Lincoln Educational Services Corp Q1 FY2024 Earnings Call

Good day and thank you for standing by. Welcome to the Lincoln Education Services 2024 First Quarter Results Conference Call. Please be advised that today's conference is being recorded.

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 the 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.

Thank you, Michael, and good morning, everyone. We've had an exceptionally strong start to 2024. 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's 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 while attracting additional corporate partners and broadening our relationships 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, 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, branded Lincoln 10.0, is a cornerstone to our success. Lincoln 10.0 combines hands-on learning at campus facilities with a greater component of classroom work delivered through online instruction. The model enables 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 graduate. The platform is creating instructional efficiencies and increasing productivity. During the quarter, we began to generate material operating leverage through the expanding deployment of Lincoln 10.0, achieving more than 200 basis points of improvement in our direct instructional cost as a percentage of revenue. When completed by the end of this year, Lincoln 10.0 will be used in approximately 65% of our classes, and we expect to generate increasing operating leverage as the year progresses 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 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 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. 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. 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 plenty 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 exceeded our plans, 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 construction shortly. We remain on schedule to welcome our first classes at this campus, 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 will offer career opportunities in the auto, diesel, welding, HVAC, and electrical fields. In addition to the 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 program replication strategy, we are consistently expanding our opportunities to increase overall student starts while remaining focused on maintaining 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 Connecticut, we helped establish a similar event in Maryland. Recently, 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 changers 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 interviewed by Stuart Varney on Fox News regarding 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 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 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 training 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 notably 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 needs of America's 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 for both next quarter and the foreseeable future. Importantly, our balance sheet remains strong, so we can achieve our growth without diluting shareholders.

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 up 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. Additionally, 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 as our new campus in Houston. By year-end, we expect to invest approximately $50 million in CapEx for these three locations as part of our estimated total capital spending of $65 million to $70 million this year. Our investments in new campuses and campus relocations for state-of-the-art facilities position us well for significant growth over the next five years. 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% start growth. Thanks to our strong performance, we finished March with almost 1,400 additional students, positioning us for continued growth this year. Our East Point, Georgia campus, which held its grand opening event this Thursday, commenced its first class in March. While this quarter, its contribution of 29 student starts and revenue of $90,000 was negligible, the campus is generating strong student interest and enrollments that are currently trending above our internal expectations. Before we dive into operating expenses, I want to note for comparability purposes that this discussion will exclude: the East Point campus; pre-opening costs of new and relocating campuses; other nonrecurring expenses and for the transitional segment. Further details of these items are available in the 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 higher 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 taught under the hybrid model. Marketing investments increased; however, we are seeing a solid return as evidenced by our 15% start growth while keeping our cost per start flat. Our first-quarter adjusted EBITDA results exceeded 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 drawing on the credit facility in the near term, the facility further enhances our financial strength and stability, providing us with the additional flexibility 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 raising our outlook for revenue, adjusted EBITDA, and adjusted net income as follows: revenue ranging between $418 million to $428 million; adjusted EBITDA in the range of $32 million to $37 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, pre-opening costs 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.

Our first question comes from Alex Paris of Barrington Research.

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 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 has two parts. Could you provide 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 expenses over the balance of the year?

Sure. Yes, I appreciate the question. So we're definitely seeing strong growth across our programs, and it's probably due to many factors, not just Lincoln 10.0. But certainly, we know that students want greater flexibility; everyone's used to doing something online these days. 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 are benefitting just from so much of the discussion that is taking place regarding the value of college and whether my child should now go to college. Just having more people perceive that and think about the skilled trades is benefiting us as well. There are probably several factors at play. Regarding marketing spend, we 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. As long as our cost per start is not increasing, we know we are getting a good return on those additional dollars.

Our next question comes from the line of Steven Frankel of Rosenblatt Securities.

Scott, could you give us some insight into how quickly we will see Lincoln 10.0 drive up graduation rates? Is that something that will be material to this year or more likely to have an impact with the full-year rollout in 2025?

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

Our next question comes from Eric Martinuzzi of Lake Street Capital Markets.

Yes. I know you didn't provide 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, would you say that is still a safe assumption?

Yes, it could be slightly if you look at our seasonality; it will trend about the same, so it will be roughly flat with Q1.

Okay. Right. And then, a new wrinkle for me here, the news that you announced with the new corporate partner, the Container Maintenance Corporation. Just curious to know the impetus behind this. Did they approach you? Did you approach them? And the fact that it won't be done at your campuses, how are we pulling this off? Are they investing in training facilities themselves, or is this still to be determined?

Sure. It is an interesting and exciting opportunity. We've been looking for opportunities like this for years. We interact with a lot of employers, both at the local and national levels. We had been working with several people in the shipping area, particularly around trailers pulled by tractor trailers for repair programs. In those conversations and by being part of the industry, we secured this opportunity. Most of our contracts are connected with our students or enhancing the curriculum we offer. In this case, we are able to take a form of curriculum we've created and then bring it to the employer to upskill their employees. We will be establishing training sites at four or five locations they have asked us to provide for them, hire the staff, train them, and then use our curriculum to upskill their employees. This gives us a lot more operating leverage since we are now open to providing trainings beyond the 14,000 students we currently have. We are actively discussing similar training programs with several other organizations involved in logistics and shipping.

I'm showing no further questions at this time. I would now like to turn it back to Scott Shaw for closing remarks.

Thank you. Thanks, everyone, for attending today's call. We hope to see you at one of our many investor conferences and non-deal roadshow events over the next few months. We appreciate your continued interest in our company. We look forward to updating you on our progress in August and wish you all a good day. Thanks, everyone.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.