Earnings Call Transcript - APEI Q2 2024

Operator, Operator

Hello, and welcome to the American Public Education, Inc. Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the conference over to Brian Prenoveau, Investor Relations. You may begin.

Brian Prenoveau, Investor Relations

Thank you, Sarah, and good afternoon, everyone. Welcome to American Public Education's conference call to discuss second quarter 2021 results. Joining me on the call today are Angela Selden, President and Chief Executive Officer; Rick Sunderland, Executive Vice President and Chief Financial Officer; Steve Somers, Senior Vice President, Chief Strategy and Corporate Development Officer. Materials for the call today are available in the Quarterly Reports section of APEI's website. Statements made during this conference call and in any accompanying presentation regarding APEI and its subsidiaries that are not historical facts may be considered 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. Forward-looking statements may sometimes be identified by words like anticipate, believe, seek, could, estimate, expect, can, may, plan, potentially, project, should, will, would, and similar or opposite words. Forward-looking statements include, without limitation, statements regarding expectations for registrations and enrollments, revenue, earnings and adjusted EBITDA and other earnings guidance, repositioning Rasmussen University for growth, change in market demands and our ability to satisfy such demand and other company initiatives, including with respect to future competition and demand and cost-saving efforts. This presentation contains references to non-GAAP financial information. A reconciliation between the non-GAAP financial measures we use and the most directly comparable GAAP measures is located in the appendix to today's presentation and in the earnings release. Management believes that the presentation of non-GAAP financial information provides useful supplemental information to investors regarding its results of operations and should be— and should only be considered in addition to and not as a substitute or superior to any measure of financial performance prepared in accordance with GAAP. Now, I'd like to turn the call over to APEI's CEO, Angela Selden. Angie, please go ahead.

Angela Selden, CEO

Thank you, Brian. Good afternoon, and thank you for joining American Public Education's second quarter 2024 earnings call. For those of you new to APEI, our four co-secondary institutions are among the largest in the country in educating adult learners, with an emphasis on educating those in service to others, namely new nurses, active duty military, veterans, first responders, and the federal workforce. On an annual basis, APEI provides online and campus-based postsecondary education and career learning to approximately 125,000 adult learners worldwide. Our mission is to empower purpose, potential, and prosperity for those in service to others. On today's call, we will cover in more detail the following positive highlights. First, in Q2 2024, this marked the seventh consecutive quarter where APEI's adjusted EBITDA has met or exceeded guidance. Overall, APEI revenue grew 3.9% year-over-year to $152.9 million. We saw a significant improvement in APEI's adjusted EBITDA, which grew 24% to $10.9 million, primarily driven by year-over-year operating expense reductions at both Rasmussen and APEI corporate. Adjusted EBITDA margin expanded by 118 basis points to 7.2% when compared to 2Q 2023. Next, I am pleased to report that Rasmussen has achieved its first year-over-year positive revenue and enrollment quarter since our acquisition in 2021, as we signaled earlier this year. And finally, we are reiterating our full-year guidance of revenue between $620 million and $630 million and adjusted EBITDA between $60 million and $70 million. Now, I'd like to provide more detail about the results and trajectory of our education units, starting first with Rasmussen. I am very pleased with the progress we have made to stabilize and put Rasmussen back on a trajectory for revenue and enrollment growth and positive EBITDA. Second quarter enrollments, which we shared in our last earnings call, were 13,600, down just 2%. More importantly, third quarter enrollments, which we are sharing for the first time today, grew slightly on a year-over-year basis to 13,500 students, powered by double-digit growth in our Nursing and Health Sciences online programs, and is the positive turn in the business toward which we have been working. This is particularly noteworthy as Rasmussen decided to suspend new enrollment in its two Wisconsin campuses, which operate in small markets, while it continues to optimize the campus footprint to improve profitability and strengthen margins. While we do not typically report starts, I think it's important to note that start growth was nearly 10% in the quarter, reflecting positive year-over-year start growth in both Rasmussen online and campus portions of the business. The continued momentum in enrollment corresponds with growth in revenue, where Rasmussen revenue was up 2%, which is also the first time since APEI's acquisition and is indicative of the path to continued growth and profitability. EBITDA for the Rasmussen segment was negative in the quarter, with the loss narrowed to $4.7 million from $7.1 million in the prior year period. In conjunction with the expected growth in enrollments in the second half, we expect Rasmussen to move into positive EBITDA territory in the fourth quarter of 2024, which sets us up for a much stronger profit picture in 2025. In terms of student outcomes, we again produced strong NCLEX pass rates in the second quarter, where 22 of 25 programs are meeting the required thresholds year-to-date. Now, I'd like to turn our attention to APEI's online university, serving military and veterans, APUS. In 2Q 2024, overall net course registrations increased 1.7% year-over-year, reflecting the strong retention of returning students. Revenue at APUS was higher due to the overall growth in registrations as well as higher average revenue per registration from last year's mid tuition and fee increases. As APUS has invested in 2024 to strengthen its online curriculum, implement a faculty pay increase for part-time faculty, invest in IT infrastructure optimization, and better align its marketing spend, 2Q EBITDA margin was slightly lower year-over-year. Looking ahead to the third quarter, we would expect EBITDA margins at APUS to be similar given those same factors. At Hondros, as previously reported, 2Q 2024 enrollment remains strong. We also saw growth continue in 3Q 2024, with enrollment increasing more than 10% year-over-year to 3,100 students, even against a strong 17% comp a year ago. Demand remained strong for both the PN and ADN nursing programs, with the new Detroit campus performing very well. Legacy campus also contributed to growth, including Indianapolis, where we still operate with enrollment cap as a new program despite exceptional NCLEX pass rates. Starts at Hondros remain robust, and we continue to be pleased with the growth we are seeing. In 3Q '24, Hondros has relocated one of its Ohio campuses and has experienced some unexpected infrastructure setbacks in that location, which we expect will result in some temporary but limited impact on enrollment at that one location. Overall, with the stabilization of enrollment and continued improvement in EBITDA at Rasmussen, at APEI, we are now delivering positive growth in revenue, adjusted EBITDA, and margins on a consolidated basis. Before turning the call over to Rick Sunderland, APEI's CFO, I would like to frame where we are as an enterprise and provide some specificity as to where we are headed. With the stabilization of Rasmussen well underway, including line of sight to continued enrollment and revenue growth from that unit, we see margins at Rasmussen shifting from negative to positive in the fourth quarter, setting the stage for 2025 and beyond. Rasmussen also expects to expand its campus footprint for the first time in over five years once the Department of Education growth restrictions are lifted, which will allow us to expand our impact in addressing the large demand for nursing and other clinical roles in our overstretched healthcare system. We fundamentally believe in our vision that education can transform lives, advance careers, and improve communities. Our four education units were built for service-minded students, offering accessible and affordable higher education and training across a diverse range of subjects. At APEI, we have carved out a distinctive market position. American Military University or AMU is the number one provider of higher education to the U.S. military and has been named the top choice nationwide for veterans using their GI Bill benefits. Hondros College of Nursing focuses on educating pre-licensure nursing students at campuses and is the number one provider of pre-licensure PN education in the state of Ohio. Both Hondros and Rasmussen continue to tackle the chronic nursing shortage by graduating thousands of new nurses each year where the demand for nurses is expected to grow significantly to 3.3 million in 2031, an increase of 195,000 and an additional 203,000 job openings each year when retirements and workforce exits are factored in. Overall, higher education remains a critical accelerator for anyone seeking employment in the US, with an increasing number of working adult students driving the higher education market, which is expected to reach approximately $173 billion by 2030. We are proud that APEI's affordable, learn-to-earn focus enables students to experience a strong lifelong return on their educational investment. With that, let me turn the call over to APEI's CFO, Rick Sunderland.

Rick Sunderland, CFO

Thank you, Angie. Total revenue in the second quarter was $152.9 million, up $5.7 million or 3.9% from the prior period. Second quarter revenue growth was driven by increased revenue at APUS, Hondros, and Rasmussen, partially offset by a revenue decline at graduate school, which was approximately $1 million less than our guidance. Total costs and expenses in the second quarter decreased $61.8 million or 29.1% compared to the second quarter of 2023, which included a non-cash impairment charge of $64 million to reduce the carrying value of RE segment goodwill and intangible assets and the corresponding tax impact. Costs and expenses for the second quarter, as compared to the prior period, excluding losses on leases, severance costs, and information technology transition services costs in 2024 and goodwill and intangible asset impairment charges in 2023, increased $0.7 million primarily due to increases in other technology and marketing expenses. Second quarter diluted loss for common shares improved significantly, narrowing to a loss of $0.06 compared to an adjusted net loss of $0.25 in the prior quarter, which excludes the $64 million goodwill and intangible asset impairment. For the quarter, adjusted EBITDA increased 24% to $10.9 million compared to $8.8 million in the prior period. The second quarter results were at the high end of guidance and represented an adjusted EBITDA margin of 7.2% as compared to 6% in the prior quarter. At APUS, second quarter revenue increased 4.7% as compared to the prior year to $77 million due to a 1.7% increase in net course registrations driven by an increase in registrations by military-affiliated students utilizing VA benefits and tuition and fee increases in the second and third quarters of 2023. In total, the EBITDA margin at APUS was 25% compared to 28% in the prior year. The change in margin was primarily due to increased information technology employee compensation and advertising costs. At Rasmussen, second quarter revenue was $53 million, an increase of 2% compared to the prior year, due to an increase in tuition in the first quarter of 2024, partially offset by a 2.2% decrease in total student enrollment. The decline in total student enrollment was driven by an 8.8% decrease in on-ground enrollment, partially offset by a 4.2% increase in online enrollment, which has a lower revenue per student compared to the prior year period. As Nancy mentioned, the year-over-year enrollment declines have narrowed in each of the past five quarters, and third quarter total enrollment is up slightly. In the second quarter, Rasmussen's EBITDA improved to a loss of $4.7 million compared to an EBITDA loss in the prior period of $7.1 million, representing an approximate 33% year-over-year improvement after adjusting for last year's goodwill impairment and this year's losses on leases. At Hondros, second quarter revenue was up 15% to $16.4 million as compared to the prior year period due to continued enrollment growth and the 2023 tuition increase. For the quarter, Hondros total enrollment grew 9.4% to approximately 3,300 students, marking the third consecutive record-setting quarter for enrollment. For the quarter, Hondros' EBITDA loss was $0.4 million compared to positive EBITDA of $0.1 million in the prior year period. Revenue in graduate school, included in Corporate and Other, was $6.5 million, compared to $7.5 million in the prior year period. For the quarter, graduate school EBITDA loss was $0.7 million compared to positive EBITDA of $0.8 million in the prior year period. At June 30, 2024, total cash, cash equivalents, and restricted cash was $156.2 million, an increase of $11.8 million from year-end 2023. For the six months ended June 30, 2024, cash flow from operations increased 16% to $33.2 million compared to the prior year. Capital expenditures for the first six months were $11.4 million, and free cash flow, defined as adjusted EBITDA less capital expenditures, was $16.6 million compared to $9.2 million a year ago. Principal on APEI's term loan at June 30 was $96 million, with unrestricted cash of $130 million. APEI continues to be net cash positive. Additionally, there are no borrowings under APEI's $20 million revolving credit facility, which remains fully available. Turning now to the third quarter 2024 outlook. APUS total net course registrations are expected to be flat to slightly down compared to the prior year between 90,500 and 92,300 registrations. We believe the softness in third-quarter APUS registration is largely attributable to changes in marketing spend in late 2023, which typically has a two to three-quarter lag in registration numbers. Appropriate adjustments are being made to marketing spend to correct this decline. At Rasmussen and Hondros, third quarter student enrollments are actually driven by the quarterly starts of these schools. At Rasmussen, third quarter on-ground enrollment decreased by 5% to approximately 6,030 students, while total online student enrollment increased by 4.7% year-over-year to approximately 7,440 students for an aggregate enrollment of approximately 13,500 students. This represents a slight increase compared to the third quarter of 2023 and is the first quarter of positive year-over-year enrollment growth since the acquisition. At Hondros, third quarter total student enrollment increased by 10% year-over-year to approximately 3,100 students. In the third quarter of 2024, consolidated revenue is expected to be between $152 million and $155 million. The company expects net income to common shareholders to be between a loss of $1.2 million and income of $1 million or between a loss of $0.06 and income of $0.05 per diluted share. Adjusted EBITDA is expected to be between $9 million and $12 million in the third quarter of 2024. Our full-year guidance is unchanged, with anticipated consolidated full-year 2024 revenue in the range of $620 million to $630 million. We expect our adjusted EBITDA to be between $60 million and $70 million for the full year. The second and third quarters tend to be seasonally low quarters with a notable increase in adjusted EBITDA in the fourth quarter, especially with Rasmussen continuing to ramp up in the fourth quarter. I will now pass it back to Angie to offer some closing remarks, after which we will begin our question-and-answer session. Angie?

Angela Selden, CEO

Thank you, Rick. During the quarter, we continued to execute our strategic initiatives to grow enrollment at APUS and stabilize and increase profitability at our other units. We're further encouraged by the performance at Rasmussen as enrollment numbers have stabilized and had the first year-over-year improvement since our acquisition. Market fundamentals continue to support our business strategy with increasing growth in higher education and online education markets, along with significant government education benefits for military investments. With our number one market position in active-duty military investments and focus on high-demand sectors like nursing, we are well positioned to capitalize on this growth. As we move ahead in 2024 and continue to execute on our key milestones, I believe that we have built the foundation of a business that can continue to deliver value to its students, stakeholders, and communities for years to come. And with that, I would now like to hand the call back to the operator to begin our question-and-answer session. Operator?

Operator, Operator

Thank you, Angie. Your first question comes from the line of Raj Sharma with B. Riley. Your line is open.

Raj Sharma, Analyst

Yeah. Thank you for taking my questions. I wanted to understand a little bit, maybe get some color on Rasmussen. I see the improvement in the enrollment is now almost flat and projected to be almost flat next quarter. Where can this business—what can this business do and is capable of specifically not as much in the year-on-year growth from here but really on the EBITDA margins, you're getting— you have negative 9% this quarter in the EBITDA margins. What could these get to in the second half and more sorts of longer-term fiscal 2025, 2026 relative to where they were when you purchased Rasmussen or what the original capability of the operation is? Thank you.

Angela Selden, CEO

Raj, thank you very much for that question. That's a lengthy question with many component parts to it. So let me start by saying, as we signaled, we believe 2024 is where Rasmussen will turn to positive adjusted EBITDA. And we see line of sight to that. We're excited about that. Several of the things that we believe will have a positive effect on 2025 include the completion of our exiting of the third-party IT agreement with creditors. We expect to see meaningful savings on a full-year run rate basis in 2025 as a result. And certainly as we turn the corner on enrollment to positive momentum in the fourth quarter and in 2025, we believe that will have a meaningful improvement in our adjusted EBITDA for each new dollar of revenue, we're now more than covering the fixed cost, and that has a significant effect on our adjusted EBITDA in 2025 and beyond. We're not presently giving guidance on 2025, but I'll turn it over to Steve for any other comments you'd like to share.

Steve Somers, SVP

Yes, Raj, I'll just add some context around there, right? In the industry in general, nursing schools and similar assets operate in the 10%, 15%, and even 15%-plus range. We're obviously working to improve that quarter-to-quarter. Angie signaled that we're going to be profitable in terms of EBITDA in the fourth quarter. So, I think it's reasonable to think that over time, we can get to 5% to 10% margins over the next one to two years as you think about us inside the industry, that would be very consistent. And I think as you look forward to the third— I think you asked about the second half as well, the third quarter and then the fourth quarter, right, we'll still be negative in the third quarter, but on a 2H basis, we expect it to be positive overall for the second half and the fourth quarter itself. So, that gives you a little bit of context around—and I think the trend that has been in place for the last 12-plus months is directing in that general zone.

Raj Sharma, Analyst

Got it. And then could you talk a little bit about the APUS enrollment trends? Is this sort of flat to down a little expected? Is that seasonal? Where do you see those trends in enrollment overall?

Angela Selden, CEO

I'll start, Raj, and then I'll have Rick provide more detail. In Rick's remarks, he discussed the decision in the fourth quarter of 2023 to dial back investments in marketing in certain segments of APUS. There's a two-quarter lag that we see in terms of those investments turning into enrollment. As we approach Q3, we are seeing the effect of that reduction in marketing spend, which has since been course-corrected, and we expect in future quarters for that enrollment momentum to return. So, Rick, I'm going to turn it over to you for more detail.

Rick Sunderland, CFO

Yes, that's accurate, Raj, and there is that lag. I would suggest that if things function as we expect and we expect they will, the course-correction we're making now or have been making recently will play out in the numbers over two to three quarters. That's just the way the business functions. We remain strong in my comments, I talked about the strength of the military affiliate. We remain strong in the veterans community, and quite frankly, our market share in active...

Angela Selden, CEO

Yes, I think what I'll also say is that the margin optimization efforts that were underway last year help us now understand the sensitivity around marketing spend. Now that we understand that, we can be a lot more thoughtful about how we invest our marketing against certain channels and segments going forward. We've tested that, and we know where those areas are. We are also seeing, in particular, growing strength in the veterans market. It's something we've been leaning into, and we want to see momentum build. So, we're pleased with the results we're seeing with veterans.

Raj Sharma, Analyst

Great. Thank you for answering my questions. That’s very helpful. I'll take it offline. Thank you.

Angela Selden, CEO

Okay. Thanks, Raj.

Operator, Operator

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

Unidentified Analyst, Analyst

Great, team. You have Matt Flynn on for Steven. Thank you for taking my questions. I wanted to start with one on the full-year guidance. Wondering if you could talk about some of the factors that would need to play out to push you towards the upper end of the guidance range, particularly for the revenue guide, which seems to assume a decent quarter-over-quarter step-up in the fourth quarter based on the 3Q guide. I know there's some seasonality at play there, but any additional color would be helpful.

Angela Selden, CEO

Yes, I'll turn it over to Rick.

Rick Sunderland, CFO

This is Rick. I'll start, and then Angie can fill in. Well, if you want to push up to that range, things that would have to go favorably would be a quicker uptake on the marketing spend at APUS, right? We talked about what has been observed as a typical lag between altering a spend, be it total dollars or allocation among segments, and then the resulting improvement in registration. If that accelerates, then, of course, that would push revenue up higher in the range. We are seeing strength at RADCO, right? We've got to turn a slight improvement year-over-year, and that momentum will continue. I think Andy commented on the strength of the start numbers, which is a leading indicator as it relates to total enrollment, and that strength could accelerate or build on itself to push us up. Then you drop down to Hondros. They've got a new program they're introducing as a new program. We don't have any observable experience in medical assisting regarding how that enrollment pattern will ultimately play out; that could go up or down, right? It's a new program. The graduate school, we've got Steve Somers, who's in the room here, he's back. While it's a smaller piece of the overall enterprise, it had an impact on the Q2 reported results. Of course, the opposite could be true, an uptake of $1 million or two there in the federal workforce would obviously be very helpful against the range. And so I'll pause there and let Angie add to the comments.

Angela Selden, CEO

So, I think that's a pretty good synopsis. The last thing I would say is that we passed on price increases in certain segments across APUS, Hondros, and other areas, and assuming that those price increases continue to hold without degradation in our student enrollments, that will also play favorably in the overall revenue that we would expect for the full year.

Unidentified Analyst, Analyst

Got it. That's helpful color. Thank you, Angie and Rick. And then I had another one on NCLEX scores. I imagine this is tougher to call, but do you have any rough estimate on when you might have all of your nursing programs with first-time NCLEX pass rates that exceed state nursing board standards? I know you continue to make good progress on that with a variety of initiatives you have underway, but any sense of timing on completely resolving those first-time NCLEX pass rate issues at the remaining campuses?

Angela Selden, CEO

Sure. The campus we are paying attention to is in Illinois, where we have done a significant amount of work renewing faculty and upgrading the curriculum. That campus was operating with an older version of the curriculum that was not aligned with the next-gen NCLEX testing. We believe that the turn on NCLEX scores in Illinois will be slower than the two other remaining campuses. But we are incredibly happy with the NCLEX results we are posting now; all of our BSN programs are above the state standards, all but one in our ADN program, which had been an area of challenge for us in the past, and two of our PN programs. We are just very pleased with the improvement demonstrated in terms of NCLEX pass rates.

Steve Somers, SVP

Matt, this is Steve. Let me just add one more comment to that. If you look back at the number of programs that are passing today year-to-date, that is now higher than it was in the prior two years before we acquired the business. So, we've obviously made a lot of improvement in the near term, and now we are on a path to a better result on a longer-term basis as well.

Unidentified Analyst, Analyst

Perfect. That's great color, and yes, great to see the continued progress there. Thank you.

Angela Selden, CEO

Thank you.

Operator, Operator

Your next question comes from the line of Jasper Bibb with Truist Securities. Your line is open.

Jasper Bibb, Analyst

Hey, everyone. Apologies if anything has been answered already. I joined a little bit late from another call. Just wanted to ask about Rasmussen. I guess, is there any update on the Florida RU campuses from last quarter? And I think there's also potentially a bill in Illinois. I think to help you a bit with the caps you mentioned in the last answer; any change there?

Angela Selden, CEO

Sure. I'm not completely clear on what you specifically mean regarding the Florida campuses. I'll start with the NCLEX results, where all program campus combinations are meeting the state standard for the year-to-date measurement period. We are very pleased with the significant improvement we’ve seen in NCLEX performance in Florida. If that doesn't answer your question, could you provide more specific details you had in mind?

Jasper Bibb, Analyst

No, no, that's helpful. I think last quarter, there was basically a technical thing where you had a really old cohort that triggered some of those campuses going on formation, and it sounded like everything was...

Angela Selden, CEO

Yes. We've been really happy with the results of pushing through and putting every single program campus combination in the green.

Jasper Bibb, Analyst

Okay. Great. And the second part of the question was, I think there was a bill in Illinois that could give you some relief. You mentioned a campus with a longer turnaround plan there. I think that bill might have afforded you more latitude at the relevant threshold. Just kind of curious if there's any update there or if that's still in the works through their legislature.

Angela Selden, CEO

Yes, that still remains in place. The relief affords us a two-year measurement period. We certainly aren't going to wait until the end; we're working very aggressively. As I mentioned before you joined the call here, we've done two major things in Illinois to accelerate our performance at those campuses, including basically a replacement and revitalization of several of the faculty there. Importantly, we are modernizing the curriculum in Illinois for a technical reason, as the Board of Nursing required us to operate with a curriculum that was older than the version we had been offering in our other campuses. We were able to work with the Board of Nursing to allow them or have them allow us to modernize that curriculum. We are moving that curriculum to the next-gen version, which is a version for the new exam. We have a high degree of confidence that the new faculty, the dedicated attention from our nursing leadership, and the new curriculum will allow us to see significant improvements in our Illinois campuses in the future.

Jasper Bibb, Analyst

That's very helpful. Thanks for taking the questions.

Angela Selden, CEO

Thank you.

Operator, Operator

This concludes our question-and-answer session. I'd now like to turn the call back over to Angie for closing remarks.

Angela Selden, CEO

Thank you, operator. I'd like to thank each of you for joining our earnings conference call. We look forward to continuing to update you on our ongoing progress and growth as we continue our rapid pace of operational execution. If we were unable to answer any questions, please reach out to our IR firm, MZ Group, who would be more than happy to assist.

Operator, Operator

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect your lines and have a wonderful day.