Earnings Call Transcript - APEI Q2 2025

Operator, Operator

Thank you for joining us. My name is Greg, and I will be your conference operator today. I would like to welcome everyone to American Public Education's Second Quarter 2025 Earnings Call. I will now turn the call over to Brian Prenoveau, Head of Investor Relations. Brian?

Brian M. Prenoveau, Head of Investor Relations

Thank you, Greg, and good afternoon, everyone. Welcome to American Public Education's conference call to discuss second quarter 2025 results. Joining us on the call today are Angela Selden, President and Chief Executive Officer; Rick Sunderland, Executive Vice President and Chief Financial Officer; and Gary Janson, Senior Vice President of Strategy and Growth. Materials for the call today are available in the Events and Presentations section of APEI's website. Statements made during this conference call and any accompanying presentation regarding APEI and its subsidiaries that are not historical facts may be forward-looking statements based on current expectations, assumptions, estimates and projections. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. 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 of today's presentation and in the earnings release. Now I'd like to turn the call over to APEI's President and CEO, Angela Selden. Angie, please go ahead.

Angela K. Selden, CEO

Thank you, Brian. Good afternoon, and thank you for joining American Public Education's second quarter 2025 earnings call. We are very pleased with our outperformance in the second quarter of 2025 and notably our accomplishments in simplifying the business and the balance sheet. We have several areas to highlight during today's call. First, APEI outperformed second quarter 2025 financial guidance. In the second quarter, we exceeded the top end of our guidance for revenue, net income, EPS and adjusted EBITDA. Disciplined operations at our education units along with continued enrollment growth have helped to drive improved financial performance. Next, several important simplification milestones were achieved that improved our balance sheet and overall financial position. We completed the sale of 2 corporate administrative buildings, collecting over $22 million. The Department of Education removed restrictions on the $24.5 million letter of credit from the 2021 acquisition of Rasmussen. That cash is now unrestricted on our balance sheet. And finally, we redeemed our preferred equity for a total amount of approximately $43 million, which was fully funded by the proceeds from the building sale and the release of restricted cash. Going forward, this will allow APEI annually to save $6 million from the elimination of the cash dividend payments. We believe we are now positioned with an improved capital structure and more financial flexibility to invest in growth initiatives. Third, after quarter end on July 25, 2025, we completed the sale of Graduate School USA. We believe this is a great outcome for APEI, for Graduate School, its employees and its students. As we determined that Graduate School was no longer a strategic fit for our future growth strategy, we are pleased to find the business a new home, which is more aligned with the Graduate School mission and market position, allowing us to focus on growing our core healthcare and military businesses. Next, we are pleased with the double-digit enrollment growth at both Rasmussen and Hondros of 10% and 18% respectively, further driving expanding margins and greater profitability. Fifth, I'm pleased to announce the appointment of James Kenigsberg as our Interim Chief Innovation and Technology Officer. APEI is investing in intelligent infrastructure, predictive analytics and personalized digital tools to modernize every part of the learner journey. James will lead our transformation efforts aimed at improving access and student persistence and delivering more responsive, mission-aligned educational experiences. James has been an invaluable resource on our APEI Board of Directors and he will be stepping away from his Board service to focus on this important assignment. James brings more than 2 decades of experience leading technology strategies in education and has served as a strategic adviser to a number of high-growth start-up and education-focused companies. Next, we continue to move closer to overall simplification regarding the combination of APUS, Rasmussen and Hondros into a single accredited institution. We have received HLC and state agency approvals. Discussions with the Department of Education and HLC are ongoing regarding the timing to complete the transaction. Finally, in summary, the improvements to the business and financial position provide us an opportunity to strengthen our full year guidance. Our CFO, Rick Sunderland, will give a deeper dive into updated 2025 guidance, but at a high level, even with the sale of Graduate School, we are maintaining our full year revenue guidance, which now reflects the exclusion of 5 months of Graduate School revenue for the remainder of 2025 and we are increasing adjusted EBITDA guidance expected now to be between $81 million and $88 million.

Richard W. Sunderland, CFO

Thank you, Angie. Total revenue in the second quarter was $162.8 million, an increase of $9.9 million or 6.5% from the prior year period. Second quarter revenue growth was driven by increased revenue at Rasmussen, APUS and Hondros, partially offset by lower revenue at Graduate School. Total costs and expenses in the second quarter were $155.7 million, an increase of $5.1 million or 3.4% as compared to the second quarter of 2024 and include $1.7 million in professional fees and general and administrative expenses related to the combination of APUS, Rasmussen and Hondros and the sale of Graduate School. The increase is primarily driven by increases in employee compensation costs, professional fees and classroom and course materials costs, partially offset by decreases in information technology costs, depreciation and amortization expenses, and occupancy costs. In the second quarter, net loss available to common shareholders was a net loss of $0.3 million compared to a net loss of $1.2 million in the prior year. As noted earlier, the second quarter loss included a $3.5 million loss on the redemption of our preferred stock. Second quarter diluted net loss per common share was a loss of $0.02 compared to a loss per diluted share of $0.06 in the prior year period. Second quarter adjusted EBITDA was $15.1 million, a $4.2 million or 38% increase over the prior year period. This was above the top end of the guidance range and represented an adjusted EBITDA margin of 9.3% as compared to 7.1% in the prior year. At APUS, second quarter revenue increased to $81.7 million, a 6.1% increase as compared to the prior year period. Second quarter net course registrations increased 7.3% as compared to the prior year. For the quarter, APUS EBITDA was $22.4 million and EBITDA margin was 27.4% as compared to 25.3% in the prior year. At Rasmussen, second quarter revenue was $59.5 million, an increase of 12.2% as compared to the second quarter of 2024. In the second quarter, online enrollment increased 12.2%, on-ground enrollment increased 3.2% and total enrollment grew 7.4% to approximately 14,600 students as compared to the prior year period. In the second quarter, Rasmussen delivered positive EBITDA of $0.2 million as compared to an EBITDA loss of $4.7 million in the prior year. At Hondros, second quarter revenue was up 10.5% to $18.1 million as compared to the prior year period due to continued enrollment growth. For the quarter, Hondros total enrollment increased 13.5% to approximately 3,700 students. At Hondros, the second quarter EBITDA was $0.1 million as compared to an EBITDA loss of $0.4 million in the prior year period. Revenue in Graduate School included in corporate and other was $3.4 million as compared to $6.4 million in the prior year period. For the quarter, Graduate School EBITDA was a loss of $2.5 million compared to an EBITDA loss of $0.7 million in the prior year period. As noted earlier, in July, we completed the sale of Graduate School. Cash flow from operations for the first 6 months of 2025 was $51.8 million compared to $33.2 million in the prior year. At June 30, 2025, total cash, cash equivalents and restricted cash was $176.6 million, an increase of $17.6 million from year-end 2024. At June 30, 2025, total unrestricted cash and cash equivalents was $174.9 million compared to $131.9 million at December 31, 2024, an increase of $43 million. Additionally, as noted earlier, in the second quarter, we redeemed all our outstanding preferred stock for $43.1 million and completed the sale of 2 corporate administrative office buildings for net proceeds of $22.5 million. Today, with these changes, including the sale of Graduate School, we believe we are well positioned to invest in the continued growth of our schools. Turning now to our third quarter and full year outlook, which covers forward-looking statements subject to the various risks noted earlier. For the third quarter 2025, APUS total net course registrations are expected to be between 97,000 to 99,000 registrations, representing a 5% to 7% increase when compared to last year. At Rasmussen and Hondros, third quarter student enrollments are actual because of the quarterly starts at these schools. At Rasmussen, third quarter total on-ground enrollment increased 11.7% to approximately 6,700 students and total online enrollment increased 10.8% to approximately 8,200 students for an aggregate enrollment of approximately 14,900 students. This represents a 10.4% increase when compared to the third quarter of 2024. At Hondros, third quarter student enrollment increased 17.6% year-over-year to approximately 3,700 students. In the third quarter of 2025, consolidated revenue is expected to be between $159 million and $161 million. The company expects third quarter net loss available to common shareholders to be between a loss of $2.9 million and $0.8 million or a loss between a loss of $0.15 and $0.04 per diluted share. This includes an anticipated $7 million to $8.5 million loss related to the sale of Graduate School. Third quarter adjusted EBITDA is expected to be between $15 million and $17 million. For the full year 2025, there is no change to our anticipated consolidated revenue of between $650 million and $660 million. Net income available to common shareholders for the year is expected to be between $18 million and $24 million. This guidance takes into account the loss on the preferred equity redemption and losses associated with the sale of Graduate School. We are increasing our full year 2025 adjusted EBITDA guidance to be between $81 million and $88 million. Full year CapEx is expected to be between $18 million and $22 million.

Angela K. Selden, CEO

Thank you, Rick. Prior to concluding our prepared remarks and opening the call to questions, I do want to take a moment to thank Steve Somers, who is leaving after 5 years with APEI. He has been instrumental in leading corporate strategy, driving Investor Relations and leading Graduate School to an outcome where it can thrive strategically with its new owners. Steve has been a great partner and advocate for me and for APEI. We wish him all the best in his next endeavors. Today, we welcome Gary Janson to our APEI earnings team. Gary has played a critical role at APEI for over 18 years and now leads growth and strategy for APEI. We have spent much of the past year setting expectations for our investors and other stakeholders and then delivering on those results. Rasmussen is delivering consistent positive enrollment growth and profitability. APUS continues to deliver consistent growth and a high margin of profitability. We set expectations for redeeming our preferred equity, selling corporate buildings, simplifying our business structure and we continue to deliver on those promises. Our enterprise was purpose-built to deliver affordable and accessible educational opportunities in fields which are in high demand. We believe that this platform and the sector tailwinds set APEI up to accelerate growth and bring more educational opportunities to a greater audience across the country. We are as optimistic today as we've ever been about the long-term potential of our company. And with that, I would now like to hand the call back to Greg, the operator, to begin our question-and-answer session.

Operator, Operator

All right. It looks like our first question today comes from Raj Sharma with Texas Capital.

Raj Sharma, Analyst

Congratulations on solid ongoing execution and solid results. Really very appreciated. On the military business. I know that you've commented in the past that there was great enrollment in the military, best in 10 years, and the prospects there seem good and you seem to have raised the guidance on APUS. Can you provide any more insight on what you're seeing in terms of potential enrollments? Also, any clarity on the tuition assistance that was supposed to be from the Big Beautiful Bill, the $100 million from the Department of Defense? Any clarity on how that flows through the system?

Angela K. Selden, CEO

Yes. Great question, Raj. Thanks. I'm going to hand it to Rick for him to answer. Go ahead.

Richard W. Sunderland, CFO

Do you want me to talk about the Big Beautiful Bill? Yes. So Raj, it's in the bill. It's in the Big Beautiful Bill. It's also in the National Defense Authorization Act, right? One authorizes, I believe the other appropriates. And so the funds are there available. I think that combined with the military meeting its annual recruiting goals early this year, and by the way, I don't think they've actually met their recruiting goals in recent years. So not only did they meet them, but they met them early in the year sets us up as the largest provider of active duty military education to benefit from those funds. One thing to understand is the $100 million is authorized through September of 2029. So it's a 4-year authorization. And I think we've talked about how the funds could be spent over a number of years with the increased funding levels then benefiting all education providers, with us being the largest in any individual year. So we are seeing strength in military registrations, Angie can comment on that. I think it has everything to do with the reputation and the quality and the outcomes of American Military University, but having the funding there that supports additional interest in and registrations with AMU and APU.

Angela K. Selden, CEO

Yes. I'll just elaborate on the question regarding how we can benefit from the $100 million. As Rick mentioned, it's spread over 4 years. We have estimated a 30% share of all active duty who take courses from anyone. So if you take $100 million, $30 million, if it's all spread equally across providers would be $30 million for us over 4 years. But our team on the ground has not yet been able to determine how that $100 million is going to be distributed, made accessible or in any other way added to the dollars available for education providers. So right now, it's our belief that it's really about allowing more active duty to enroll because they haven't demonstrated an increase in the reimbursement rate. They haven't demonstrated an increase in the total number of classes or the total dollar reimbursement on an annual basis yet. But there is talk that those things are under consideration. But no more information has been provided since the last earnings call we had to share. So we're all waiting for more information.

Richard W. Sunderland, CFO

That's right. I'd like to add one point. So there have been times, Raj, when we've been asked whether that funding is at risk. And I think we have evidence now that the funding is not only not at risk, but it's going to be elevated.

Raj Sharma, Analyst

Got it. That's super helpful. And then just lastly, I noticed that Rasmussen's margins have great performance on the enrollment increases. However, Rasmussen's margins were down sequentially Q2 versus Q1 on flat revenues. Anything in particular going on there? And I have a follow-on question on just overall; it seems like Rasmussen and Hondros are at breakeven levels. So you should be seeing, as you've talked about in the past, operating leverage kicking in, in a bigger way. Is a lot of the increase in the EBITDA largely projected to be coming from that? And/or is G&A also kind of coming down or is there any change in the G&A levels? So I'm sorry, that was two long-winded questions.

Richard W. Sunderland, CFO

Yes. Let me start with the first one and then you may have to clarify the second one. So the first one, sequentially, you're correct. The margin is lower in Q2. In the first quarter, they implemented a new vendor for course materials for the nursing program. And the management team at Rasmussen negotiated what I'll describe as a discount in the first quarter of that new vendor relationship. So when we get to the second quarter, the costs there are fully loaded; you should consider that to be kind of the run-rate cost as it relates to course materials. The other element sequentially would be all the schools at APEI have their annual salary increases, merit increases beginning April 1. So the second quarter has a load of salaries that reflects the new compensation for all employees.

Angela K. Selden, CEO

Yes. Well, there's no question. If we compare quarter-to-quarter, from Q1 of '24 to Q1 of '25, there's almost a $4.85 million change in EBITDA there and the EBITDA flow-through is about 75%, 76%. The same is true in Q2, where we were at minus 4.7% for the second quarter and we're positive 0.2% in the second quarter and that flow-through again is above 75%. So there's such dramatic flow-through on that next dollar of revenue now that we will see continued acceleration as enrollments continue to grow at Rasmussen. The other part of your question is about G&A. We pay very careful attention to our non-student-facing investments. And we do not anticipate big step-fixed increases in those expenditures for the remainder of 2025. The only thing that will increase will be those things that are tied to volume increases in the students, like faculty and course materials.

Richard W. Sunderland, CFO

And I would add, Raj, you were focused on G&A. We're focused on every part of the P&L, right? In S&P, we're seeing continued improvement, meaning reductions in our advertising costs at Rasmussen while seeing improvements in lead flow. Right? And you've got the enrollment growth. So I want to call out the efficiency we continue to experience in marketing across the enterprise and specifically at Rasmussen.

Maxwell Scott Michaelis, Analyst

Congratulations on the sale of Graduate USA as well as cleaning up the balance sheet a little bit here. A quick question on Rasmussen. Now with the Department of Ed unlocking the $24.5 million and you guys talked about the restriction you had on from adding new programs and locations, do you have internal expectations around new program adds and campus expansions at the company?

Angela K. Selden, CEO

Yes, it's a great question. We have locked in November 20 of this year for an investor meeting that we're hosting in New York City and we're really excited to share a multi-year view of our campus opening strategy, our program addition strategy. So we look forward to hosting Lake Street to share that multi-year view with you.

Maxwell Scott Michaelis, Analyst

And then, just maybe a quick question around the NCLEX scores here. I know you guys don't share the data anymore, but how would you say those trended in Q2?

Angela K. Selden, CEO

We do not have all Q2 results in, but they're pacing as we had expected. So we don't have any concerns at this point, but we're still awaiting a few campus-state combinations to report their results. So, we're paying careful attention to that. We know they're not posted publicly yet either. So there's a slowdown in posting results. We're not sure why.

Maxwell Scott Michaelis, Analyst

And then last one for me, guys. Just with the Department of Ed releasing that letter of credit, so $24.5 million, that $22 million coming in from the sale of the administrative buildings and then the $6 million in savings you guys are getting from cleaning up the preferred. How would you rank investment going forward in 2025 in terms of the company?

Richard W. Sunderland, CFO

Yes. Thank you for that question. So let me rank them and Angie can correct my ranking if she doesn't agree. First of all, and I've been saying this, we intend to invest in our growth initiatives. So that would be healthcare expansion, which we've talked about and technology and we introduced a change in the technology structure at APEI. We're interested in tuck-in acquisitions, and I would generally characterize that as campus, singular, small campus type acquisitions. You all know we have to keep a minimum amount of cash for regulatory compliance and we do pay attention to our leverage ratio. And last to my list would be stock repurchases and/or dividends.

Maxwell Scott Michaelis, Analyst

What were the stock repurchases in Q2?

Richard W. Sunderland, CFO

We didn't do any in Q2.

Angela K. Selden, CEO

We have an open authorization, but we have not done that. Remember, it was just in May that the LC was released and we're looking at our strategy. We're doing that work now and more of that will come in November.

Matthew R. Filek, Analyst

You have Matt Filek on for Stephen Sheldon. Great work this quarter. When you're able to consolidate the educational units into one platform, can you talk about some of the revenue and cost synergies that provides for the business?

Angela K. Selden, CEO

You bet. And Matt, we'll be able to give you more precise numbers and expectations on that in the November investor meeting. But directionally, when you think about the full ladder of nursing curriculum that Rasmussen offers, we'll be able to transfer access to that curriculum directly to all the Hondros campuses and the 3,700 students and 6,000 alumni that can benefit from the advancement of post-licensure nursing education that's available from Rasmussen. Additionally, the combination will allow our campus-based students and their friends and family to have access to the entire course catalog from APUS and the course catalog from Rasmussen. So today, as we have spoken in the past, Hondros has 2 programs it offers. APUS offers 200 programs, Rasmussen offers over 60 programs. So from any place a student may find an APEI school. So the marketing dollar we spend, whether they land at APUS, they land at Hondros, or they land at Rasmussen, they'll now have access to over 250 different choices for educational opportunities for themselves.

Matthew R. Filek, Analyst

Great. That's super helpful, Angie. And then I just had a quick follow-up for Rick. You guys have done a really nice job showing up the balance sheet, and Rick, I appreciate the additional detail on the capital deployment outlook from here. But I was wondering if you could maybe just remind us how much cash you feel you need on hand to run the business? And then what does pro forma cash look like after the sale of Graduate School USA?

Richard W. Sunderland, CFO

The answer to the question about how much cash is needed to run the business depends on our intended use of the cash. This consideration is part of the multi-year planning process we are currently undertaking. When I mention the use of cash, we aim to keep our composite score above 1.5, and different uses will impact that score in various ways. However, we are confident that the cash we currently have will support the activities I previously mentioned. What was the second question?

Matthew R. Filek, Analyst

Yes. Just wondering what pro forma cash looks like after the sale of Graduate School USA?

Richard W. Sunderland, CFO

It's really interesting. As we said, there's a loss associated with the sale. Some of that is actually a cash loss in the sense of paying some closing costs. But what we really did and when we focus on the balance sheet is we had a present value $28 million lease liability associated with the facility in Washington, D.C. And with the sale of Graduate School, that liability conveyed to the buyer. And so when we talk about cleaning up the balance sheet, there's an element to that, which is releasing ourselves of a very large lease liability for a facility in Washington, D.C.

Lucas John Horton, Analyst

Congrats on the great quarter. I just wanted to clarify on the GS USA sale. So your revenue guidance for the year was reiterated, but that's excluding $7 million of revenue that they've done in the first half of the year. Annualize that, it's really like a revenue raise guidance. Just want to clarify that wasn't initially part of the range.

Angela K. Selden, CEO

That's correct. When we provided the original guidance, we did not have a buyer for Graduate School, so we included a full year of revenue for them. Now we are reiterating our guidance and removing the five remaining months of revenue we would have otherwise collected from Graduate School if we still owned them. You are correct about what you mentioned.

Lucas John Horton, Analyst

Okay, awesome. And then just on the institution consolidation, I just want to check, timelines still remain intact here, kind of effective or I guess done by 3Q, effective by year-end. And then I guess, specific to that on the marketing channel, how does that kind of streamline the marketing end-user or student acquisition being under one umbrella and being able to offer those courses or the broad catalog of courses to all students?

Angela K. Selden, CEO

Yes, great question. So timeline-wise, we're really happy that we've got all the approvals lined up, right? We've got our accreditor approvals. We've got our state approvals. We have been in active dialogue with our accreditor, HLC, and the Department of Education on trying to finalize the timeline. Frankly, the department is very busy right now and has fewer people to do the work than they've enjoyed in the past. And so they're trying to find a timeline that works for HLC, for APEI, and for the department. So we're waiting on a confirmation of a timeline from ED. And then to answer your question on what happens in the future system, what we're excited about is that we'll have a system landing page. We'll have a place where people who might be interested in knowing more about our university system can go. We'll have places for them to explore each of the different divisions, which will be APUS Global, our military business and our healthcare business. And so you're right that they'll be able to see from that single landing page all the different choices that they can consider.

Richard W. Sunderland, CFO

Yes, and I would add marketing is already a shared service, right? And so we do experience the efficiency of that cost across the enterprise. But everything Angie said is correct.

Angela K. Selden, CEO

But we don't really share the leads today.

Richard W. Sunderland, CFO

That's right.

Jasper James Bibb, Analyst

Just one for me tonight. I joined a little late, so apologies if this has already been covered in the prepared remarks. But if not, just hoping you could comment on the Big Beautiful Bill. Just curious if you see any exposure to new accountability standards there across any of your portfolio schools or any other potential implications from the bill to highlight for us?

Angela K. Selden, CEO

Yes. Thanks, Jasper. We are very pleased with the minimal impact that the Big Beautiful Bill has on our business. The positive, if you didn't hear our commentary on the question from Raj, there was additional funding put into TA of $100 million that came through the bill that we believe will flow through and widen the TAM, making a bigger TAM for our active duty military students. So we believe that is a benefit to us.

Richard W. Sunderland, CFO

You mentioned the accountability standards, right? They mirror the prior legacy gainful employment metrics, which we've always done very well with. When you build universities that deliver good outcomes, high quality at a very affordable price in very relevant degrees and growing industries like nursing, you're going to do well against gainful employment. So we don't see much impact there.

Angela K. Selden, CEO

The other impacts that get some discussion have to do with the lifetime caps on various loan categories. And when you run universities that are very affordable, your students aren't borrowing debt at the levels where they should be significantly impacted by that. I'm sure there are probably a few, but it's really not an important element to our business.

Operator, Operator

And that does conclude our question-and-answer session. I'd now like to turn the call back to Angie for closing remarks. Angie?

Angela K. Selden, CEO

You bet. Thank you very much, Greg, and thank you to all of you who have joined the call today. We look forward to seeing all of you in New York City on November 20 for our first Investor Day where we're going to share with you updates on our progress, a focus on our growth, but certainly a multi-year view of how we intend to grow top line and bottom line results for our business. So we hope that you'll join us for that Investor Day in New York City. And if there are questions you have that we didn't answer for you today, always feel free to reach out to the MZ Group, Brian Prenoveau is on our call here today. They're our IR firm and they'll be more than happy to get you connected with any of us, Gary, Rick or Angie, in order to be able to be sure that we can answer your questions. So thank you so much for the time today. We look forward to speaking with you very soon.

Operator, Operator

Great. Thanks, Angie. And ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may now disconnect your lines at this time. Have a wonderful day.