Q3 2022 Perdoceo Education Corp Earnings Call

Good afternoon. Thank you for attending today's her dose you Education Corporation third quarter 2022 earnings conference call. My name is Anna and I will be your moderator for today's call all lines will be muted during the presentation portion of the call.

I'd now like to pass the conference over to your host David Schneider with Investor Relations. Please go ahead.

Thank you Hannah good afternoon, everyone and thank you for joining us for our third quarter 2022 earnings call with me on the call today is Todd Nelson Executive Chairman, Andrew Hurst, President and Chief Executive Officer, and Ashish Ghia Chief Financial Officer.

This conference call is being webcast live within the Investor Relations section at <unk> Dot com.

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

Let me remind you that this afternoon's earnings release and remarks made today include.

Forward looking statements as defined in section 21 E of the Securities Exchange Act of 1934.

These statements are based on assumptions made by and information currently available to Kratos Your education and involve risks and uncertainties that could cause actual future results performance 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, 2021, and subsequent filings within 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 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 not substitute for the most directly comparable GAAP measures.

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 Andrew Hurst Andrew.

Thank you Davis and good afternoon to everyone and thank you for joining us.

Overall, we are pleased with our operating results and continued progress during the quarter.

I would like to thank our faculty students support staff.

And all our other employees for their hard work dedication and diligence in serving and educating our students.

Third quarter operating results came in ahead of our expectations in part due to better than expected.

<unk> and student engagement and retention as overall macroeconomic and governmental responses generally wind down from the pandemic.

Operating expenses were also lower than expected further helping the results for the quarter.

And we have continued to invest in data analytics and technology upgrades.

Maintaining appropriate levels of academic and student support services.

That we believe are positively impacting academic outcomes and student experiences.

Let me touch upon some of the key operational highlights from the quarter.

First we experienced better than expected improvement in student retention and engagement.

As the lingering impacts from the pandemic and overall macroeconomic policies continued to wind down.

Our student support teams have been leveraging technology and data analytics to serve students more efficiently and we continue to grow our corporate population.

We are pleased with the progress and expect yearend total enrollments at <unk> to grow versus the prior year, while our U S is expected to show a decline.

Second adjustments to our marketing processes that began in the third quarter of 2021 are now fully annualized.

Recall that these marketing changes were made to refine our process to identify prospective students who are more likely to succeed at one of our academic institutions.

We are now fully realizing some of the intended benefits, namely stronger engagement from prospective students and improve retention.

Third we continue to focus on our corporate partnership program at both institutions and the teams are successfully engaging with employers who provide tuition assistance programs.

Which allows for a debt free education for their employees.

Now, let me touch upon some of the financial results for the third quarter.

We reported net income of $22 $1 million or 32 cents per diluted share.

While adjusted earnings per diluted share, which excludes certain significant and noncash items was.

It was 39 cents.

As expected total student enrollments at our institutions declined by two 1% compared to the prior year quarter end.

But this was an improvement from the 7% decline in the second quarter.

By segment total students increased by two 7% at sea to you.

<unk> decreased by nine 5%.

The <unk> system.

A quick note on our technology investments.

We are making necessary investments to upgrade our student serving systems.

And to continue to leverage data analytics and machine learning to enable timely and relevant engagement with our students.

We launched a new student relationships system that provides assistance and insights and the advising process.

Enabling us to effectively engage with students with the appropriate support at the right time.

We continue to make meaningful updates to our mobile applications for both students and faculty.

We have upgraded our mobile technology framework, allowing for better performance and increase stability.

These upgrades also provide more flexibility with third party plug ins, enabling consensus consistency amongst newer devices.

Overall app usage is high at both institutions.

At approximate 90% adoption rate.

Lastly, after being successfully launched our U S. We have also completed the chatbot integration with messenger, it's CPU, allowing students to receive real time support.

With that said I would now like to turn the call over to Ashish for a deeper review of our operating performance for the quarter Ashish.

Thank you Andrew.

I will now review, our third quarter results and then discuss our balance sheet capital allocation and updated 2022 outlook before handing the call back to Andrew for his closing remarks.

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

I would also like to remind you about our year over year comparable to two factors.

Financial results for the AI your system and CTO reflect the three acquisitions that we have completed since the third quarter of 2021.

Including the most recent acquisition, which was completed on July one 2022.

Also total enrollment numbers that I discuss.

Or any enrollment trends that I referred to exclude learners participating in non degree seeking professional development and continuing education offerings.

Adding degree seeking non titled forward South based program at other universities.

With that said, let us begin with an overview of the operating and financial results.

For the third quarter of 2022 total company operating income decreased by 22, 5% to $29 3 million as compared to an operating income of $37 $9 million in the prior year quarter.

Adjusted operating income, which excludes certain significant and noncash items and which we believe is more reflective of the underlying operating performance decreased to $38 7 million as compared to $46 3 million.

This result exceeded the high end of our previously provided outlook range for the quarter.

Primarily due to better than expected improvements in student engagement and retention, resulting in higher revenue.

As well as operating efficiencies realized within marketing and admissions.

Net income for the quarter was $22 1 million compared to $27 8 million equating to <unk> 32 cents per diluted share as compared with 39 cents.

Adjusted earnings per diluted share, which we believe is more indicators of the underlying operating performance was 39 cents as compared with <unk> 40.

In the prior year quarter.

Now to revenue.

Revenue for the quarter was $168 4 million or approximately three 2% lower than the prior year quarter, primarily driven by lower total enrollments at <unk> system and continued growth in the number of students participating the corporate partnership program, especially at <unk>.

These factors were partially offset by revenue associated with acquisitions completed in 2021, and 2022 that were not part of the full comparative prior year period.

Let me spend a minute to comment on the corporate partnership program that has contributed to the total enrollment growth at <unk> in.

In general these partnerships take time to develop and are awarded higher tuition grants from the university to offset their tuition costs, resulting in lower revenue pursuant in any given period.

However, we believe humans participating in these programs typically experience higher retention.

Better academic outcomes graduate with no debt and ultimately may lead to a higher lifetime value per student.

Overall, we are pleased with the progress we have made in this area and we will continue to make necessary investments to further expand and support this program.

As it relates to our segments total student enrollment as of September 32022 were two 7% higher at <unk> and lower by nine 5% at ARU system as compared to the prior year quarter end.

Growth in total enrollments at <unk> was primarily driven by improved engagement from prospective students starting school as well as higher retention for continuing students.

Total student enrollment declined at AIG system, but as previously discussed the rate of decline during the quarter has moderated from the double digit declines experienced in the first half.

Also note that changes to our marketing process have annualized during the third quarter and we are now fully realizing the intended benefits of the change through improved student retention and engagement.

Third quarter revenue at <unk> was $97 6 million or six 9% lower than the prior year quarter due to an increase due to an increasing percentage of students participating in the corporate partnership program and the lag impact on the current quarter revenue due to lower total enrollments in the <unk>.

Previous quarters.

Operating income of 31, and a half billion dollars during the quarter was $9 7 million lower versus the prior year quarter, primarily due to the decrease in revenue while operating expenses remained relatively optimized in line with total enrollment trends.

Turning to <unk> system.

Revenue was $70 6 million for the quarter, an increase of two 4% as compared to the prior year quarter, primarily driven by the acquisition during the current quarter.

Excluding the recent acquisition completed in July of 2022 revenue would have been lower as compared to the prior year quarter. As a result of the decrease in total student enrollments.

Operating income of $9 6 million increased 15, 1% as we continue to realize operating efficiencies in admissions and marketing as well as improved bad debt expense.

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Also please note that due to the improvements in student retention engagement and better than expected operating performance in the third quarter. We now expect second half revenue to be relatively flat as compared to the second half of 2021.

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Moving on to corporate and other third quarter operating losses remained relatively flat at $11 8 million versus $11 7 million in the prior year quarter.

Please note operating losses for both periods include legal fees, including those associated with 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.

Moving onto income taxes.

For the third quarter, we recorded a provision for income tax of $9 2 million, resulting in an effective tax rate of 29, 5%.

The effective tax rate for the quarter was impacted by a $1 $4 million valuation allowance increase.

Weighted to select combined state net operating losses, which increased the effective tax rate for the quarter by approximately four 6%.

Finally, we expect that for the full year 2022.

Our effective tax rate will be between 26 and 27, 5%.

As a reminder, we have been making quarterly estimated tax payments since 2021 and expect to continue doing so each quarter moving forward.

Now to our balance sheet.

As of September 30, we ended with $525 $2 million of cash cash equivalents restricted cash and available for sale short term investments as.

As compared to 499.

$4 million at year end 2021.

Year to date net cash provided by operating activities was $107 6 million.

<unk> is $1 $44 2 million in the prior year.

Please note that the timing of title for cash receipts negatively impacted operating cash flows for the current year to date.

Cash provided by operating activities for the current year to date was partially offset with cash outflows related to the acquisitions completed in July .

Share buybacks and capital expenditures.

Speaking of capital expenditures for the third quarter, Capex was approximately $2 $3 million or one 4% of revenue.

For the full year 2022, we foresee capital expenditures to be approximately 2% of revenues as we continue to invest in our technology infrastructure upgrade.

Finally to our outlook.

As previously discussed both our academic institutions have experienced improvements in student engagement and retention in recent months and our third quarter operating performance was better than expected.

As a result, we now expect full year 2022, adjusted operating income to be between $157 million to $160 million as compared to the previously provided range of $142 million to $148 million.

Adjusted earnings per diluted share is now expected to range between $1 $5900 62 per diluted share as compared to the previously provided range of $1 41 $2 48.

As it relates to the fourth quarter, we expect adjusted operating income to be between $25 5 million to $28 5 million as compared to $42 million in the prior year quarter with adjusted earnings per diluted share for the fourth quarter to range between 27, and <unk> 30 per.

<unk> share versus <unk> 40 in the fourth quarter of 2021.

Okay.

Lastly, as disclosed in our Form 10-Q filed today and the 10-K filed in February 2022.

The department of education is going through various stages of negotiated rulemaking surrounding a variety of topics. We continue to monitor these rulemaking activities, including recently announced rules that go into effect next year.

I would like to conclude by commenting on our balanced approach to capital allocation that is intended to enhance shareholder value, while maintaining appropriate levels of student investments in our academic institutions.

We continue to focus on maintaining a strong balance sheet and adequate liquidity, while investing in organic projects in particular technology related initiatives, which are designed to benefit our students.

In evaluating diverse strategies to enhance stockholder value, including acquisitions and share repurchases.

With respect to share repurchases, we repurchased two 1 million shares for the first nine months of 2022 for approximately $23 1 million at an average price of $11 <unk> per share.

As of September 32020 to approximately $26 $8 million, what's still available under our authorized stock repurchase program.

It is our intent to continue repurchasing shares under our program when market and other conditions are appropriate.

And with respect to acquisitions, we continue to explore acquisition opportunities that further extend the depth and breadth of our educational offerings.

Finally, we ask that you refer to our earnings release filed today for important information about the key assumptions and factors underlying our 2022 outlook.

And other expectations discussed on today's call as well as the GAAP to non-GAAP reconciliations.

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

Thanks, Ashish, we are pleased with our third quarter operating results and remain focused on serving and educating our students to further enhance academic outcomes and student experiences.

Thank you all for joining us today, and we look forward to speaking with you again next quarter.

Today's pre dose Education Corporation third quarter 2022 earnings call. Thank you for your participation you may now disconnect your lines.