Earnings Call Transcript - PRDO Q3 2021

Operator, Operator

Good afternoon, and welcome to the Perdoceo Education Corporation Third Quarter 2021 Earnings Conference Call. I would now like to turn the conference over to Wyatt Turk. Please go ahead.

Wyatt Turk, Investor Relations

Thank you. Good afternoon, everyone, and thank you for joining us for our third quarter 2021 earnings call. With me on the call today is Todd Nelson, President and Chief Executive Officer; Ashish Ghia, Chief Financial Officer. This conference call is being webcast live within the Investor Relations section at perdoceoed.com. A webcast replay will also be available on our site, and you can always contact the Alpha IR for Investor Relations support. Let me remind you that this afternoon's earnings release and remarks made today include forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934. These statements are based on assumptions made by and information currently available to Perdoceo Education and involve risks and uncertainties that could cause actual future results, performance business prospects and opportunities to differ materially from those expressed in or implied by those statements. These risks and uncertainties include, but are not limited to, those factors identified in Perdoceo's annual report on Form 10-K for the year ended December 31, 2020, and subsequent filings with the Securities and Exchange Commission. Except as expressly required by the Securities Laws, the company undertakes no obligation to update those factors or any forward-looking statements to reflect future events, developments or changed circumstances or for any other reason. In addition, today's remarks refer to non-GAAP financial measures, which are intended to supplement or substitute for the most directly comparable GAAP measure. The earnings release that accompanies today's call contains financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures and is available within the Investor Relations page of the company's website. With that, I would like to turn the call over to Todd Nelson. Todd?

Todd Nelson, CEO

Thank you, Wyatt. Good afternoon, everyone, and thank you for joining us on our third quarter 2021 earnings call. I'd like to begin by thanking our faculty, student support staff, and all our employees for their hard work, dedication, and diligence in serving and educating our students. In general, we are pleased with our third-quarter results, during which we made adjustments to our marketing and admissions expenses while continuing to prioritize resources for technology and relevant student support processes that we believe enhance student experiences, retention, and academic outcomes. For the quarter, we reported net income of $27.8 million or $0.39 per diluted share while adjusted earnings per diluted share, which excludes certain significant and non-cash items, was $0.45. It was also a busy quarter on the acquisition front. We completed two acquisitions, DigitalCrafts, which closed on August 2, and more recently, Hippo Education, which closed on September 10. DigitalCrafts provides individuals an opportunity in the technology area through reskilling and upskilling courses within the areas of web development, web design, and cybersecurity. Hippo Education is a provider of continued medical education and exam preparation for medical professionals. These two recent acquisitions have significantly expanded our non-degree portfolio of professional development and continuing education offerings. Supported by our existing university operations, we believe these businesses will have several opportunities to grow the revenue. Ashish will provide more details around these acquisitions shortly. But for now, let us go back to our operating results. Some of the key takeaways and highlights for the quarter and year-to-date results. First, as discussed last quarter, we believe the prolonged pandemic and its resulting safety measures as well as the macroeconomic and governmental responses have impacted overall student engagement. We continue to see some students pausing their academic programs or deferring their decision to begin classes during the current quarter. We are cautiously optimistic that these trends will reverse and are already seeing some positive signs for our September and October sessions. Second, beginning in the third quarter and aided by data analytics, we made adjustments to our marketing strategies to further improve our focus on identifying prospective students who are more likely to succeed at one of our universities. We believe these adjustments, along with the enrollment trends I just discussed, will impact near-term student enrollments. However, in the long run, we believe these marketing adjustments will further enhance student experiences, retention, and academic outcomes. Third, we contained an excellent job in managing overall expenses, responding in part to student enrollment trends while continuing to prioritize resources for our student-serving functions. Fourth, we continue to focus on our corporate partnership programs at both institutions. And as previously mentioned, CTU's enhanced corporate partnership team is fully in place and is already engaged with employers to leverage their tuition assistance programs and provide a debt-free education to their employees. With that said, total student enrollments at September 30, 2021, decreased by 0.9% compared to our September 30 of the prior year. At CTU, total student enrollments increased 7.5%, primarily due to its academic calendar redesign. As a reminder, CTU implemented a redesigned version of its academic calendar in early 2021, similar to what AIU implemented a few years ago. At AIU, total student enrollments decreased by 11.6%. We believe this decline was attributable to the factors I discussed earlier. Additionally, Triton University, which primarily serves active-duty and military-affiliated student populations, continued to be impacted by the transition of the Army education and registration portal and the subsequent technical challenges with the portal. Trident is working with students individually to minimize confusion and uncertainty. Before turning the call over to Ashish, I'll now touch briefly on investments in technology and other student-facing functions. Our investments in machine learning and data analytics for the third quarter were largely a continuation from previous quarters. As we further expand their use across academics and advising functions. We also began a multi-year project to implement enhancements to our student technology infrastructure during this quarter. This includes several upgrades to our mobile platform and virtual campus as well as the redesign of our digital toolsets and technology that are utilized by our faculty and student support teams to serve and educate students throughout their academic lifecycle. We are confident that these upgrades will further enhance student experiences, especially for our nontraditional adult learners while driving efficiencies within the business. With that said, I would now like to turn the time over to Ashish for a deeper review of our operating performance in the quarter. Ashish?

Ashish Ghia, CFO

Thank you, Todd. I will now review our third-quarter results and then discuss our balance sheet, capital allocation, and 2021 outlook before handing the call back to Todd for his closing remarks. Please note that all comparisons I discuss are versus the comparative prior year period unless otherwise stated. Before I discuss our operating results, a quick note regarding year-over-year comparability and the operating income adjustments. First, operating results for AIU reflect the DigitalCrafts acquisition commencing on August 2, 2021, and the operating results for CTU reflect the Hippo acquisition commencing on September 10, 2021. Second, as previously discussed, we no longer include adjustments for any expenses related to closed campuses when presenting adjusted operating income or adjusted earnings per diluted share because these expenses are no longer material. Third, we are also now adjusting for legal fees associated with certain matters. All prior-year period amounts have been recast to maintain comparability. And fourth, AIU's operating results are fully comparable to the prior-year quarter as it relates to the Trident acquisition. With that said, let us begin with an overview of our operating results. Third-quarter operating income was $37.9 million as compared to $32.1 million. Adjusted operating income, which excludes certain significant and non-cash items and which we believe is more reflective of the underlying operating performance increased 28.4% to $46.3 million for the quarter versus $36.1 million in the prior year. Net income for the quarter totaled $27.8 million or $0.39 per diluted share. Adjusted earnings per diluted share, which, again, we believe is more reflective of the underlying operating performance, was $0.45 for the quarter as compared to $0.35. The improvement in adjusted operating income for the quarter was primarily due to the revenue increase at CTU as well as lower marketing and admission expenses as compared to the prior year, which more than offset lower revenues at AIU as well as increased employee-related healthcare expenses. Now for some additional details surrounding our third quarter 2021 results. Revenue for the quarter increased to $174 million as compared to $169.1 million with the revenue increase at CTU, partially offset by the decline at AIU. As it relates to our segments, total student enrollments for CTU increased by 7.5% as of the quarter-end, while third-quarter revenue increased 5.9% to $104.8 million. Revenue and enrollment comparability were positively impacted by the academic calendar redesign. Operating income for the quarter grew 24.9% to $41.2 million due to revenue growth as well as lower marketing, bad debt, and admissions expenses. Turning to AIU, total student enrollments as of the quarter-end decreased by 11.6%, while revenue decreased by 1.6% to $68.9 million for the quarter. However, lower marketing and admission expenses more than offset this revenue decline and resulted in an operating income increase of 51.2% to $8.3 million for the quarter. In summary, we do expect total enrollments to be impacted in the short term for the reasons Todd discussed earlier. And as a reminder, there is typically a lag impact on revenue from changes in total student enrollments. Moving on to corporate and other. Third-quarter operating loss was $11.7 million compared to $6.4 million in the prior-year quarter. This increase in operating loss was mainly due to legal fees associated with acquisition efforts and the responses to the Department of Education relating to the loan forgiveness applications by former students. Please refer to the disclosures regarding borrower defense to repayment in our 10-Q that was filed this afternoon for additional information on this matter. Now turning to income taxes. For the third quarter, we recorded a provision for income taxes of $9.6 million. This resulted in an effective tax rate of 25.6%. As a reminder, we began making quarterly estimated tax payments in the second quarter of this year and expect to continue doing so each quarter moving forward. Finally, we expect that for full-year 2021, our effective tax rate will be between 26% and 26.5%. This full-year estimated rate is negatively impacted by the tax effect of stock compensation, increases in tax reserves for uncertain tax positions, and the tax effect of expenses that are not deductible for tax purposes. Now to our balance sheet and liquidity. Year-to-date, net cash provided by operating activities was $144.2 million versus $137.8 million in the prior year. This increase was primarily driven by revenue growth at both CTU and AIU for the current year-to-date. We ended the quarter with $481 million of cash, cash equivalents, restricted cash, and short-term investments. This represents an increase of approximately $70.6 million over year-end 2020. Key drivers of cash through the third quarter were positive cash flows from our universities, which were partially offset by cash outflows related to federal income tax payments capital expenditures, and the acquisitions of DigitalCrafts and Hippo Education. Let's take a minute to discuss our acquisitions. As Todd mentioned, these acquisitions expand our educational offerings that provide upskilling, reskilling, continuing education, and exam preparation opportunities. The initial cash consideration for DigitalCrafts was $16.25 million. For the trailing 12 months ended September 30, 2021, DigitalCrafts had unaudited revenues of approximately $7 million. The initial cash consideration for Hippo Education was $42 million. For the trailing 12 months ended September 30, 2021, Hippo had unaudited revenues of approximately $10 million. Capital expenditures for the third quarter were approximately $3.2 million or 1.8% of total revenue. We continue to expect full-year 2021 capital expenditures to be approximately 2% of revenues as we invest in our technology infrastructure upgrade and relocate our Colorado Springs ground campus at CTU. Finally, let us discuss our outlook for the remainder of the year. We expect full-year 2021 adjusted operating income to range between $167 million and $170 million from our previous range of $165 million to $171 million. This compares to adjusted operating income of $159 million in 2020 and equates to expected growth of approximately 5% to 6.9%. Adjusted earnings per diluted share is now expected to range between $1.60 and $1.63 versus $1.56 in 2020. This updated full-year 2021 outlook implies fourth-quarter adjusted operating income to be in the range of $33.5 million to $36.5 million as compared to $41.3 million in the prior-year quarter, with adjusted earnings per diluted share for the fourth quarter to range between $0.30 and $0.33 per diluted share versus $0.40 in the fourth quarter of 2020. Let me conclude by commenting on our balanced approach to capital allocation. We continue to focus on maintaining a strong balance sheet and adequate liquidity while investing in organic projects, such as new academic programs at our universities, and evaluating diverse strategies to enhance stockholder value, including acquisitions and share repurchases. We completed two acquisitions during the quarter with a combined initial cash consideration of approximately $58 million, which was fully funded with the company's available cash balances. We are pursuing additional acquisition opportunities similar to these two and currently anticipate that we will complete another acquisition by the end of 2022. With respect to share repurchases, the company's current stock repurchase program, which was set to expire on December 31, 2021, has been extended to February 28, 2022, by the company's Board of Directors. At the current market price for the company's common stock, we believe repurchases enhance stockholder value and currently intend to pursue them when deemed prudent, based on market and other conditions. As of September 30, 2021, approximately $22.9 million of the original $50 million authorization was available under the stock repurchase program. Please refer to our earnings release filed today for important information about the key assumptions and factors underlying this outlook and other expectations discussed on today's call as well as GAAP to non-GAAP reconciliations. With that, I will turn the call back over to Todd for his closing remarks.

Todd Nelson, CEO

Thank you, Ashish. Throughout the quarter, our team continued to display its steadfast commitment to serving and educating students. We believe that investments in our student technology infrastructure, as well as our focus on serving and educating students, will further enhance student experiences, retention, and academic outcomes. We're excited about our acquisitions this quarter and look forward to further integrating them within our institutions. Thank you again for joining us today, and we now look forward to opening the line for any analyst questions.

Operator, Operator

Our first question comes from Alex Paris of Barrington Research. Please go ahead.

Alex Paris, Analyst

Hi, guys. Thanks for taking my questions.

Todd Nelson, CEO

Hi, Alex.

Alex Paris, Analyst

So first off, Todd, you mentioned making adjustments to marketing, admissions, and student support, and I have to admit that I didn't quite catch everything. Could you go over that again? I also have a few follow-up questions on that because you noted it could impact enrollment due to these changes. There are many other factors affecting enrollment right now, which I'll address in my follow-up question if that's alright.

Todd Nelson, CEO

Sure, absolutely. As you have probably noticed, similar to other education providers, we've faced some challenges due to the pandemic, particularly with the availability of stimulus dollars for students. We've observed that some students are postponing their decisions about when to start classes. In response, we decided to adjust our marketing expenses to cater to this specific group of students. However, we have seen some positive trends in student starts for September and October, and we will continue to monitor the situation. If we identify a promising opportunity, we will likely reinvest in that area. For now, this is the adjustment we are discussing.

Alex Paris, Analyst

What specifically is that? Is it micro-targeting? Are you spending your marketing dollars in a different way or in other ways? Or is it about increasing the total amount spent, or both?

Todd Nelson, CEO

Yes. It involves analyzing the financial aspects and the profiles of students to determine where we are making the most effective investments based on their performance. Looking ahead, if we find that certain areas are yielding better results, we would aim to increase our investments in those segments.

Alex Paris, Analyst

Got you. And does this mean there's going to be a ramp-up in marketing spending in the fourth quarter year-over-year or not necessarily?

Todd Nelson, CEO

Yes. Not necessarily. One of the things we are very proud of is our ability to adjust and adapt quickly based on what we observe in the external market. However, that doesn’t imply any changes; we would certainly make adjustments if necessary.

Alex Paris, Analyst

Okay. There is generally a decline in enrollment. We have discussed how the pandemic has delayed decisions for new prospective students. I also think I heard you mention that this leads to an increase in students taking a semester off, rather than completely dropping out. Is that correct?

Todd Nelson, CEO

Yes. What’s happening is that current and potential students may delay their decision to start due to various external factors affecting their finances and other areas of their lives. We have continued to see a good flow of inquiries and applications, but we are experiencing a decline in the actual rates of students beginning classes. Additionally, some of the current students are taking some time off. The positive aspect is that with our model, this break doesn’t usually mean an entire semester; it could just be a course or two.

Alex Paris, Analyst

Got you. And were there any fields of study at either AIU or CTU or both that were particularly hard hit or some certain programs standing out on the positive side?

Todd Nelson, CEO

I don't think that's the case. We've observed some areas that appear quite stable, while others are a bit weaker, but nothing has really stood out as exceptional.

Alex Paris, Analyst

Okay. And then AIU was down. Part of that was Trident and their military exposure due to the Army technology portal for tuition assistance having some troubles, and we've heard that from others in this space also. CTU was up on the other hand, but you attribute that to the academic calendar redesign. Question is, would CTU also have been down had it not been for the academic calendar redesign this quarter?

Todd Nelson, CEO

I don't know, Ashish, do you have any information on that?

Ashish Ghia, CFO

Yes. So while we have not explicitly calculated that, yes, it is impacted by the calendar redesign positively. And beyond that, a substantial portion is attributable to the calendar redesign. It is very hard to say exactly what would have happened without that, but you should attribute a substantial portion to the calendar redesign.

Alex Paris, Analyst

Fair enough. And thank you for giving us some revenue information on DigitalCrafts and Hippo. I know these are small ad tech companies privately held, what do they look like in terms of profitability? Are they breakeven? Do they produce EBITDA? Or do they take away from EBITDA at this stage?

Todd Nelson, CEO

Ashish, do you want to go ahead and comment on that because I think you have that information?

Ashish Ghia, CFO

Yes. While we have provided some revenue information, we haven't disclosed any EBITDA figures for these companies. However, these companies are relatively small, so their EBITDA isn't significantly impactful to our overall operations, at least for 2021.

Todd Nelson, CEO

But I think Ashish, I'd probably say that they are either cash flow neutral or slightly positive?

Ashish Ghia, CFO

Sure. Yes, it's about cash flow neutral. That is correct.

Alex Paris, Analyst

Okay. As we approach the end of my questions, I would like to discuss the guidance assumptions based on what you just provided for the fourth quarter. Before addressing that, I noticed that your performance in operating income, adjusted operating income, and adjusted EPS in the third quarter was significantly better. However, your guidance for the fourth quarter still appears to be below my estimates. Were there any revenue pull-forwards that influenced this? How should I interpret that?

Todd Nelson, CEO

Ashish, any color you can add to that?

Ashish Ghia, CFO

Yes. So Alex, a few things here. First is on the outlook or the guidance. As we said, the CTU revenue, which was a big contributor for Q3 was positively impacted by the calendar redesign. So there's always some timing between quarters from that perspective. And then second, as we said, fourth quarter, as we pointed out, is an implied outlook. We had an original outlook range. And historically, too, we try to give a full-year outlook within the range. and we try to deliver and hopefully get beyond the outlook. But those are the two big kind of call-outs for the fourth-quarter outlook.

Alex Paris, Analyst

And then just the last-end-related question. Does your guidance that's implied for the fourth quarter benefit from any academic calendar redesign issues in the fourth quarter?

Ashish Ghia, CFO

In terms of the fourth quarter, there will always be some lingering effects from the academic calendar redesign at CTU. However, AIU's academic calendar is currently more stable. Therefore, I expect that the fourth quarter will be less affected by the academic calendar compared to our third quarter, which saw a positive impact.

Alex Paris, Analyst

Okay. That is great. Thank you for answering my questions, and I will get back in the queue.

Todd Nelson, CEO

Thanks, Alex.

Operator, Operator

The next question comes from Dan Moore of CJS Securities. Please go ahead.

Unidentified Analyst, Analyst

Good afternoon. This is Brendan on for Dan. Just wanted to ask on stickiness or retention rates of the new students you've been bringing in since the pandemic began. Is there any discernible difference gather bad compared to your initial retention rates for new students compared to the two, three years prior to the pandemic?

Todd Nelson, CEO

Ashish, do you want to comment on that?

Ashish Ghia, CFO

So in terms of the students that we are getting in, we have not seen any material difference in terms of the students that are coming in prior to the pandemic and post-pandemic. But as Todd and I pointed out, in general, we are seeing students taking a pause from their academic programs. And they are not necessarily students who started before or after, but in general, because of everything going on, we do see students taking a pause. But as we've also said, we are cautiously optimistic, and we do see some initial optimism on trends in the most recent months.

Unidentified Analyst, Analyst

Okay. Great. And then looking at just your cash, obviously, it continues to build. Just how much is enough in your view? And then what's the downside to being more aggressive for returning cash to shareholders? Or are you mainly focused on M&A?

Todd Nelson, CEO

Yes. In our opinion, as we mentioned earlier, there are some strong acquisition opportunities available. We also believe that share buybacks are a viable option for us. For now, that will be our strategy moving forward.

Unidentified Analyst, Analyst

Okay. Lastly, I want to highlight the focus on the 90-10 rule currently. Can you provide an update on the status of CTU and AIU in relation to those thresholds on a pro forma basis following the recent acquisitions?

Todd Nelson, CEO

No, we can't. But the best thing to do is, again, look, make sure that you look at our K and Q on whatever we have there, but that's not something that we've typically provided prospectively.

Unidentified Analyst, Analyst

Okay. Great. Thanks.

Operator, Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Todd Nelson for closing remarks.

Todd Nelson, CEO

Again, we want to thank you for joining us for this quarter, and we look forward to speaking again with you next quarter. Thank you.

Ashish Ghia, CFO

Thank you.

Operator, Operator

The conference is now concluded. Thank you for attending today’s presentation, and you may now disconnect.