Q1 2022 Adtalem Global Education Inc Earnings Call
Form 10-K filed with the SEC and our other filings with the SEC.
Any forward looking statements made by this based only on the information currently available to US and speaks only as of the date on which it is made we undertake no obligation to publicly update any forward looking statements, whether written or verbal that may be made from time to time, whether as a result of new information future developments or.
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During today's call our commentary will refer to non-GAAP financial measures, which are intended to supplement not substitute for our most direct comparable GAAP measures are press release, which contains the GAAP financial and other quantitative information to be discussed today as well as reconciliation of GAAP to non-GAAP measures is available on our website.
Right.
Please note that all financial results in comparisons made during today's call on a continuing operations basis exclude special items in our in comparison with the prior year period, unless otherwise stated.
Telephone and webcast replays of today's call are available for 30 days to access to replace please refer to today's press release.
We'll begin today's presentation when prepared remarks from Steve beer and talents, President and Chief Executive Officer, and Bob Salem, Senior Vice President and Chief Financial Officer.
Following the prepared remarks, we will have a question and answer session and with that I will now turn the call over to Steve.
Benji Joan.
I'm pleased to welcome you all towards first quarter fiscal year 2022 earnings call today.
But first in my new role as President and Chief Executive Officer of that town.
During the quarter, we've made significant progress against key initiatives that will allow us to accelerate the performance of our healthcare focused assets.
We are well on our way to becoming a pure play healthcare education provider with the scale and capabilities to capitalize on the robust and durable demand for skilled healthcare professionals.
This scale and these capabilities are valued by our employer partners that are students alike.
As CEO I intend to fully leverage these strengths to drive significantly improved operational and financial performance for stakeholders.
Key to the subjective has been the addition of Walden University to our portfolio.
As part of the integration process, we've introduced a new enterprise level operating model that allows for more efficient and strategic use of shared services across the portfolio.
This new model will also enable our institutions to focus on curriculum.
Demick outcomes in students success.
While providing consistent high quality support across the entire student, Germany from admissions to matriculation to completion.
The efficiency inheriting this new model complements the value capture elements of the integration brings.
Bringing greater speed uncertainty to our efforts to realize cost synergy goals of $60 million in annual run rate cost savings by the second anniversary of completing the transaction.
The new operating model also requires executive leadership.
With proven track records of success and matrix organizations at.
At a proven ability to drive consistent and profitable organic growth.
In August we announced the appointment of John Danaher.
Opposition executive with extensive experience across higher education.
Hospital systems, and healthcare focused education, as the new president of <unk> medical and veterinary.
Also we announced the appointment of James Bartholomew as senior Vice President Chamberlain and institutional shared services.
James has a proven track record and leading academic institutions a scale.
It assumes responsibility for the strategy operations and growth that Chamberlain at a critically important time.
In addition.
He takes on the key role of optimizing our shared services model strive enhanced quality efficiency.
I have also refreshed and enhance the capabilities of my senior team to include Bob failing.
As our permanent Chief Financial Officer.
Maurice Herrera, as our Chief marketing Officer, and Stephen Tom as our new Chief customer Officer.
The operating for more than 30 years of finance and operations experience, along with a passion for developing and leading high performing teams.
Maurice brings nearly 30 years marketing leadership experience and has a proven track record of successfully shaping and accelerating growth through a blend of innovative brand in digital marketing strategies.
Steven has led Walden digital transformation at the intersection of customer experience in technology.
Improving personalization.
The channel engagement innovation and self service.
With these appointments I firmly believe that we are much better equipped to meet the needs of our students an employer partners as a leading provider of healthcare education.
Taken together, we expect these changes to our operating model and leadership team to drive enrollment growth.
Improved persistence and significant cost savings, while maintaining superior student outcomes.
All of which are key to significantly significantly improving our financial results and long term value creation.
And speaking of student outcomes I would be remiss if I failed to note that we remain dedicated students success is a critical measure of our performance.
Outcomes continue to compare favorably across the higher education landscape, even as we expand access to high quality education to diverse in underserved communities.
As but one measure of those outcomes. The U S Department of Education published it's 2018 cohort default rates in late September.
I'm proud to say that all that talent institutions came and well below the overall national averages for proprietary and not for profit institutions public or private.
Before I hand, it over to Bob for more details on the quarter and segment level performance, Let me provide a high level overview of our financial performance in the quarter.
We do have a revenue and operating income within expectations, including.
Including 29.9% year over year revenue growth due to the acquisition of Walden.
And 430% organic revenue growth.
Within our segments total new student enrollment decreased $14, 1%.
Driven primarily by Chamberlain in Walden, while total enrollment decreased four 5%.
And Chamberlain, we had a challenge in comparison to the record new student enrollment levels, we achieved in September 2020.
With new student enrollment for the September 2021 session Trindon closer to historical levels.
The declines are primarily attributable to COVID-19 related headwinds at our post licensure nursing programs at both Chamberlain embolden.
At the Delta variant search this summer place much greater demands on working nurses negatively impacting the demand for ongoing education.
We expect these headwinds to subside over time as Kobe transitions to more of an endemic stage.
In the interim we're increasing our investments in marketing, while taking a more targeted approach in our efforts to capture an increasing share of the existing demand.
Longer term, we believe market demand among healthcare provider's for highly qualified nurses will continue to accelerate trading opportunities to improve growth rates for both trembling and Walden.
Along these lines. We are encouraged by Chamberlain's continued expansion of its healthcare provider partner programs.
As we highlighted in our earnings release.
At Walden, social and behavioral sciences programs continue to perform well.
Similar to Chamberlain the decrease in new student enrollment at Walden represents a return to more hysterical historical trends enrollments nursing programs. Following a surge in enrollment levels in the prior period and we to believe that is attributable to covet related headwinds and post licensure programs.
We also believe new in total enrollment of Walden was adversely impacted by negative publicity surrounding that now concluded U S Department of Justice inquiry.
By way of reminder, this inquiry concluded with no determinations of any misconduct level.
Operationally the integration process is proceeding according to plan and we remain very confident and delivering are projected cost synergies.
Overall performance and our medical and veterinary segment is solid.
However, it Ross met we're seeing some challenges given the convergence of a surge in COVID-19 cases on the outlet of Barbados with the timing of our return to in person campus construction. This fall.
This quarter, we appointed highly chumney as the new Dean of Ross met.
And Heidi brings more than 20 years of experience and medical education, including eight years of leadership in it you see where she elevated the academic operational and financial outcomes at that institution.
It's new leaderships top priority to drive operational improvements at Ross met in future quarters, and mitigate near term headwinds.
Finally, our financial services segment showed very strong performance in the quarter aided by strong demand, an ongoing innovation and product mix and customer support.
The new financial services senior leaders I appointed last year continue to drive strong growth and operational improvements across each of our financial services businesses.
As we announced in August we're exploring strategic alternatives for financial services segment and that process is underway and proceeding very well.
The level of interest we received in these businesses is extremely high.
And I am confident that we'll be able to execute a strategy that unlocks significant value.
Allows for substantial delevering of the balance sheet.
And yields a pure play portfolio with an attractive healthcare focus.
In closing the first quarter of fiscal 2022 yielded solid results in the face of lingering pandemic related headwinds.
But to be cleared the long term prospects French hallum could not be more encouraging.
As we execute successful integration of Walden.
Realize the full benefit of our cost synergies.
Implement a more efficient operating model.
Unlock the value of our financial services segment.
And turned our full attention to competing in the very attractive healthcare space with market, leaving scale and brands.
I'm extremely bullish on the opportunity to create superior value for our stakeholders.
I am grateful for the opportunity to lead this great organization at this important time.
And I have no doubt that we will meet our moment and emerge as the leading provider of professional talent to the dynamic healthcare industry.
And with that I'd like to pass it over to bond to discuss our financial results and performance within each of our segments in greater detail.
Thanks, Steve Good afternoon, everyone I'll start by providing some highlights on companywide performance and then walk through performance in each of our segments. I'd also like to remind everyone about our updated reporting segments. Following completion of the Walden acquisition, we've updated our business segments as follows Chamberlain.
Then Walden medical invest in financial services I would refer you to the 8-K, we filed recently for historical information broken down in the new business segments, where applicable.
And the first quarter revenue increased 29.9% to 348 $3 million compared with the prior year, primarily due to the acquisition of Walnut.
Excluding Walden, we generated for 3% organic revenue growth to 207, 279 $7 million compared with the prior year.
Cost of educational services was $163.1 million in the first quarter, an increase of 43, 5% compared with the prior year.
Students services and administrative expense was 159 $5 million in the first quarter of 59, 2% increase when compared with the prior year.
The increased cost of educational services and student services and administrative expense is primarily driven by the inclusion of Walden and the current period and higher costs associated with the return to in person campus instruction at Chamberlain, and our medical and vegetables.
Consolidated operating income excluding special items in the first quarter was 54 $6 million, a 4% increase compared with the prior year attributable to higher revenue, mostly offset by higher costs from return to in person campus instruction new campus expensive.
And increased marketing expense.
Net income from continuing operations, excluding special items was $31.3 million and $24, 1% decrease compared with the prior year due to higher interest expense related to the acquisition.
Looking at our segments and beginning with Chamberlain. The segment reported first quarter revenue of 135 $6 million, an increase of one 4% when compared with the prior year.
Operating income declined from $32 million $29 million to primarily to increased investments in marketing and higher costs associated with the return to in person campus instruction.
New in total enrollment in the September session decreased 13.4% and 2.8% respectively compared with the prior year.
As Steve said this decrease in new student enrollment was primarily attributable to a return of historical levels from record high levels in the September of 2020 session and Covid related headwinds in our post licensure programs.
We expect these headwinds subside over time and believe that demand for nurses will continue to outpace apply over the long term, which inherently create stronger growth opportunities for us in the future.
Turning to Walden revenue in the first quarter was $68.6 million the.
The segment operating loss was 11 $6 million driven primarily by intangible amortization expense.
Segment operating income excluding special items was $11 million.
New and total student enrollment during the quarter decreased 15, 5% and five 5% respectively compared with the prior year again due to the comparison with the surge in new student enrollment in the prior year Covid related headwinds in our post licensure programs and other factors that Steve Hi.
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Our integration efforts are progressing well and we remain on track to realize the $60 million of cost synergies that in the first two years of Walden ownership.
And our medical in that segment revenue was essentially flat compared with the prior year.
Segment operating income declined from $22.8 million to $15 $7 million, driven primarily by higher costs related to return to in person campus and structure.
September session medical in that school of new student enrollment decreased four 6% in total student enrollment decreased six 9% compared with the prior year driven primarily by declines at Ross met.
Now turning to financial services as Steve noted a review of strategic alternatives for the segments businesses is proceeding well and we continue to be excited about the level of interest we are receiving.
We also continue to be confident in our ability to execute a strategy that deliver significant value for our shareholders and allows for thoughtful delevering.
First quarter revenue increased 19.9% to 59 $3 million compared with the prior year driven by increases in revenue across each of the main businesses within the segment.
Operating income was $12.6 million, an increase of 73, 7% compared with the prior year.
Segment operating income, excluding special items increased to 54.8% to $13 $4 million compared with the prior year, driven primarily by higher revenue, which resulted in improved operating income.
Akm's revenue increased as Nonconference certification offerings continue to perform well and conference revenue began to shore recovery.
Revenue growth was driven by expansion of its continuing education program offerings and an increase in CPA exam preparation revenue.
Encores learnings continued focus on execution and a favorable mortgage market and strengthen its continuing education business drove increased revenue in the quarter.
Turning now to our balance sheet, we ended the first quarter with cash and cash equivalents $361 million and outstanding Bank borrowings under our existing term loan B and senior secured notes of $1.65 billion.
Turning to cash flow in the quarter net cash provided by continuing operations was $49 million.
Capital expenditures for the quarter totaled seven $3 million.
As a result free cash flow in the first quarter was $33.6 million.
As a reminder, we defined free cash flow is cash provided by continuing operations last capital expenditures.
Moving on to our outlook, we are reaffirming our previous guidance of adjusted revenue to be within the range of 168 $5 billion and 173 $5 billion and adjusted diluted earnings per share of $4 and $24.45 and continuing operations.
Excluding special items.
But that I will now turn the call over to the operator for Q&A.
At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation somewhat indicate your line isn't the question queue. You may start to move your questions on the Q, but participants using speaker equipment and may be necessary for you to.
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First question comes from the line.
Hilda BMO capital markets. You May proceed with your question.
Thank you so much one of the drill a little bit further into what was going on with some of the nursing enrollment.
Some curtains excuse me I think you mentioned the issue was mostly in the post licensure program. The way I understood. It is that they're still making a lot of money now. So there's no reason for them to go back to school if they can still work and make a lot of money. One is that what you are talking about and then too. If that's the case would you have seen or did you see an increase in.
Licensure programs because of the same issue.
Yes, thanks for the question.
So the primary drivers when you cited.
The scarcity of experience nursing Talaat and the market is such that.
Those nurses are at very high demand and they've got lots of market opportunity to earn lots of money and as a result or less focused on continuing their studies. In addition to that we've got lots of nurse that you might be inclined to continue their studies put our otherwise burned out by some of the burdens associated with.
With caring for patients in the coven environment. So that that's that's been the primary driver.
In the post licensure space on pre licensure we've.
We've seen a slowdown as well, but it is not of the same magnitude as what we've seen in the post licensure space.
Okay any reason.
Again to pre licensed for programs. Most of these folks are not necessarily nurses I'm. Just curious why they are not attending if it's such a hot industry.
No I think I think that too is part of the broader sort of Covid dislocations I think enrollments in higher education programs across the board or.
Are suffering.
His folks are reluctant to return to school in this environment and even in programs.
Where we are seeing steady enrollments, we see students, taking lighter loads and fewer hours and that sort of thing. So again. We think this is deplorable, we think it will pass.
In due course.
But there is a COVID-19 fatigue headwind that I think shows up in both pre licensure and post licensure.
Okay, that's fair and I know a lot of the other companies are saying similar issues.
I wanted to go to the guidance. So it sounds like some of these issues were somewhat new I know they may have been happening for a while but they seem to have exacerbated over the past few months yet.
Iterative guidance and I think the enrollment declines are certainly worse than we had expected of them assume others as well can you give us some comfort how we can get to original guidance, giving how things have changed over the past few months.
Yeah. So I think we anticipated that there'll be some fall off and enrollment obviously that follow up with more severe than we anticipated.
Having said that.
Revenue for the quarter.
Within expectations, albeit at the low end of those expectations were still growing our programs and the other thing you should keep in mind is that and you know this as well as I did when we're on an academic fiscal year, it's the first quarter.
We remain optimistic that some of these headwinds will dissipate over time and as a result, we've not seen enough of this trend to be prepared to suggest that our full year guidance is out of reach.
Okay I know, it's still early so I understand that so that's great alright, I'll jump back in the queue. Thanks, so much.
Thank you.
Our next question comes from the line of gas Miller was there do you May proceed with your question.
Yeah, Thank you and good afternoon.
Sorry.
<unk>.
The Delta surge in the impact you mentions increasing marketing I guess, there's a potential.
Offset just.
Are you increasing marketing spend into a lower marketing efficiency.
Environments or or not said, what's funding that because there's no change in the guidance and.
I know you're confident that.
The synergies, but it doesn't sound like those or increase so just help us understand I don't know any order of magnitude around marketing or there's erosion of efficiency just <unk>.
<unk> understand the credibility of that potential upside.
Yeah, So all starting to walk in Shopian behind me, but we think there are targeted opportunities to invest at the top of the funnel to try to preserve.
As much of our shares we can in an otherwise demean.
Demand challenged environment.
That's true in the nursing programs. We think there are also opportunities to do that across the the medical programs and again, given our level of confidence in what we can do from an overall.
Margin perspective, with the cost synergies, we're trying to achieve over the year, we feel comfortable at this early stage in the year of making those targeted investments because obviously the benefits.
Economic benefits over the lifetime value of those students are really attracted to us. So we think it's an investment worth making at this point in the cycle.
Okay, I would agree with that and the only other thing I would say what.
Specifically segmenting and looking at the population of students to be smarter with how we are going to market in terms of.
Trying to get those those students into the pipeline.
The only other thing I would add to spell marketing generally we mentioned in the prepared remarks that.
We recently brought on a new Chief marketing officer will reach a rare and one of the things we cast him with this helping us.
Think more expansively about how we bring a more dynamic allocation of the investment resource across the products, we take to market.
So that will not necessarily funding new investments with with new money, we're actually taking investment.
Places, where we think the return is relatively modest places, where we think the return is more attractive were experimented with that kind of dynamic resource allocation as we speak.
Got it.
Mm Walden.
Stand some potential impact from the D O J and Cory but looking.
To gain confidence Oh Wow.
Walden.
Corey treadmill sits.
<unk> I mean, the logic is there as to why that would have an impact which is trying to sort through that other potential I guess temporary impact from.
And what's what are you seem to give you confidence that that was the case.
Yeah. So.
There's a bit of a lag in in when the efforts at remediation around some of the noise around Doj actually show up and the model. So.
If I go back several months increased war suffering as a result of that and there were quite a bit of questions on the part of students about the efficacy of the program accreditation what does this mean and as you know.
We had folks in the market for.
For reasons, they understand best at that that sorts really amplify this negative message around the efficacy of Goldens programs.
Up to the point at which the Doj inquiry was resolved so it's going to take a little time for those remediation efforts to flow through the consciousness of our prospective students social media word of mouth, but we fully expect that within a reasonable period of time, maybe a quarter or so we will we will see those.
Increase in those conversions get back two trends that.
That we would have expected in our modeling of that business in the early days of our ownership.
Okay. Thank you.
Sure.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, one moment, while I pull for questions.
Okay.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to you Mr. <unk> beautiful closing remarks.
Sure, but my thanks to everyone for joining the call before we sign off though I do want to take a moment and thank all of our colleagues at at Talon done amazing work for students and employers over the last quarter, we've got a really aggressive and ambitious change agenda and our teams across all of our institutions have been.
Super resilient and Super agile and embracing that a change agenda and so I just want to thank them for their commitment and support and we look forward to picking up the conversation again next quarter.
Thank you for joining US today. This concludes today's conference you may disconnect your lines at this time.
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