Q2 2021 Perdoceo Education Corp Earnings Call

Good evening and welcome to the Fiduciary Education Corporation second quarter, 2021 earnings conference call and webcast.

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I would now like to turn the conference I thought said, Mr. What took place go ahead.

Thank you good afternoon, everyone and thank you for joining as far as second quarter 2021earnings call with me on the call today is Todd Nelson, President and Chief Executive Officer, and Ashish Ghia Chief Financial Officer.

Conference call is being webcast live within the Investor Relations section per dose.

A webcast replay will also be available on our site and you can always contact the Alpha IR group for Investor Relations support well.

Let me remind you that this afternoon's earnings release and remarks. My remarks made today include forward looking statements as defined in section 21 E of the Securities Exchange Act with 1934.

These statements are based on assumptions made by and information currently available to produce you know 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 these statements.

These risks and uncertainties include but are not limited to those factors identified in <unk> annual report on form 10-K for the year ended December 31, 2020, and subsequent filings with the Securities and Exchange Commission income.

As expressly required by the Securities Law. 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 but non stop.

Institute for the most directly comparable GAAP measures the earnings release that accompanies today's call contains finance on other quantitative information to be discussed.

As well as the reconciliation of the GAAP to non-GAAP measures.

Payable within the Investor Relations page of the company's website with that I'd like to turn the call over to Todd Nelson Todd.

Yeah.

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Disconnected please standby apologies.

Logistics, a day conference operator, I will just add.

The headroom to come while we wait for Mr. Nelson to join equities Okay.

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Ladies is the conference operator, Mr. Todd Nelson. Please go ahead.

Thank you, while I'm not sure what happened without technical difficulty, but I'm back in now.

Good afternoon, everyone and thank you for joining us for our second quarter 2021 earnings call I'd.

I'd like to begin by thanking our faculty student support staff and all other employees.

Another quarter of hard work diligence and dedication in serving our students.

Overall, we are pleased with results over quarter.

Our team was able to adapt well to a changing environment, while keeping student experiences retention and academic outcomes at the forefront of our operations.

We also continue to put our balance sheet to work and executed another strategic acquisition that will outline for you in a few minutes.

We believe that prolonged pandemic and its resulting social distancing practices and safety measures as well as the macroeconomic and governmental responses.

Has impacted overall student engagement similar to what other academic institutions and the postsecondary education industry may be experiencing.

While prospective student interest remains in line with our recent experience.

During the quarter. Some students began deferring their decision to begin classes and theres been an increase in current students taking a pause from their academic programs.

From what we're seeing so far going into the traditional back to school months. We believe this changes in behavior may be temporarily temporary and was impacted by a better than expected opening of the economy and the various stimulus packages supporting it. However, additional time is needed to assess the impact of the evolving pandemic environment on student behavior.

For the quarter, we reported net income of $26.6 million or <unk> 37 per diluted share.

Adjusted earnings per diluted share, which excludes certain significant and non cash items was 41.

Our balance sheet remains a source of strength that has enabled us to make investments in student serving functions as well as evaluate acquisitions of high quality academic programs.

Speaking of which let me take a minute to discuss our recent acquisition of digital Kras, which closed on August 2nd.

Launched in 2015 digital craft has helped to provide individual an opportunity on the technology area that through Reskilling and upskilling courses within the areas of web development web design and cyber security.

The acquisition of digital craft fits well with our overall objective of extending the breadth of our academic program offerings, while diversifying revenue away from federal student financial aid funding.

Learners, our work looking for ways to elevate their skills in a targeted manner without a long term commitment of time and we believe the programs of digital cross can offer that opportunity we're.

We're excited to welcome <unk> team and are already exploring ways, we can leverage our marketing and technology expertise to further grow digital kras program offerings.

Turning to student enrollment total student enrollments as at June 32021 grew 7.5% as compared to last year.

At <unk> total student enrollments increased 14, 2% due to the academic calendar redesign at <unk> as a reminder, CQ implemented a redesigned version of its academic calendar in 2021 similar to what you had implemented.

At ARU total student enrollments decreased by 1.8% due to lower enrollments at Trident exclude.

Excluding Trident total enrollments at <unk> showed growth as our teams focus on serving prospective students and improving student engagement.

As a reminder, tried and primary focus is on serving active duty military affiliated populations. We believe the transition of the army registration portal and the subsequent technical challenges with the portal impacted Triton enrollments more than we expected.

Leadership continues to work with the portal support team to serve prospective students more effectively.

The prolonged pandemic also resulted in cancellation of most military in person support events educational pairs on office hours, we believe the sustained impact of these interruptions manifests itself in the total enrollments for the quarter. We do however believe these issues may be transitional and we are already seeing military events, increasing and most.

Lee installations are reopening there on education offices to support in person activity overall, we're very pleased with how triton transitioned into our organizational and complements ARU.

Right and expanded and diversified our academic program offerings, particularly at the graduate level and importantly, it has also allowed us to internally develop a framework for integrating acquisitions.

Now turning to our technology initiatives.

We believe investments in technology and student serving functions have been key drivers to our total enrollment growth due to the incremental impact on students' experiences and student learning.

To you in error, you have continued to leverage data analytics and technology to enhance the effectiveness of their services to students.

Our investments in machine learning and data analytics are mostly a continuation from previous quarters.

As we expand their use across various student serving processes. Additionally, we are evaluating a redesign of our digital infinite tools and technologies that are utilized by our teams to serve and educate students sundar academic lifecycle.

We are confident that continuing to refine these internet face student platforms will further enhance the student experience, especially for our non traditional adult learners, while driving further efficiencies within the business.

Finally, a quick comment regarding our efforts on some of our other initiatives specifically expanding the corporate partnership program of CPU and offering more force development training program Triton.

That can help develop skills and knowledge in a specific endeavor erg interest the enhanced corporate partnership team as C. G is fully in place and is already engaging with employers to leverage their tuition assistance programs and provide a debt free education to their employees.

Triton, we have already launched 7 training programs in the medical human resource and project management sales and are looking to launch more.

Overall, we believe our academic value proposition resonates well with our students, especially non traditional students including adult learners.

And remain confident in our objective of diversifying our academic program office with that I'd like now to turn the call over to Ashish for a deeper review of our operating performance and quarter Ashish.

Thank you Todd.

I will now review, our second quarter results and then discuss on our balance sheet and 2021 outlook.

Before handing the call back to Todd for his closing remarks.

Please note that all comparisons I discussed on versus the comparative prior year period, unless otherwise stated.

Before I begin a quick reminder, about year over year comparability.

Operating results for <unk> reflect the Trident acquisition commencing on March 2020.

Beginning with this quarter.

Operating results are fully comparable to the prior quarter as it relates to the Trident acquisition.

I would also like to remind everyone that we are no longer including 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.

All prior period amounts have been recast to maintain comparability.

Let's start with an overview of our operating results for the second quarter of 2021 total company operating income was $36 million as compared to an operating income of $37.4 million.

Adjusted operating income, which excludes certain significant and noncash items.

And which we believe is more reflective of the underlying operating performance totaled $42.3 million for the quarter, reflecting an increase of 1.8% versus the prior year.

Net income for the quarter was $26.6 million with 37 cents per diluted share.

While adjusted earnings per diluted share, which again, we believe is more reflective of the underlying operating performance was 41 cents for both the current and the prior year quarter.

Let me quickly comment on the adjustments to the reported operating results for the quarter.

In addition to the typical depreciation and amortization adjustment.

We are also adjusting for legal fees associated with 2 matters.

Acquisitions, and second responses to the department of Education.

Moving to the loan forgiveness application submitted by former students.

Please note the day prior period amounts were re cash to maintain compatibility.

Improvement in the adjusted operating income for the quarter was partially due to operating efficiencies gained by reallocating resources across various student serving functions well.

Ministry of expenses, excluding adjusting items for certain legal fees were lower as compared to the prior year.

This was partially offset by the revenue decline in <unk> as well as an increase in employee health insurance expenses.

Moving on to some more details around the second quarter 2021 results.

Total company revenue of $175.5 million for the quarter was slightly lower than the prior year quarter revenue of $176 million.

We believe this decline was primarily due to some of the unique issues faced by Trident in serving the military population.

As well as due to the evolving pandemic environment, and the resulting impact on student engagement.

As Todd mentioned, we believe these issues may be transitory in nature and are already seeing some improvements, but as a reminder, there is a lag impact from enrollment fluctuations. So these issues may impact revenue in the second half of the year, particularly in the fourth quarter.

As it relates to our segments second quarter revenue on CTO increased 1, 8% or $1.8 million to $102 million due to the academic calendar redesign that resulted in more revenue days for the quarter.

Operating income was up 7% to $35.4 million, primarily supported by the revenue growth.

Turning to <unk>.

Revenue decreased by 3.4% for $2.6 million to 70 to $73.2 million for the quarter.

While operating income was approximately $1.3 million lower as compared to the prior year quarter.

Note that this decline in operating income is primarily attributable to our marketing efforts to support the launch of the new workforce development training programs at Trident.

Total student enrollments at June 32021 increased by 14, 2% at <unk>, while decreasing by 1.8% at <unk>.

Please note that CTO as total student enrollments were positively impacted by the academic calendar redesign.

Moving on to corporate and other second quarter operating losses totaled $8.7 million versus $6.2 million in the prior year quarter.

This increase in losses was primarily due to $2.4 million of legal fees incurred during the quarter associated with responses to the department of education related relating to the loan forgiveness applications by former students and acquisitions.

Please refer to our 10-Q disclosure regarding borrow defense to repayment for additional information on that matter.

Now to income taxes.

For the second quarter, we recorded a provision for income taxes of $9.3 million, resulting in an effective tax rate of 25, 9%.

The second quarter tax rate was benefited by 0.4%.

For the net impact of the tax effect of stock based compensation and the release of previously recorded tax reserves.

As a reminder, we utilized all of the $109.7 million of federal net operating loss carry forward in 2020.

And anticipate utilizing the remaining $10.3 million of Odell supported foreign tax credits in 2021.

As a result and as discussed during our last call. We have started making quarterly estimated tax payments beginning in the second quarter and expect to continue to doing so in each quarter moving forward.

Finally, we expect that for the full year 2021.

Our effective tax rate will be between 26% and 26, 5%.

This full year estimated rate is negatively impacted by increases in tax reserves for uncertain tax positions.

And the tax effect of expenses that are not deductible for tax purposes.

Okay.

Now to our balance sheet.

Year to date net cash provided by operating activity activities was approximately $82.7 million as compared to $105.4 million in the prior year.

The decline was primarily attributable to the timing of cash flows that positively impacted the prior year as well as federal tax payments made in 2021.

We ended the quarter with approximately $487 million of cash cash equivalents restricted cash and available for sales short term investments.

This represents an increase of approximately $73 million over year end 2020.

Key drivers of cash to the second quarter work.

Positive cash flow from our universities, which were partially offset by cash outflows for is related to federal tax payments.

Capital expenditures.

Share repurchases.

Speaking of which during the quarter, we repurchased approximately 440000 shares.

Capital expenditures for the second quarter were approximately $2 million or 1.1 percentage of revenue.

We now anticipate full year 2021 capital expenditures to be approximately 2 percentage of revenues.

As we invest in our technology infrastructure upgrade and relocate our Colorado Springs Crown campus at C T.

Finally, let us discuss our outlook for the remainder of the year.

Our full year adjusted operating income outlook remains unchanged in the range of $165 million $271 million as compared to $159 million in 2020.

Or expected growth of approximately 3.8% to 7.5 per cent.

We have not adjusted the outlook for the acquisition of digital tracks. Because we currently believe the acquisition will not have a material impact on the adjusted operating income outlook for the year.

Adjusted earnings per diluted share is expected to range between $1.58, and $1.64 per diluted share versus $1.56 in 2020.

For the third quarter 2021 outlook.

We anticipate adjusted operating income to be in the range of 39, 5% to $41 million as compared to $36.1 million in the prior year quarter.

Moving to adjusted earnings per diluted share to range between 38 cents and 39 cents per diluted share versus 35 cents in the third quarter of 2020.

As mentioned earlier, beginning this quarter legal fees associated with borrowed defense to repayment claims as well as those to support our acquisition efforts will be on adjusting items to our operating results.

However, due to the inherent difficulty in forecasting the timing or amount of these legal fees.

Third quarter quarter end full year GAAP to non-GAAP reconciliations for adjusted operating income and adjusted earnings per diluted share outlook did not include any amounts for such legal fees.

As a result forward looking GAAP financial measures may vary materially from the actual GAAP results.

Let me conclude by commenting on our balance approach to capital allocation.

We continue to focus on maintaining a strong balance sheet and adequate liquidity, while prudently investing in organic projects such as academic programs at our universities and evaluating diverse strategies to enhance stockholder value, including acquisitions and share repurchases.

As Todd mentioned, we just completed the acquisition of digital crashed this week.

The initial cash cash consideration of $16.25 million was funded with the companies available cash balances on the date of acquisition.

And is also subject to a working capital adjustment.

In addition, our post closing post closing contingent consideration payment of up to 2 and a half million dollars is expected to be paid in early 2024 based upon the level of achievement of certain financial metrics.

As mentioned earlier, we do not expect the acquisition to have a material impact on our adjusted operating results for 2021.

Digital cash will be a part of our <unk> University system and we are.

Cited to welcome the entire digital crash team on board.

Please refer to our earnings release filed today for important information about the key assumptions and factors underlying this outlook and other expectation discussed on today's call as well as the GAAP to non-GAAP reconciliations.

With that I will turn the call back over to Todd for his closing remarks.

Thanks Ashish.

Again, I'm extremely proud of the entire per dose Youll channel, which has shown a steadfast commitment to serving in educating students while adjusting their outreach and engagement strategies in response to the ever changing and evolving pandemic.

We look forward to continuing to educate and serve our current and prospective students while keeping our focus on student experiences retention and academic outcomes.

Thank you again for joining us today, and we will now open the line for any analyst questions.

Thank you.

The question and answer session.

Ask the question you May press Star.

And then 1 on your telephone keypad.

You are using a speakerphone please pick up your handset before pressing the capes.

Withdraw your question. Please press Star and then 2.

At this time I will pause momentarily to assemble L roster.

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

Hi, guys.

Thanks for taking my question today.

Hum.

A couple questions on all over the price, but I guess I'll start I'll start with the acquisition of digital crash.

Yes.

I hear you that it's not going to have a material impact on adjusted operating income for the year what about revenue.

Yes, it will obviously impact revenue however.

We have not disclosed any of those numbers and but yes. It will obviously positively impact revenue for the third quarter and full year.

Okay.

So not disclosed.

Then I had a question about.

The work force development programs had tried and you've got you got 7 launched.

And I realize youre considering others.

Could you, perhaps give us some color on on those 7 programs when do they launch and whats. The initial response from our.

Prospective students.

Sure. Thanks, Alex.

We were they have been launched we have been really very pleased with.

Thousands of inquiries, which is good.

We surpassed the 100 students, which is also something we're pleased with and you know, we're obviously just getting going but I'm really excited about the future.

Great. Thank you.

And then is it still your intention.

To roll these programs out to.

A are you at larger sea to you at some point.

Well, they they right now and yes, absolutely I mean, you know.

Anybody who would have interest on that and obviously there are those who have expressed interest in the past but right.

Right now again, we just you know are said very pleased with the response would be average just given us encouragement to develop additional programs. It takes time, obviously to build enrollment but.

Let me answer your question is yes.

Okay. Thank you and then.

Just a few cats and dogs left you.

You're relocating the Colorado Springs campus at say to you I wasn't aware that with plans.

Why was that.

And.

Maybe a little color there.

You bet great question.

We liked the facility we had but it was a it was a lease facility and we made the decision to.

Frankly upgrade to a better facility and obviously take advantage of.

Lease rates in the Colorado Springs market, but again based on demand.

And that being our home campus. It was very important that we maintain.

Presence in Colorado Springs, but again it was a good opportunity for us to upgrade.

Great and then I guess the last 1 from me is I E.

I had the 10-Q open and I'm trying to.

Understand this whole Bowers defense to repayment and the legal or the legal fee in settlement.

Alright.

The quarter whats going on there just maybe a little color and then I'll read the 10-Q more carefully.

Sure and by the way, we do encourage you to read that.

As we disclosed in our 10-Q, we have been notified that the department there were several thousand.

Of these borrowed defense claims and by the way it covered a time period of a decades.

Obviously, a significant number of those EBIT from schools that have been taught out close for some time so.

Obviously that's.

No idea how long those have been there.

But you know again.

1 of the things that's important that's why obviously you read the 10-Q each 1 of these you have to have a response regardless of how.

They may seem to be not a very valid claim but again you cannot not respond you have to and so that's why there is legal fees associated with that.

But again, we're looking forward to making sure we get all of the information that was individual responses to those and.

So that's the process that you have to follow.

Alright, so just a little clarification.

Were.

The majority at schools that have been closed or where their claims at <unk> and <unk> as well.

Again, just refer to the best look at the 10-Q cases as these come in and you analyze them and I don't really have that information at this point Alex.

Okay fair enough.

I'll leave it at that for now and get back on the queue.

Okay. Thanks, Thanks, Alex thank.

Thank you.

Thank you.

Again, if you have a question. Please press star and then 1.

Sorry, your next question.

Okay.

Apologies for that your next question comes from Greg <unk>. Please go ahead.

Hey, guys. Thanks for taking my questions just wanted to fragrance.

In light of the fact that we are in a heightened investment year I guess, we can call. It just wanted to understand maybe a little bit of clarity on where some of the dollars are going and kind of how youre thinking about the payback and just things you usually don't add on a calendar year. So I mean, how should we be thinking about this is.

It's gonna go throughout the fourth quarter, possibly is there some spend that might trickle into to next year or is this something that might be winding down in November just trying to get a sense of where the heightened investment is.

Sure well, obviously you know.

We feel very optimistic based on the inquiries and the interest on our programs.

As we've said.

On prior calls as well that.

Our ability to add to the breadth and depth of our programs is very important.

But again it was very appealing with digital crap.

Obviously as we said we're looking at other things that are at will continue to add to that.

Some of them, it's easier to bring to closure or to close on sooner rather than later.

You know, it's just hard to say how much of that will be this year or will fall into next year, but obviously as we have in this case, we'll make sure that we gave you the information as soon as we have it but basically it's oh that's it.

Okay, Great and then just again I know, it's it's always kind of out there in the past.

Anything on the front on maybe closing the spread in terms of operating.

Profitability of our U N C. T. You I mean is there is it still just a question of scale.

So I think scale of being being the biggest 1 but.

But obviously, we need to continue to watch where the demand in our in our particular industry goes and if there's.

Opportunities as it wasn't trying to add some breadth and depth there but.

But we may find that there's also some opportunities for CPU as well so.

Would want to invest there, but I do think scale is still the largest.

Excluding some external issues that you may face that are based on demand that we just you know it's hard to predict that.

But I guess, maybe now that now that you have a good picture of what AI, you looks like with tried and I mean, theres nothing structurally significantly different from a.

Versus C. T O is that fair to say.

Yeah, that's fair to say you know you have obviously your your accreditation is similar.

We're positioned in the market in a similar way.

There is still some difference in the number of <unk>.

Programs, but as we continue to add those programs that are you again.

They become closer but again similar attributes.

There aren't really any big differences in the attributes of the 2.

Okay, Great. That's helpful. Thanks, a lot.

Thank you Greg.

Thank you.

Thank you.

<unk> another question in the queue, but just as a reminder, if you wish to ask a question. Please press star 1 on your telephone.

Right 1 more balance for the roster to bring simple. Thank you.

Okay. There are no further questions at this time I will now pass back for any closing remarks.

Well. Thank you again for joining us for the quarter, we look forward to speaking again next quarter. Thank you.

Thank you.

Okay.

Thank you that does conclude our conference for today. Thank you for participating you may now disconnect.

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