Q2 2023 American Public Education Inc Earnings Call
Sure.
Ladies and gentlemen, thank you for standing by my name is Cheryl and I'll be your conference operator today.
At this time I would like to welcome everyone to the.
The American Public Education, Inc. Reports second quarter 2020 feet result conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If he would like to withdraw your question Press Star one again.
I would now like to turn the call over to Brian Coyne AVP of Investor Relations and corporate development. You May now go ahead.
Thank you and good afternoon, everyone welcome to American Public Education's conference call to discuss second quarter 2023 financial and operating results. Joining me on the call today are Angela Selden, President and Chief Executive Officer, Rick Sunderland, Our executive Vice President and Chief Financial Officer, and Steve Summers, Senior Vice President and Chief strategy and corporate development.
Officers materials for the call today are available under the events and presentations section of the API website statements made during this conference call and any accompanying presentation regarding API and its subsidiaries that are not historical facts may be forward looking statements based on current expectations assumptions estimates and projections forward looking statements made.
Times 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 in enrollments revenue earnings and EBITDA and other earnings guidance initiatives to improve <unk> pass rates and reposition Rasmussen University for growth and other company initiatives, including with respect to leadership changes future competition and demand.
And our cost savings efforts 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 others. Our dependence on the effectiveness of our ability to attract students who persist and are likely to succeed our inability to effectively market or our.
Grams 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 creditor requirements and the impacts thereof challenges with acquisitions our inability.
Excited during our 2023 earnings calls.
In the second quarter of 2023, we delivered revenue of $147.2 million, which is at the top of the guidance range and adjusted EBITDA of eight $8 million, which is 38% above the high end of the guidance range.
This is the result of strong continued enrollment growth at American public University system, Honduras College of nursing.
<unk> University online and graduate school USA.
These trends are continuing into the third quarter and we are confident in our ability throughout the remainder of 2023 to drive year over year revenue and EBITDA growth as well as margin expansion across these three education units and Rasmussen online.
We acknowledged that the acquisition of Rasmussen has not met our expectations.
We believe we have isolated the overall causes of the challenges, including post COVID-19 market and operational headwinds and pre licensure ADN nursing <unk>.
And simultaneously experiencing a significant exit of senior leadership team.
Despite these setbacks we continue to believe that there is considerable value in the <unk> in the business.
With new leadership in place since mid April we see Rasmussen improvement initiatives gaining traction.
However, as that new team evaluated the near term business momentum they.
They made adjustments to the timing and velocity of <unk> recovery, which contributed to a non-cash impairment charge, which Rick Sunderland will discuss in more detail.
Not including the impact of these non-cash charges.
Net income available to common and diluted earnings per share was better than the high end of our guidance range.
Here are some of the highlights from <unk> improvement initiatives.
Rasmussen online enrollments are up year over year for the fourth consecutive quarter, while non nursing enrollments posted their first positive growth quarter. Since one Q2 thousand 19.
For the 15 Rasmussen campuses with ADN programs, where we received quarterly and quacks results.
14 posted meaningful improvements and two Q twenty-three.
In addition.
Rasmussen campuses have continued to diversify from their historical reliance on the ADN R. N program for the majority of student enrollment.
And particularly in the markets where enrollments are capped.
By enrolling students in other approved nursing and Allied health programs.
Three Q twenty-three enrollment resulted in a 14% increase in new students and those programs as compared to the prior year period.
In August to better align with the current revenue profile of the business.
We started right sizing the cost structure of both Rasmussen and the entire API enterprise.
These actions are expected to reduce run rate expenses by $12.4 million per year and.
And we will result in approximately $2.8 million a pre tax cash expenses associated with employee severance costs in Q3, and then in year 2023 benefit of $2.1 million net of the severance.
Additionally, beginning in the third quarter, we plan to reduce certain non labor costs by approximately 800000 to $1.1 million on an annualized basis.
In connection with these cost savings initiatives are API board of directors is also taking certain steps to reduce our overall governance structure costs.
Including making no changes to the API aboard compensation structure for 2023.
Which is the third consecutive year of no change.
And taking steps to reduce the size of our board.
Two of our longest standing board members, Jean Halley and Dr. Barbara <unk> are not going to stand for reelection at our next annual meeting.
And our board intends to reduce the size of the board at that time, rather than filling the vacancies.
Finally, our liquidity and capital position remains strong as we continue to generate free cash flow, which has enhanced our liquidity position to $113 million of unrestricted cash at the end of two Q twenty-three and a zero dollar net debt position.
Now I would like to provide more details regarding our education unit, starting with a P U S.
Our team is driving net course registration growth and overall margin expansion due to a modest price increase and improved marketing efficiencies.
Overall net course registrations were up 5.7% during two Q twenty-three compared to the prior year period.
Including up 8% in active duty military and nearly 10% in the veterans channel.
<unk> team is focused on continuing to grow the veterans channel. While also executing on plans to grow in the non military channel.
As previously mentioned.
<unk> instituted tuition and fee increases for it's non military and veteran students in April of 2023.
Even with these tuition fee increases we believe that <unk> is tuition and fees remain lower than the average in state cost at public universities and our programs offer exceptional return on higher education investment for our students.
The modest select increases in tuition combined with the tighter focus on marketing spend and other costs allowed <unk> to increases EBITDA margin by 600 basis points to 28% from 22% just a year ago.
And up from 25% in the first quarter of 2023.
We expect continued year over year margin expansion at a P. U S for the balance of 2023.
Going forward, we expect <unk> course registrations to be in the range of plus 6% to plus 8% and three Q twenty-three compared to the prior year period.
Turning to Handros two Q twenty-three enrollment was approximately 3000 students an increase of more than 22% compared to the prior year period.
65% of Honduras enrollment is in its Pn program as Honduras offers a ladder pn to ADN curriculum in Ohio, and Honduras is currently licensed to offer only pn in our Indianapolis in Detroit campuses.
Our expansion into Michigan continues to be a huge success with over 100, new starts in the summer of 2023, which brings the total number of enrolled students to over 275 as of the third quarter.
This growth and demand are almost entirely grassroots driven resulting in low marketing costs through the first three quarters of 2023, we expect in future quarters for those costs to normalize as the market matures.
Similar to progress on the <unk> on our end results at Rasmussen I'm also pleased to share that we have seen meaningful improvements in the first time and collect pass rates for our ADN R. N program at Handros on a year over year basis.
RPM programs continue to surpass the necessary benchmarks in Ohio, and our 2023 pass rates exceed the benchmarks in Indiana.
As of yet there are no graduates in Detroit, So no scores yet to share.
Strong continued enrollment growth has also allowed an expansion of margin from minus 10% to positive, 1% and slightly positive EBITDA in two Q twenty-three.
Ponderosa's three Q twenty-three enrollment is 2800 students an increase of 17% compared to the prior year period and does reflect some disruptive effects of the move of the Dayton campus.
This represents 14 consecutive quarters of year over year enrollment growth.
And with a focus on reducing operating costs. We expect continued revenue growth and year over year margin expansion through the end of the year at Handros.
At graduate school it continues to deliver improvements to both the top and bottom line <unk>.
<unk> increased 70% from the prior year period to 7.5 million, while EBITDA increased almost $2.5 million to positive $1 million in the quarter compared with the prior year period.
Graduate school is highly seasonal with the second and third quarters performing the strongest we expect solid revenue growth and margin expansion on a full year basis in 2023.
Turning again to Rasmussen.
With the hiring a permanent leadership during the first half of twenty-three initiatives to return Rasset sentient growth and profitability are gaining traction.
As a reminder, at the end of 2022, we reorganize the business into two divisions Rasmussen online and Rasmussen campuses there.
This was done to provide more visibility to the sustainable growth and profitability initiatives for the fully online program.
And the campus space nursing and Allied health programs.
It was also done to dedicate more resources to improving student educational experiences specifically for the campus space nursing programs through our center for educational readiness to improve student mastery and increase and collects first time pass rates.
And finally, we did the reorganization into two divisions to reduce operating costs.
And three Q twenty-three.
Total new students starts are positive year over year at Rasmussen.
Driven by improve marketing to increase enrollment.
Rasmussen online student enrollment has increased on a year over year basis for the fourth consecutive quarter.
And Additionally, rashes and saw a 14% increase in new student starts in third quarter twenty-three and campus based non ADN nursing and Allied health programs.
Due to tightened admissions policies across all campuses and enrollment caps in Illinois in the twin cities, we are still experiencing declining enrollment for Rasmussen campus based ADN nursing programs.
Next.
I shared a few minutes ago and collect scores meaningfully improved into Q twenty-three.
Starting first with Minnesota, all for twin cities ADN campuses improved on a year over year basis.
And the remaining three out state programs surpassed the state thresholds.
Or to Kansas campuses have also seen strong and quick results for both the ADN nbcsn programs, both exceeding the state standards.
In Florida three of five campuses met the state standard and in Illinois, while the campuses fell short of the state benchmark, we saw significant improvement.
We continued to provide all students with the resources, both on campus and remotely to properly prepare for their respective and quacks exam to our center for nursing excellence.
Before turning the call over to Rick Sunderland to review, our second quarter results in third quarter outlook in more detail.
I'd like to comment more broadly on our outlook regarding Rasmussen specifically.
Specifically in nursing education generally.
We continued to believe both based on strong secular trends.
And handros enrollment momentum.
That pre licensure nursing education remains a promising longterm market for enrollment growth.
Those secular trends for nursing education include a projected chronic shortage of nurses in the United States with close to 250000 annual openings over the next decade.
This shortage was exacerbated by the stress is placed on the nursing community due due to the pandemic, which has precipitated more exits and early retirements from the nursing field.
With 22 campuses focused on educating new nurses, we believe Rasmussen remains physician to help address this chronic need.
Educate more new nurses to join the workforce.
We are optimistic about <unk> role in the nursing and Allied health ecosystem, and we remain committed to its mission to students faculty and staff.
With that let me hand, the call over to our CFO Rick Sunderland.
Thank you Angie.
Pushing its second quarter 2023 financial results.
Total revenue for the second quarter was $147.2 million down 2% from the prior year period due to an $11.9 million for 90% decline in revenue at Ross.
Partially offset by increases in revenue of each of the three other education units.
H U S revenue was approximately $74 million for the second quarter of $3 $7 million for $5, 2% compared to the prior year due primarily to continued growth and of course registrations for military students utilizing ta.
The impact of our tuition increase for non military students.
This registration growth was achieved on a lower advertising spent.
Advertising spend for the quarter was approximately $1.1 million lower than the prior year.
Advertising spend is approximately $2.7 million lower than the prior year period.
EBITDA for the quarter was $2000 $2 million compared to $15.2 million in the prior year.
<unk> $5 million for 33%.
<unk> margin for the quarter was 28% compared to 22% in the prior year.
In the second quarter restaurants to revenue was approximately $52 million, a decrease of $11.9 million or 19%. This.
This decline was primarily due to a 12% decrease in total enrollment and the continued change in student mixed more online students, which generally pay lower tuition.
Lessons on ground nursing students, partially offset by tuition increases in certain programs, which took effect January 2023 to help offset increased costs.
Excluding the impairment in both periods.
<unk> EBITDA for the quarter was an EBITDA loss of $7.1 million compared to positive EBITDA of $4.5 million in the prior year quarter, a decrease of $11.6 million.
EBITDA margin for the quarter was negative 14% compared to positive 7% of the prior year.
The reduction of EBITDA and EBITDA margin is due to the high fixed cost structure of racehorses campus based operations, coupled with the decline in enrollment in revenue.
In addition to the labor cost reduction initiatives prescribed by Angie that API, we plan additional long labor related cost reductions of approximately 0.8 million to $1.1 million for the remainder of the year.
Focused on improving profitability at restaurants in the coming quarters.
That hydro second quarter of 2023 revenue was approximately $14 million, an increase of $2.8 million or 24% compared to the prior year period, driven by higher total enrollment at higher tuition levels similar Rasmussen ponderosa implemented a 5% increase in tuition and fees, which took effect in the second quarter to help.
Offset increased cost.
With this increased revenue in improving scale, Honduras was able to deliver positive EBITDA for the second quarter and a proven over the EBITDA loss in the second quarter of 2022.
Graduate School revenue include incorporating over other was $7.3 million for the second quarter, 2023, or $3.1 million or 72% compared to the prior year.
Overall on a consolidated basis HPE adjusted EBITDA was $8 8 million for the quarter compared to $14.5 million in the prior year period.
The current quarter results represent an adjusted EBITDA margin of 6% compared to 10% in the prior year quarter.
Net loss per diluted share for the current quarter was the loss of $2.93 compared to a loss per diluted share of $5.82 in the prior year period.
Quarter cost of expenses include a non-cash impairment charge of $64 million to reduce the carrying value are you segment goodwill and intangible assets.
Reflect the corresponding tax impact.
This compares to $845 million.
Non-cash impairment charge in the prior year period.
Given the calculations consideration of time value of money and Ross performance of this year the impairment reflects the delayed recovery and return to profitability.
That Roswell importantly.
Importantly, our model recognizes the essential work now underway to expand the programs offered at campuses and to the <unk>.
Cost containment initiatives to right size the institution was.
When adjusted for the impact of these non-cash charges that Rasmussen net loss per diluted share for the current quarter was approximately a loss of 25 cents.
Per diluted share, which was better than the high end of our guidance range.
Total cash cash equivalent to June 30th 2023 was $139 million, an increase of $9.9 million from your end 2022 restricted.
Restricted cash at June 30th was approximately 2000 7 million and continues to be almost entirely comprised of a restricted certificate of deposit the security's a letter of credit for Rasmussen with the department of education the.
The increase in cash was due primarily the payments from army received during the first six months, which total approximately $42 million.
Which $29 million related to periods. Prior to 2000, 2003, offset partially by the use of cash that Rasmussen in Honduras and to other changes in working capital.
Api's remaining principal on the term loan is approximately $99 million at June 30th with unrestricted cash of approximately $113 million net debt remains at zero. Additionally.
Additionally, there are no borrowings under API $20 million revolving credit facility, which remains fully available at this time.
Turning now to the third quarter of 2023 outlook.
Api's outlook for the third quarter of 2023 is as follows.
Total net course registrations are expected to be in the range of plus 6% to plus 8% for a registration range of 90500 registrations to 92500 registrations.
Ah Roswell sent in Honduras third quarter student enrollments are actual because of the quarterly starts at these schools.
Ah Rasmussen third quarter total non nursing enrollment increased 5% to approximately 7700 students while total nursing student enrollment decreased 25% year over year to approximately 5700 students for an aggregate rasmuson enrollment decline of approximately 10 per.
Sent year over year to approximately 13500 students.
<unk> third quarter total student enrollment increased by 17% year over year to approximately 2800 students.
And the third quarter of 2023 consolidated revenue is expected to be between $148 $3 million to $150.3 million. The company expects the net loss to common shareholders to be between a loss of $5 $7 million and a loss of $4.3 million and the loss per diluted share.
Of a loss of 32 cents to a loss of 2004 cents per diluted share.
Adjusted EBITDA is expected to be between $8.4 million and $10 $4 million for the third quarter of 2023.
With that operator, who would like to open the line for questions.
At this time I would like to remind everyone in order to ask the question Cresta than a number one on your telephone keypad.
We will call just for a moment to go potty CUNY lasting.
The first question comes from the line of Jasper <unk> will choose security.
Your line is now open.
Hey, good afternoon, everyone. Just wanted to follow up on the impairment charge. So I I think earlier, you mentioned that the new Rasmussen leadership might be thinking that the recovery there is going to be longer than previously anticipated.
Should investors think about I guess your updated timeline, the return rasmussen enrollment growth and profitability.
We see positive momentum and enrollment, particularly at restaurants and online moving.
Moving the overall enrollment trends too positive.
Okay I'm not.
But as a whole and including the nursing business do you have any kind of timeline for when the declines there might start to level offer.
Cause I think that's probably the main contributor as far as an operating leverage perspective.
But jasper Sanjay thanks for the question.
We.
As you probably saw it in the Powerpoint materials.
Have seen a quarter over quarter.
<unk> improvement in the in.
In the enrollment as a percentage of the prior year period, and so we while we can't say one data point makes a trend we do believe that.
There is stabilization in the Rasmussen business as Rick mentioned, we have seen not only a fourth quarter now of our online enrollment growth being positive, but also a 14% increase in the 980.
Nursing.
Start and that is really a deliberate strategy on the <unk> part to direct marketing dollars towards campus space program.
That are available to enroll students in and allow us to continue to fill the campuses.
And drive profitability from the campuses without having to exclusively rely on the <unk>.
On our end program as was the case in the past.
So we can't yet put a pin on when we see the nursing enrollment at Rasmussen.
Flatten out and become positive, but we do see.
Really important signals.
Enrollment momentum across as other categories and really importantly, the improvement in our anthrax.
Pass first time pass rates, which will also signal to prospective students the strength of the Rasmussen both ADN.
As well as LPN Nbcsn nursing programs.
Okay. Yeah. Thanks for that and then just almost third quarter guidance.
How should we think about the underlying margin assumptions for the main portfolio schools there.
You said that the really strong margins in this this quarter is is that going to be the primary driver.
I guess I'll try that one sir.
Yes, that's exactly right.
Okay, and then just just one more <unk>.
On the note and the 10-Q about the the Bloomington.
Credit Asian review.
How should we think about the timeline there to resolve that and looked at the name for the rock.
Specifically the Rasmussen leadership team is engaging.
With those different regulatory and licensing bodies in the state of Minnesota, and we believe that we will be able to continue the dialogue with those those different governing bodies to be able to <unk>.
Come to a resolution that we believe will allow us not only to.
Continue to grow the BSN program, which has really tremendous and.
<unk> pass rates, but also to continue to moderate the enrollment in the twin cities campuses around the AGN program, which has been the primary focus.
The.
Those governing bodies attention to the results from our ADN program. So it's limited to the four twin cities campuses, which already have quarterly enrollment caps.
That that we have already seen.
A really meaningful part of enrollment decline.
Taking place because of the enrollment cap that we've imposed on those campuses over the last.
Four quarters.
Alright, that's that makes sense last question for me any update on eight cents and compliance with the revised 90 ton threshold there for this fiscal year.
Yeah, just for a trick.
Yeah, we've talked about this over several calls and.
Everyone's aware that the change in the rule in January adding.
Ta VA moved.
Apus closer to the 90% threshold, we continue to work the initiatives that we've.
Previously discussed.
To be.
Employer reimbursement.
I don't know if we've talked about international is a particular initiative, but.
We have.
Some some beginnings in that arena also all all designed to <unk>.
Improve the 10 ratio.
Okay I appreciate the detail there thanks for taking my questions.
Thank you.
And next question comes from the line of Alex Perez with Barrington Research. Your line is now open.
Hi, guys. Thanks for taking my question I, just I have a couple but sort of in reverse order.
And your response to the 90 10 questions just ask.
I haven't looked at your cue yet, but what was the 90 10.
Of.
A P U S.
<unk> 2022.
The previous methodology.
You've probably disclose that in the 10-Q right.
It was in the 10-K.
Alex you are talking about the prior year.
Different basis, it was 38%.
Mmk.
And and roughly what percentage of students at a P U S military or veterans.
Well you can look at the the concentration note and the financials of course, that's on an accrual basis and the 90 10 calculations done on a cash basis I think Alex we routinely.
Say that.
For new students they self identify as active duty military it's something like 65%.
And.
What's your.
So I need a new methodology that will be four fiscal years completed in 2023. So next year's 10-K will will have a different basis for calculating that are you comfortable you know.
Given your exposure given your initiatives that you'll come in underneath those targets.
We have a good team at Apus, Alex who know how to.
Worked for various channels, including the the channels that deliver on the 10 side of the equation.
Great and is there any value to like bringing in graduate school USA underneath <unk>.
To give you more 10 revenue for that calculation is that something you could do or would consider doing.
Which Alex we certainly looked at that graduate school.
As a training company adult learning company that provides courses to the federal workforce.
So those.
Most typically ended up being federal dollars.
And when you look at the new rules.
Phoenicians are very broad as to what constitutes a federal dollars us placing those dollars in the 90 side of the calculation.
Gotcha, Alright, that's a good answer thanks for that I'm moving to my primary question, though I want to congratulate you on improving and collect scores.
Particularly in the twin cities in Illinois, where the issue was most.
Profound what have you done there to improve and clutch scores over the over the year to date period or over the last 12 months.
Alex is anti I'll start and then happy to open it up to others.
As we discussed two calls ago, we want to specific initiatives one what we called the center for educational readiness and that was really making sure that the necessary faculty and Clinical's were available at the time the students needed them.
To complete their hands on learning experience and then the second was to operationalize Our center for nursing excellence, which really takes each student one by one identifies where they're learning gaps are and and purpose build learning.
Experiences either a remediation tools or remediation course work.
What I want tutoring.
Whatever it takes to help those students be able to overcome those shortcomings in their learning experience and so we think having.
Focused on both the overall learning environment and experience, creating a better learning environment through more predictable clinical's and at the same time.
Tailoring the remediation experiences for the students has led to that those improvements.
Great that's helpful.
I guess, that's the only those those are my questions for now thank you very much and I'll get back in the queue.
Thank you jokes.
There are no further questions at this time, ladies and gentlemen that concludes today's call. Thank you all for Johnny you May now disconnect.
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