American Public Education, Inc. (APEI) Q1 2023 Earnings Call Transcript


Thank you for standing by. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the APEI reports first quarter 2023 results conference call. [Operator Instructions]

Ryan Koren, AVP Investor Relations and Relations Development. You may begin your conference.

Ryan Koren

Thank you and good afternoon, everyone. Welcome to American Public Education conference call to discuss first quarter 2023 financial and operating results. Joining me on the call today are Angela Selden, President and Chief Executive Officer; Rick Sunderland, Executive Vice President and Chief Financial Officer; and Steve Somers, Senior Vice President and Chief Strategy and Corporate Development Officer.

Materials for the call today are available under the events and presentation section of the APEI website. The 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 may sometimes be identified by words like anticipate, believe, seek, could, estimate, expect, can, may, plan, should, will, would, and similar or opposite words.

Forward-looking statements include, without limitation, statements regarding expectations for registrations and enrollments, revenue, earnings and EBITDA, and other earnings guidance initiatives to improve NCLEX pass rates and reposition Rasmussen University for Growth and other company initiatives, including with respect to leadership changes and future competition and demand.

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. These include, among other things, our dependence on the effectiveness of our ability to attract students who persist and are likely to succeed, our inability to effectively market our programs or expand into new markets, the reduction, elimination suspension or disruption of tuition assistance, changing market demands, economic and market conditions, our inability to meet regulatory and accreditor requirements and the impacts thereof; challenges with acquisitions, risks related to our debt and preferred stock and risks described in our presentation, today’s press release, our Form 10-K for 2022, our Form 10-Q filed today and other SEC filings.

The company undertakes no obligation to update publicly any forward-looking statements for any reason unless required by law. 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 our presentation and in our earnings release. Management believes that our presentation of non-GAAP financial information provides useful supplemental information to investors regarding our results of operations and should only be considered in addition to and not as a substitute for or superior to any measure of financial performance prepared in accordance with GAAP.

I will now turn the call over to our CEO, Angela Selden. Angie, please go ahead.

Angela Selden

Thank you, Ryan. Good afternoon, and thank you for joining our call to discuss 1Q ’23 results for American Public Education. Throughout today’s call, you will hear more details about some key themes, including APEI exceeded its profitability guidance and delivered $7 million of adjusted EBITDA in 1Q ’23. We continue to address the ongoing headwinds at Rasmussen University, one of which has been the absence of permanent senior leadership in the last 12 months.

We are excited to announce that Paula Singer has accepted the role of President at Rasmussen University. Paula brings 27 years of experience at Laureate Education, including as President of Walden University and CEO of Laureate Online, where she built a reputation as a highly regarded education and business leader. She and her team will be evaluating key aspects of Rasmussen to unlock value and build on the operational improvements started in 4Q ’22.

Each of our other 3 education units; APUS, Hondros College of Nursing and Graduate School USA, will deliver 1H ’23 enrollment growth and momentum. APUS delivered a 7-year high for net registrations in Q1 ’23, and Hondros delivered all-time highs in both 1Q ’23 with 2,700 students and then 2Q ’23 with almost 3,000 students. We are confident that now with leaders in place at each of our 4 education units, we will have the proper focus and talent to execute on our strategy of leadership in military and health care education and career learning while setting APEI on a path for long-term growth and profitability.

Now I’d like to provide more details about APEI’s first quarter results. Starting with APUS, net course registrations increased 2% during the first quarter over the prior year period. This was driven primarily by continued strong military performance, strengthening APUS’ #1 active duty educator position.

Today, total active duty registrations grew by 7% during 1Q ’23 compared to the prior year period, with all branches of the Armed Services seeing year-over-year increases, including Army at plus 6%, Air Force at plus 9% and Coast Guard at plus 11%. APUS’ strong military growth was offset partly by a year-over-year decline in total nonmilitary and veteran registrations. Overall momentum continues into 2Q ’23, where we expect net course registrations to be in the range of plus 2% to plus 6% compared to the prior year period. Overall, we expect to see strong revenue, substantial cash generation and improving EBITDA margins throughout 2023 for APUS.

At Hondros, 1Q ’23 set another all-time high total enrollment record with 2,700 students and delivered a 10% increase compared to the prior year period. During 2Q ’23, all but 1 of the Hondros campuses had year-over-year enrollment growth, leading to another all-time high total Hondros student enrollment of approximately 3,000 students or plus 22% above the prior year period. Hondros’ strong 2Q ’23 enrollment reflects our successful efforts to re-enroll approximately 300 students who returned to Hondros to continue their pursuit of an LPN degree after having previously paused their education, in many cases, due to COVID-related disruptions.

I am also pleased to announce that Hondros Detroit campus, which opened in 4Q ’22 has been a strong success as we are enrolling LPN students on the back of strong word-of-mouth demand with over 100 students enrolled in 1Q ’23 and over 200 enrolled in 2Q ’23. This demonstrates the acute need for nursing programs in the Michigan region, and we expect this campus to continue to grow rapidly during 2023.

Also yesterday, Hondros opened its newly relocated Dayton campus to a more central location to serve a larger portion of the Dayton market. We are working on initiatives to increase enrollment at each Hondros campus, which may include launching additional programs to increase campus utilization and drive down total cost per student. As we mentioned last quarter, we expect revenue growth, EBITDA increases and margin expansion during 2023 at Hondros.

Graduate School USA has also started 2023 with solid enrollment momentum, which translated to over $5 million in revenue, an increase of more than 60% compared to the prior year period. For 2023, we still expect mid- to high-teen percentage revenue growth year-over-year and improved adjusted EBITDA.

Given the continued inflationary pressures on APEI’s overall cost structure, including at each of the education units, we have implemented select tuition increases. This includes certain tuition increases implemented in January at Rasmussen and increases at APUS and Hondros that took effect in April with additional planned fee increases in the coming months, resulting in a meaningful increase in revenue and margin in 2H ’23.

We are committed to providing affordable, high-quality education to our students, but also recognize the heightened inflationary pressures and believe the tuition increases are both prudent and reasonable. As stated on our previous earnings call, 2023 will be a year of rebuilding at Rasmussen to replenish leadership and drive enrollment momentum for long-term sustainable growth and profitability. I’m pleased to announce that we are making progress towards these goals with the hiring of Paul Singer as President.

Additionally, Paula has brought in 2 senior leaders to assist in the Rasmussen transformation, a nearly 25-year veteran of Laureate Education to lead finance and transformation and an industry veteran to lead nursing education as Associate Provost and Vice President for the School of Nursing. Paula deeply believes in the Rasmussen mission, the talent of its teams and the ability for Rasmussen to create great educational outcomes for its students.

Together, Paula and these 2 new executives round out our Rasmussen leadership team. This new leadership team with the expressed goal of returning Rasmussen to excellence has established its priorities and is executing on key initiatives.

Turning to Rasmussen enrollment. We have seen the third consecutive quarter of growth for our Rasmussen Online segment, which represents over half of Rasmussen’s total enrollment. However, Rasmussen’s on-ground nursing enrollment declined due to tightened admissions policies and enrollment caps in Illinois and the Twin Cities, which represented over 50% of the enrollment decline.

The new leadership team has put several initiatives in place to help mitigate these challenges and position the university for overall future growth and success. One initiative is to more fully utilize Rasmussen campuses to increase enrollments with both nursing and allied health programs that are already approved on those campuses. Our analysis has shown that on most campuses, Rasmussen has 25% to 50% more student capacity as compared to what is being utilized today. Additionally, with the restructured operating model of Rasmussen Online and Rasmussen campuses, each segment can focus on its unique growth and value levers.

Even though the COVID-19 pandemic is behind us, we are still educating a large portion of pre-licensure nursing students who began their program during the 9 quarters from 2Q ’20 through 2Q ’22, when Rasmussen chose to educate students exclusively online. We have seen NCLEX results decrease as a result of this online education experience. And even though we have moved back to on-ground delivery of labs, clinicals, and most nursing courses, we have not yet consistently and predictably seen NCLEX improvements. We anticipate that improvements are on the horizon, and we remain focused on providing enhanced support to our nursing students through our center for nursing excellence and with the leadership of our new VP School of Nursing and Associate Provost.

Turning our attention to APEI. We also wanted to highlight that effective March 28, 2023, Michael Braner, a managing partner of 325 Capital, which is one of APEI’s larger common shareholders, was appointed to the APEI Board of Directors. Michael has significant experience partnering with management teams to enhance long-term value creation, which aligns well with APEI’s priorities. We are excited for him to have joined the APEI Board.

As we indicated publicly after our 4Q ’22 earnings call, there was a remaining $8 million share repurchase authorization under our existing share repurchase program. From the end of March to the end of April 2023, we exhausted that $8 million by repurchasing over 1.3 million shares in the open market.

I would now like to turn the call over to Rick Sunderland, APEI’s CFO, to review our first quarter results and second quarter outlook in further detail.

Richard Sunderland

Thank you, Angie. Total revenue for the first quarter was $149.7 million, down 3% from the prior year period due to a $9.6 million or 14% decline in revenue at Rasmussen, partially offset by increases in revenue in each of the other 3 education units. At APUS, revenue was approximately $74 million for the first quarter, up $0.9 million compared to the prior year due to higher net course registrations from military students utilizing TA, which is at a lower revenue per net course registration.

Hondros’ first quarter 2023 revenue was approximately $13 million, which is a 14% increase compared to the prior year period, driven by higher total enrollment. The decline in Rasmussen’s first quarter revenue was primarily due to a 12% decrease in total enrollment and a slight change in student mix to more online students, which generally pay lower tuition than Rasmussen’s on-ground nursing students. Graduate school revenue included in corporate and other was $5.2 million for the first quarter of 2023, up $2 million from the prior year period or greater than 60%.

On a consolidated basis, APEI adjusted EBITDA was $7 million for the current quarter compared to $17.4 million in the prior year period. The current quarter results represent an adjusted EBITDA margin of 5% as compared to an adjusted EBITDA margin of 11% in the prior year period. The decrease in adjusted EBITDA margin is driven by the significant decline in margin at Rasmussen due to lower revenue and its fixed cost campus-based operating model.

The margin decline at rates was partially offset by a margin improvement at APUS, driven by the increase in revenue and a year-over-year decrease in advertising costs. Net loss per diluted share for the current quarter was a loss of $0.38 compared to income per diluted share of $0.28 in the prior year period. Total cash and cash equivalents at March 31, 2023 was approximately $136 million, an increase of approximately $7 million from year-end 2022.

The Restricted cash at March 31 was approximately $27 million and continues to be almost entirely comprised of a restricted certificate of deposit that secures a letter of credit for Rasmussen with the Department of Education. The increase in cash was due primarily to payments from Army received during the first quarter, which reduced the total accounts receivable due from Army to $19.2 million compared to $26 million at year-end 2022, a decrease of $6.8 million.

In particular, there was an improvement in accounts receivable from Army older than 60 days from core start date. Army past due accounts receivable was reduced by $6.5 million to $10 million at March 31. Overall, cash provided by operating activities was $12.8 million during the current year period compared to $25.3 million in the prior year. The decrease in cash flow from operations was principally due to the loss at Rasmussen in the current year period.

APEI’s remaining principal on the term loan is approximately $99 million at March 31, with unrestricted cash of approximately $109 million, net debt remains at 0. Additionally, there were no borrowings under APEI’s $20 million revolving credit facility, which remains fully available at this time.

Finally, as Angie mentioned earlier, we completed the remaining authorized $8 million of share repurchases subsequent to quarter end. In total, APEI repurchased approximately 1.3 million shares.

APEI’s outlook for the second quarter of 2023 is as follows: APUS net course — total net course registrations are expected to be in the range of 85,300 to 88,700. At Rasmussen and Hondros second quarter student enrollments are actual because of the quarterly starts at these schools. At Rasmussen, second quarter total nursing student enrollment decreased 22% year-over-year to approximately 6,400 students. Non-nursing total enrollment declined 3% for an aggregate Rasmussen enrollment decline of approximately 12% year-over-year to approximately 13,900 students.

At Hondros, second quarter total student enrollment increased by 22% year-over-year to approximately 3,000 students, Hondros’ largest total enrollment figure ever. In the second quarter of 2023, consolidated revenue is expected to be between $145.5 million to $147.5 million. The company expects the loss — the net loss available to common shareholders to be between a loss of $6.4 million and a loss of $5 million and the loss per diluted share of minus $0.36 to minus $0.28 per diluted share. Adjusted EBITDA is expected to be between $4.4 million and $6.4 million for the second quarter of 2023.

With that, operator, we would like to open the line for questions.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Raj Sharma with B. Riley.

Raj Sharma

I guess I just want to delve into Rasmussen and the developments there. Firstly, do you think the management lineup has been fully revitalized after the departures?

Angela Selden

Raj, Angie here. Yes, we have a fully staffed leadership team now at Rasmussen with a complement of a very seasoned executives that will be able to jump in and have impact very quickly.

Raj Sharma

Right. And then just in terms of the outlook for Rasmussen, it seems like the hits continue while your other divisions performed really well, Rasmussen kind of underperforms and some of these actions that you had taken, the nursing enrollment issues, the NCLEX scores you’re saying and the marketing efficiency. Can you comment on those on how they are progressing and whether you’d be able — how soon would you be able to stem the nursing enrollment losses?

Angela Selden

Sure. I’ll start and then, Rick, please feel free to jump in and supplement. So what’s interesting about the nursing enrollment momentum at Rasmussen is the following. As you remember from our last discussion, we saw a significant increase in nursing enrollment when Rasmussen went online in 2Q of ’20 to begin educating its pre-licensure nursing students online. And that created an influx of additional students and access to faculty that allowed Rasmussen to educate a larger number of students than it had historically. We are now seeing those students completing their education and graduating, which is creating an inverse trend in terms of our total enrollment.

During that period of time, we had new students growing every quarter and fewer students graduating and now we have the inverse occurring here. So as we work that large number of students through the pipe, we will begin to see stabilization. As we mentioned just a few minutes ago, we are pleased with the online enrollment at Rasmussen, which is 50% of Rasmussen’s total enrollments and has grown for 3 quarters.

As it relates to your question on NCLEX, we’ve done 3 things in the last several weeks and months in order to be able to improve our NCLEX’ performance. First, you’ll see in the 8 campuses in the Twin Cities and in Illinois, specifically, we’ve tightened our entrance requirements, across all of our campuses we’ve improved our test banks. We’ve increased our integrity of our student assessments along their educational journey. And we have enhanced the alignment of the curriculum across each one of the courses to improve the overall success rate of our students.

With those 2 dynamics that I just described, as these cohorts continue to move through the education and graduate — we will still, as I mentioned a few minutes ago, be focused on growing other programs in our campuses. In many of our campuses, we have 3, 4 or 5 additional programs where we can enroll students that have no caps associated with them. And so we’ve been working with each one of the campus executive directors and the regional leaders to devote marketing resources and local energy to enrolling students in those uncapped programs.

So let me stop there and see, Rick, if you have anything you’d like to add?

Richard Sunderland

Yes. Raj, it’s Rick. I’d like to add a really important event that took place in the first quarter, which was the completion of the in-sourcing of the colleges marketing agreement, which we began in the fourth quarter and completed in January, right? So I think it’s really important that we control that marketing engine when you combine that with the new management team in place. I think it really sets the foundation to really achieve that sort of intermediate and long-term enrollment growth.

Raj Sharma

And that marketing, the efficiencies that you were going to obtain from the new marketing engine, taking it in-house, how is that progressing?

Richard Sunderland

Right. So significant efficiencies in terms of spend and then the result — what results from that spend in terms of, let’s say, lead generation. But the important thing to note and I think we said this in earlier calls is we’re able to reinvest those funds to add additional fuel to that marketing engine.

Raj Sharma

And then congratulations on strong results in the military, the grad school, Honduras, and I’ll take my questions offline.


[Operator Instructions] I’m showing there are no further questions at this time. And this does conclude today’s conference call. You may now disconnect.