S. On a pro forma basis, in the last 12 months ending in March 2021, Hondros and Rasmussen have $183 million of nursing revenue. The acquisition will add a number one market position in pre-licensure nursing to the two existing number one positions in active-duty military and veterans education at APUS today. Today, pre-licensure nursing education or the curriculum to create new nurses is roughly half of the $28 billion total nursing education market. With the shortage of registered nurses in the United States, growth in the demand for nursing education is expected to accelerate, particularly for pre-licensure education. As we work toward closing the acquisition of Rasmussen University in late summer 2021, I am pleased to report that Rasmussen’s accrediting body, the Higher Learning Commission, or HLC conducted focused site visits relating to the change in ownership application. The HLC is expected to consider this matter at their June 2021 meeting, which is consistent with our timeline to complete the Rasmussen acquisition in the third quarter of 2021. Additionally, we have been keenly focused on executing a high-quality integration process. This includes best practice identification, process analysis across all shared services functional areas, detailed sequencing and timing of integration activities, as well as an emphasis on aligning culture and establishing clear communication. We have engaged third parties to assist us in these efforts and to help ensure that we provide a high-quality experience for all constituencies—students, faculty, staff, and shareholders. This acquisition will be an important milestone in the history of our company. As we have discussed since announcing the transaction, Rasmussen is a high-quality institution, with an attractive regulatory profile that has seen impressive gains in recent years as a result of continued enrollment growth in its nursing school and a focus on operating efficiency. Importantly, Rasmussen is strongly aligned with our APEI mission, helping learners of all backgrounds maximize their higher education return on investment, or HEROI.

Thank you, Angie. Going on to Page 7, APEI’s outlook for the second quarter of 2021 is as follows. While the ongoing transition to ArmyIgniteED did not adversely affect registrations in revenue for the quarter ended March 31, Army enrollments subsequent to March 31 have been adversely impacted by this transition. We expect the continued disruption to Army TA and resulting decreases in Army registrations to have an adverse impact on the second quarter. Because of the uncertainty created by this disruption, we will not be giving new student registration guidance this quarter and we will provide a wider range on total net course registrations in our guidance. In making that decision, we are also taking into account the general uncertainty in demand levels as a result of the pandemic. We believe that as the pandemic abates, demand will moderate and we expect our growth rate to slow.

Thank you again, Rick. APEI’s growing educational platform is uniquely affordable, flexible, and inclusive, which we believe will drive sustainable growth and operating leverage. Our 2021 priorities are focused on driving the platform’s growth while staying keenly focused on student outcomes and academic quality. These priorities are deeply aligned with our mission, setting adult learners on the path towards achieving their dreams while maximizing the return on their higher education investment, or HEROI. We have aligned resources and management attention against three key pillars of value creation in 2021: driving sustainable growth in our core businesses where there are large addressable markets and where we enjoy defensible leadership—number one market positions; acquiring and successfully integrating Rasmussen University to diversify our revenue sources and continue to capitalize on the secular growth in nursing and healthcare education; and bolstering our digital transformation to create a distinctive student experience. In summary, at APEI, we are pleased with the high-quality scale platform we are building and look forward to updating you on the progress of our 2021 priorities on our next earnings call. Before we open the line for questions, I would like to personally thank Chris Symanoskie, our Vice President of Investor Relations, for over 14 years of service and contribution to APEI, who will be leaving us after this earnings release. Since our IPO in 2007, Chris has led our Corporate Communications and Investor Relations activities and has done so with the professionalism and accuracy we all expect. We wish him all the best in his next endeavor. Operator, please now open the line for questions.

And your first question comes from the line of Jeff Silber with BMO.

Thank you so much—excuse me, thank you so much. I wanted to talk about this Army disruption issue, you mentioned some dates in there. I am assuming this was something that you were not aware of when you reported your fourth quarter numbers?

Hi, Jeff. I am going to turn that question over to Rick.

Jeff, we did learn a couple of weeks before the February 11 start of the transition that, that was the date that Army would be transitioning. The blackout period was stated as February 11 to March 8 and so the go-live then essentially coincided with our year-end earnings announcement. So, they were right on top of each other as it relates to when the portal was announced to go back online.

Okay. And you mentioned that these unfortunately happened in the past and I completely understand that. You used the example, I think of with the Navy in 2019. Can you remind us what the impact was from these kinds of disruptions? If you happen to have some ranges that would be great.

Well, let me tell you this, when you look at Army registrations and you compare those to Navy, Army registrations, looking at 2020 were about 2.5 times the size of the Navy. So, while the Navy outage existed for a period, probably similar to what we’re seeing here, the impact was smaller just because of the relative size of the two branches.

Yes. I just was referring to maybe the impact on the Navy, if you happen to have that handy? If not, I can follow-up, on your Navy enrollment of course registrations?

Well, Jeff, that was—they just stopped funding. So, the impact was 100%. We lost every single Navy registration during that period. And here, we’re still seeing Army registrations. The Army has something called an exception to policy. We would not—we are not allowed under the DoD MOU to voucher students. They have to be approved for TA before they—we can let them in the classroom. And so what the Army has done is made an exception to that policy where they have said all students can register with us and that the Army will retroactively process that TA. We are submitting a monthly list of students that we’re serving and the Army will then match that up with students that are requesting TA once the portal goes live. I would also say, similar to the Navy experience back in 2019, these are matters that affect all schools that are a party to the DoD MOU and serving students under the tuition assistance program. The impact on us as the number one provider is larger than others, but everyone else is going to be experiencing the same matters that we are.

Okay. That’s really helpful. I really appreciate the color. Keeping the conversation down on D.C., President Biden released the American Families Plan, I guess it was a few weeks ago, and talking about funding to community colleges. I know that’s not your exact competition, but do you think any of the things in his plan in terms of funding more toward non-profit entities will impact your business going forward?

I’ll start and then, Rick, if you want to add some details that would be great. So, one of the questions that we received in the past is about the Navy community college, and what the Navy community college may do to enrollments at APUS. And what we’re actually seeing is positive momentum in our Navy registrations even with the announcement of the Navy community college. So, as we’ve discussed before in that matter and I think is also true with the broader community initiative announced by the Biden administration, we see community college education as a pathway to completing their degree with APUS. We offer a highly affordable way to complete their 4-year degree. Furthermore, we also see that the community college process help students prepare for the completion of their 4-year degree. Oftentimes, if we have a student who may enroll with APUS without a significant amount of prior higher education experience, they don’t always persist at the same rate. We actually warmly embrace community college students because we really believe that they have demonstrated persistence in their educational endeavors.

Yes. So, to size that, about 18% of our registrations are at the associate’s level, so it’s not bachelors, they are the majority. I’ve always been thinking of it as just opening pathways for students. As Angie said, when students come to us with an associate’s degree, they have got that experience at the associate level or a college level and they tend to be better students in terms of persistence and completion. We don’t know what the impact of the community college of the Navy is going to be, but, as Angie said, we are seeing some current momentum in the Navy. If it opens pathways for students to come to us with an associate’s degree, we find those to be good students for us.

Thanks, Jeff.

And your next question comes from the line of Tobey Sommer with Truist Securities.

Thanks. Just to delve into the sort of technology disruption, do you have any prior experiences to know whether you’ll have a sort of a surge in enrollments if this system is up and running in June, or do you just kind of perhaps go back to where you were before? I’m really just trying to get a sense of why you think there is pent-up demand accumulating as a result of this?

Yes, Tobey, good question. We do have prior experience in these matters. And the good news is, with our monthly starts, service members in this case, soldiers, who have been disrupted, many are still taking classes, but there is obviously a disruption of a meaningful nature. I have the opportunity to process their TA once the system goes live and start with us the first Monday of the following month. So, that’s good news. We don’t have a quarterly system where if you’re locked out the first month of the quarter, you’ve got to wait two months to start. I don’t think you are going to see a surge in demand. If you were going to take one course and you were unable to do so or chose not to do so, it’s unlikely you’re going to take two courses once the system comes back online. So, we would see soldiers who were unexpectedly and unfortunately delayed begin their registration process, but it’s unlikely that they would increase the number that they would be taking immediately just because they were unable to take a class. That’s our experience.

I will say, Tobey, the one thing that we did see in Q1 was that there was meaningful momentum in our Army segment. So just returning to a level similar to what we saw in Q1, we have very favorable results for the business when those soldiers are able to fully engage with the new portal.

Thanks. And at a localized level, can you just maybe give us an update on changes in the competitive environment at Hondros in the Ohio marketplace, how the community colleges and other kinds of local competitors there have evolved and maybe gotten a little bit better at delivering their services as the pandemic is going on?

Sure. Actually in many ways we are seeing the opposite. For example, we continue to see that 4-year state institutions turning away students once they have completed the general education and not admitting them directly into the nursing program. Consequently, we’ve been able to attract many students who—and that was that program we call the Direct Entry ADN Program. Students who had some prior education who don’t have to begin with the practical nursing degree that can come in and start their registered nurse progression— that’s become a very popular onboarding track or pathway, as Rick described it, to attract a new class of students into Hondros that are not being able to access other educational opportunities to become a new nurse in the State of Ohio. So, we continue to see significant favorable momentum as a result of those limits that still exist, both at the community college level as well as at the 4-year state school.

Yes. I would add, I mean the second-quarter guidance is strong, right, and that’s actual numbers because of the quarterly start system. Harry keeps reminding us that he is going to be comping against his own numbers. So, he continues to perform well even against the numbers he was able to put up last year.

Thanks. And just kind of wanted to ask a longer-term question, with respect to the company’s ability at Hondros to attract and retain educators. That seems to be an area of bottleneck within the healthcare education market. Could you maybe speak to that? And any thoughts you have on new initiatives you could put in place to continue to grow that resource?

Great question. Certainly something that is top of mind for us, making sure that we can create that great educational experience for our students. As the number of students that we serve is growing and social distancing requirements have diminished somewhat, but still create a different capacity maximum for some of our labs in practicum. So, we continue to take advantage of the ability for students to take some of their coursework online, which has given us some leverage with our existing faculty. We’ve created some creative solutions, which include allowing us to have some of our full-time nurses work part-time as educators. The third thing that we’re seeing certainly is that as the pandemic starts to subside, there are practicing nurses who are really looking to take a pause and perhaps provide an educational experience for students for a period of time, rather than being on the front line. It’s not to say that we’re fully staffed; we are in constant recruiting mode across all our campuses. But we’ve done, I think, a very admirable job of putting great faculty in front of our students even with the growing enrollment that we’ve seen over the last six quarters.

Thank you very much.

Thanks, Tobey.

Your next question comes from the line of Greg Pendy with Sidoti.

Hey, guys. Thanks for taking my question. Can you just talk specifically about the military environment, I guess given the disruption that’s going on right now, and kind of market shares, how that might be impacted? As you mentioned, obviously that other people serving that industry—that market will also be impacted. So, can you just give us a little bit of color on that? How it will impact...

Yes, sure. I’ll start. I am sorry I didn’t mean to cut you off, Greg. Do you want to finish your question?

No. I just want to—I was going to say you are very levered to that vertical, but just kind of how it will impact the landscape and maybe your personal market—your market share?

Sure. So, first of all, I just really want to make sure that for clarity purposes the portal only is Army, so it’s not all branches of the military. We saw really meaningful positive momentum in all other branches of the military in Q2 of ‘21 so far, based on what we’ve seen so far in the forecast. We do know, based on publicly available information, that we are the number one provider of education to active-duty military, so that’s the umbrella of all the different branches. But we do not have transparency around our position serving and educating Army soldiers specifically. We don’t know where we rank, but we do know overall among all military branches that we are the number one educator. I did mention that it is nearly a quarter of our student enrollments in 2020. So, you can deduce that is a very meaningful part of our business. And as Rick mentioned, it is different from the Navy disruption where the Navy essentially shut off funds completely and no Navy soldiers could take courses without using a different kind of funding source. If they wanted to use a different funding source like FSA, they could do so, but their TA was not available. In this case, we still have Army soldiers taking courses, but not nearly at the levels that we’ve experienced in the last several quarters.

Yes, Greg, and I would add, as I said earlier, the portal applies to every institution. So I wouldn’t expect it would rearrange the order of the chairs on the deck; everyone’s being impacted, and maybe to your point, there could be variations in the level of disruption. But we have no indication of such. As we talk to our peer institutions, we’re all going through the same thing.

That’s very helpful. Thanks.

Yes. I think the other thing I would just add to this is one of the things we described when we announced the Rasmussen acquisition in October was the importance of diversification. We are known as the number one provider of active-duty and veterans education. We also want to make sure while preserving those number one positions that we—on behalf of the shareholders offer diversification and that’s why we believe the momentum that we’re seeing in nursing and the acquisition of Rasmussen will help us have a diminished reliance on any branch in the military in the period of time after we have completed the acquisition of Rasmussen.

That’s very helpful. Thanks a lot.

Thanks for your question, Greg.

Your next question comes from the line of Raj Sharma with B. Riley.

Hi, good afternoon, guys. My questions all relate to the portal right now. So what has been gathered as the problem with the portal? Anything that the portal administration is communicating to the schools?

Hey, Raj, it’s Rick. The communication is thin. But what we can discern from the various communications and some verbal communication, right, we have contact with periodically, is that it’s a data conversion issue. The data conversion was somehow incomplete. As we said earlier, that new portal did come online for a few hours and then was taken down. And so that’s my understanding that it was the data conversion issue. We’ve actually started exchanging files with the Army in advance of this limited user test. But I think they are still working on just the fundamentals of transferring data from the old system to the new system.

And I would just add, Raj, that the—I think what’s adding complexity to this process is it is also a change in providers. There is one provider providing GoArmyEd and that is sun-setting and a new provider is standing up ArmyIgniteED. And so that I think is adding complexity to this data conversion process.

Got it. And then—so the way I’m looking at it is 23% of your business is the—in 2020 was Army, and in the month of April, you saw a 25% decline, so—in the registrations. So, the guidance the down 8%, is that the 25% of 23%, that’s why 6% decline and that’s the revenue decline, is that the impact? And if it reopens back in June, do you expect an impact in the following quarter at all on enrollment?

Well, on the last part, Raj, it certainly depends on when it comes back online. Our first start after June 30th is the first Monday of July, and we will have a calendar up. And, obviously, students register in advance of that start. So, we really don’t have any visibility at this point whether it’s going to come up the first week in June or the third week in June, and that would have a meaningful impact on the July registrations. In theory, if it comes back in June, partial recovery and then full recovery after that.

Right. And then is this the right way of looking at it is 23% of the business basically half quarter of that business did not enroll or is not expected to enroll?

I think your math is directionally correct, Raj.

Okay. And then how does the cash flow get impacted? I think you said that you can—they can enroll and then you can apply to—for tuition assistance. Do you collect the tuition on the spot or then you have to wait, I guess—and had any funding occurred on this sort of application from April, for example?

That’s correct. So, we bill—each of the services has its own portal and the processing is different based upon the portal on the third party that is processing the invoices. In the case of the Army, we bill in arrears, so it’s after the start. The processing time is typically around 30 days. We’ve got the backlog in invoicing because the system is down. And it does affect cash flow. But we feel comfortable with $321 million in cash. We’re going to be able to work our way through that. Once it comes back online, we don’t have any experience with processing through ArmyIgniteED, that’s number one. So what I said about the cadence of payment may be altered and we also know that it would take more time to process a backlog than it would concurrent processing, right. So we would expect a cash flow impact related to the Army and the portion of the business it is for some period of time, but we have plenty of cash cushion, and we do believe that processing will materially result, right. There may be some bad debt expense above what we normally see, but right now we don’t view that as a significant matter.

Got it. And then just my last question is on the debt syndication. So, the cash balance does not include any—so the debts not been funded yet, right? It will be funded concurrent with the acquisition?

That’s correct. We have—well, we still have the option to replace the $29 million in preferred with cash. But as it relates to the cash associated with the debt, we have not funded that, right. And as we said in the Q, there are really two commitments we’ve made. Number one there is the OID. So there is an underwriter fee that will come out of the net proceeds and then there are, what we call ticking fees. There are amounts that have to be—that are committed, if you will, as advanced interest that will be paid at closing.

Right. And then any sort of thoughts on there is going to be a substantial cash balance post-acquisition. Any thoughts on that or...

Right. So, I think you can do some math on that. So, we got $321 million. We’ve got roughly a quarter and a half to go. We’re going to add $175 million and then we will pay $300 million or $329 million in cash. I think if you do the pluses and minuses, you’ll find that we retain a lot of cash, right. So, purposely you want to manage the business on that basis.

Alright. Okay. Thank you so much. I’ll take my questions offline. Thank you.

Thank you, Raj.

Thank you, Raj.

And your last question comes from the line of Tobey Sommer with Truist Securities.

Hey, just a follow-up question. Thank you for taking it. With respect to the Army portal, are there any expense impacts we should think of if the timing plays out as you currently envision sort of with you normalizing, such as, for example, potentially a spike in marketing as you kind of rev the courses back up and alert everybody that they can get back to their education?

Tobey, I don’t think it would be a material amount. What we are really doing is we have got our military outreach folks. There are roughly 25 of those that interact with ESOs, educational service officers, and then we have got our student-facing teams. What we are planning is a communication effort that would include those individuals that are already on staff. I haven’t heard from Beth LaGuardia, our CMO, of any outside spending at the immediate launch of the portal.

Nor have I.

And that concludes today’s conference call. Thank you for participating, and you may now disconnect.