Q3 2023 Lincoln Educational Services Corp Earnings Call
Good day and thank you for standing by welcome to the Lincoln Educational Services' third quarter 2023 earnings Conference call.
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And I'd like to hand, the conference over to your Speaker today, Mr. Michael <unk>. Please go ahead.
Thank you Crystal good morning, everyone before the market opened today Lincoln educational services issued its news release reporting financial results for the third quarter ended September 32023.
Relief is available on the Investor relations portion of the company's corporate website at Www Dot Lincoln Tech Dot E. D. You join.
Joining us today on the call are Scott Shaw, President and CEO, and Brian Meyers Chief Financial Officer.
This call is being recorded and is being broadcast live on the company's website and a replay of the call will be archived also on the company's website.
Statements made by Lincoln's management on today's call regarding the company's business that are not historical facts may be forward looking statements. As term is identified in federal Securities Laws Award May will expect believe anticipate project plan intend estimate and continue as well as similar expressions are intended to identify.
Forward looking statements.
Forward looking statements should not be read as a guarantee of future performance or results. The company cautions you that these statements reflect current expectations about the company's future performance or events and are subject to a number of uncertainties risks and other influences many.
All of which are beyond the company's control that may influence the accuracy of the statements and the projections upon which the segments.
Such statements are based factors that may affect the company's results include but are not limited to the risks and uncertainties as discussed in the risk factors section of the annual report on Form 10-K, and quarterly report on Form 10-Q filed with Securities and Exchange Commission.
Forward looking statements are based on the information available at the time those statements are made.
<unk> good faith belief as of the time with respect to future events.
All forward looking statements are qualified in their entirety by this cautionary statement and Lincoln undertakes no obligation to publicly revise or update any forward looking statements, whether as a result of new information future events or otherwise after the date thereof, now I would like to hand, the call over to Scott Shaw, President and CEO of Lincoln Educational service.
Scott. Please go ahead.
Thanks, Michael and good morning, everyone. Our transform our transformative growth strategy continued to generate exceptional results during the third quarter as revenue increased 10, 5%.
After realizing 18% student start growth during our second quarter student start growth during the third quarter surpassed 7%. These topline results exceeded our expectations and as Brian will review during his prepared remarks, we are increasing our guidance for the full year.
Our topline growth was achieved through student growth a three percentage point increase in average student population and a six 8% increase in average revenue per student.
Continued rollout of our hybrid instructional platform, which we call link and 10.0 also contributed to increasing our average revenue per student growth.
As we've discussed with you in the past our hybrid model combines hands on learning at campus facilities, while delivering a greater component of classroom work through online instruction. It enables our students to work part time or manage other commitments, while they pursue their Lincoln education and is specifically designed to help a higher percentage of students to graduate.
The hybrid model also standardizes our programs across campuses with on campus time slots of morning afternoon, and evening courses and with consistent start dates that provide greater flexibility efficiency and overall capacity at our existing campuses.
The rollout of our hybrid model and most campuses coupled with adding existing proven programs at select campuses positions us to drive higher campus in company profitability in the long term once we complete our transition in the model excuse me our transition to the model in 2025.
During the third quarter.
Our exceptional student start growth was driven by the increased number of leads generated by our marketing programs. This lead generation is occurring across the board both geographically as well as from our curriculum perspective and has been accompanied by a healthy conversion rate of those leads what we find particularly encouraging is that this lead generation student start growth is <unk>.
Really all organic there is little if any contribution from recently started programs since their launch dates were delayed due to later than expected regulatory approval.
Once our recent initiatives start to contribute to students starts we are very well positioned to continue student start growth.
During the third quarter, we saw a shift in the marketplace beginning to take hold from both a geographic and curriculum perspective, we are experiencing increased demand for Lincoln's programs and this increased demand is occurring despite a continued very low unemployment rate and exceptional GDP growth <unk>.
It appears that more and more people are interested in acquiring real hands on skills that lead to solid careers. There are a number of factors driving this increased interest.
Many people are questioning the value of a four year degree and the accompanying that many students essentially do graduate with a four year degree don't have the marketable are applicable skills that today's employers demand at.
At Lincoln, we strive to provide strong ROI programs that lead to solid in demand careers and we deliver these programs in a supportive environment that focuses on graduating and placing students.
Also the careers, we offer will most likely not be replaced by artificial intelligence or be offshore, adding security to our students career decision.
With our country's growing need for middle skills trades people, we feel good about our positioning and long term growth opportunities.
We also believe that being aligned with industry also drives interest in our programs for example in the past year, we have launched to Tesla program, one in Denver, and the second in Columbia, Maryland, and Nashville, We launched our first specialized training program for truck OEM Peter Bill.
Both companies approach Lincoln since we are known for quality graduates in our ability to be a strong partner focused on helping our students while supporting each company's specific needs.
During the second quarter of 2024, we will start to layer on starts at our new Atlanta campus as well as the first programs developed under our replication strategy.
Further out our new lease in Nashville gives us twice the space that we have at the new Atlanta facility.
When we opened the new Nashville facility in the first half of 2025. It will include two new programs. In addition to the current Nashville market offerings.
During this quarter, we purchased a new facility in Levittown, Pennsylvania, which when opened during the first half of 2025 will house our programs serving the Philadelphia market. This new facility gives us the space to expand our offerings in Philadelphia beyond automotive to include HVAC welding and electrical.
And the facility has space to add additional programs or partnerships.
Brian will review our strategy regarding the purchase of this facility and our near term plans during his comments.
We remain on track to achieve our objective to develop 10, new programs under the replication strategy.
These programs are already in some stage of development and will begin enrolling during 2024.
Remainder of our planned to be opened during the first half of 2025. They are all deployed a link and 10 point old platform and we remain on target to realize our three year profitability goals for each of these 10 programs.
At the same time, we continued to pursue our strategy of opening one new campus per year.
That will come.
Atlanta will welcome our first classes during the second quarter of next year and last Friday, we announced our plans to expand into the Houston, Texas market. Our first campus in Houston will be located in the heart of one of Houston busiest commercial corridors and strategically located for both students convenience and maximum graduate exposure to area hiring.
<unk> the new Houston campus will represent our second campus in Texas and will allow us to take advantage of the country's fourth largest employment market the.
The new campus will feature an approximately 100000 square foot training center offering career opportunities in the auto diesel welding HVAC and electrical fields of the $2 4 million jobs are expected to become available nationwide in these industries by 2032 over 290000 of those jobs are.
Projected to be in Texas.
Over the next two years as we layer on new campus openings and the program replication strategy, we consistently expand our opportunities to increase overall student starts.
While we remain focused on continuing the impressive organic start growth at existing programs, our strategy and its successful execution fueled our long term optimism for Lincoln to repair increasing number of students for good paying rewarding and a central careers, while helping American corporations closed their skills gap.
Our new campuses program replication strategy, the Lincoln 10.0 platform and improving the efficiencies and effectiveness of our financial aid programs are requiring as we've said in the past increased investments. During 2023. Some of these initiatives require us temporarily to double up on processes. So that we maintain our high level of <unk>.
Service during the third quarter. These investments were primarily recognized in SG&A expenses and supported our strong student start growth and higher lead generation, Brian will provide more details as well as the progress we have made on bringing these increases down during his remarks.
Recently, the department of Ed issued its long awaited updated rule on gainful employment rule establishes specific debt to income percentages that educational programs must achieve the data used to establish the percentages won't be available until July one of next year, we have some small programs that might be impacted by the rules implementation.
Which wouldn't come until two years after the July one 2024 data setting date.
We expect that others with a larger presence in the curriculum is most likely to be impacted by the rule setting will challenge the rule, which has been successfully done in the past. The bottom line is that we are required to take yes, I'm sorry. The bottom line is that if we are required to take some action. We don't expect the action to have much impact on our EBITDA growth.
Programs potentially impacted arent part of our replication strategy, our new campus development plans.
2023 is shaping up to be a very strong year for Lincoln and we are positioned to continue our growth in 2024 and beyond.
We should start to see improvement in our operating efficiency by the second half of next year, but we expect to continue to make investments in replicating programs and opening up new campuses for the foreseeable future.
Interest in our programs and the new hybrid teaching model is quite strong and employers continue to face increasing challenges when it comes to finding trained employees at the same time I noted earlier in my remarks, how we are seeing an increased number of prospective students looking for alternatives to four year College are strong graduation, and placement rates provide.
Excellent reference points, and our balance sheet, which has never been stronger as enabling Lincoln to expand our programs and locations, which will create long lasting benefits to our students. Our graduates are instructors, our corporate partners and increasingly returns to our shareholders.
I also want to announce that we will be hosting a virtual investor day from our new Atlantic campus sometime in the first half of next year more information on this event will be made available at the beginning of the new year.
Now I'd like to turn the call over to Bryan. So he can review some of our financial highlights during the quarter.
As our as well as our increased guidance Brian. Thanks.
Thanks, Scott Good morning, and thank you for joining our third quarter earnings call before I begin my prepared remarks with with veterans day being celebrated a few days or like to take a moment to thank our veterans our students alumni and instructors who have sacrificed and serves to protect our great nation.
As Scott highlighted we are very pleased with our significant progress made towards our long term strategic growth plan.
With the addition of the Houston and Atlanta campuses will be expanding our footprint to 23 campuses in 2025. Moreover, the relocation of our existing Philadelphia Nashville campuses will enable us to expand our program offered offerings growing our student population and adding to our earnings.
In terms of the Philadelphia campus relocation as previously mentioned, we purchased the facility in Levittown, Pennsylvania to serve as the future campus location. We are now pursuing a sale leaseback agreements, which should enable us to recover our initial investment of $10 million and reinvest the proceeds into facility build out.
Quarterly as of quarter end the purchase price of this facility is presented on the balance sheet as assets held for sale.
Turning to the P&L results, which excludes the transitional segment, the preopening costs of our new Atlanta, Georgia campus and nonrecurring items.
As a reminder, the transitional segment includes assemble Massachusetts campus.
We have completed this assessable teach out of the final students as of the end of October.
We will continue to incur some libyan expenses through the end of the year.
Revenue during during the quarter increased 10, 5% or $9 4 million to $99 5 million. The increase in revenue was mainly driven by student start growth of seven 1% and average revenue per student growth of seven 3%.
To expand on those drivers the student start growth was mainly derived from organic programs and the increase in average revenue per student was mainly attributed to tuition increases compliance combined with the acceleration revenue recognition, particularly for students enrolled at our evening programs under our new hybrid teaching model.
Operating expenses were $96 million in line with our expectations after adjustments for non recurring items detailed there our adjusted EBITDA calculation, we reflected it in our Q3 earnings release.
The main expense increases over the prior year were instructional expenses largely due to our population growth and merit increases.
Planned increases in marketing investments, which are generating greater returns as evidenced by our flat cost per start during the quarter and a higher bad debt expense due to higher student accounts receivable. We ended the quarter with high levels of receivables due in part to our initiative to transition our financial aid process, which continues.
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Adjusted EBITDA was $6 1 million compared to $7 4 million.
Excluding nonrecurring items detailed in our Q3 earnings release.
Though 2023 is slightly behind last year. We are pleased with this result, as our growth has delivered performance that was slightly above our internal plan given our high level of investments this year.
Diluted EPS was <unk> <unk> based on $30 7 million weighted average shares outstanding.
Now turning to the balance sheet and cash flow.
We ended the quarter with a strong balance sheet with approximately $70 million of total cash and no debt outstanding during.
During the quarter, we earned approximately 900000 of interest income and $1 9 million for the nine months.
Cash used in operating activities was approximately $6 7 million.
This quarter, we experienced some delays in our cash collections, leading to a higher accounts receivable balance and the previously mentioned increase in bad debt expense in.
In addition, our income tax payments material increase in the third quarter compared to prior year, we paid nearly $4 billion more of income taxes. This year. Since we are fully utilize our federal Nols to offset our taxable income.
In terms of state Nols, we have approximately $30 million of gross Nols to utilize in 2023, and beyond which will reduce our future state tax liability.
Capital expenditures during the quarter were $17 8 million, which includes $10 million for the purchase of our Levittown, Pennsylvania facility. It also includes the Buildout of our new Atlanta campus.
Lastly, we are updating our guidance to reflect our continued strong performance in Q4, our business momentum.
We're raising our revenue outlook to be between $370 million and $375 million, we're raising the lower end of the range of adjusted EBITDA, We now expect to range between $24 million to $26 million.
We are raising our adjusted income outlook to a range between 12 million and $14 million.
In terms of student starts were increasing our projections to a range between 8% to 11% and.
And lastly, we are refining our capital expenditure outlook to range between $30 million and $33 million.
Capital expenditures guidance includes the new Atlanta build out but excludes the recently purchased facility in Levittown, Pennsylvania.
In terms of stock based compensation, we expect it we expect it to be approximately $5 million for the year in Q4 stock expense to be around 800000.
In conclusion throughout the first nine months of 2023, we have consistently achieved better than anticipated results across our key performance metrics.
Main focus on our key growth initiatives and I want to acknowledge the entire team's efforts and contributions in delivering another strong performance this past quarter.
I will turn the call back over to the operator, so we can take your questions operator.
Thank you.
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May rejoin the queue if needed.
Please standby, we compile the Q&A roster.
And our first question will come from Alex Paris from Barrington Research. Your line is open.
Please check that your line is not on mute.
And Mr. Paris, if you'd like you can please rejoining by using the call me option and we're going to move on to the next caller.
And our next.
Question will come from Steven Frankel from Rosenblatt Securities. Your line is open.
Good morning, I Wonder Scott if you can give us a little more color on the nitro.
<unk> here and starts do you think this is reflecting the fact that.
Our students no longer feel some of those inflationary pressures that we're keeping people on the sidelines.
Or is there something else going on that you think it's driving.
The changes.
Hi.
Thanks, Steven and good morning, I think it's a number of things you are right last year in the during the summer time gas prices were quite high which really impacts our students on a day to day basis, and while gas prices aren't as low as they've been maybe historically it doesn't seem to be impacting students as much there is still <unk>.
Lots of talk about inflation, but I guess, what I attributed to US there just seems to be the stronger interest overall as I mentioned in our types of programs and I think these based off of what I hear somewhat anecdotally as well as what I read out there certainly the current generation is thinking.
More speculatively I guess about college and so I think there are more people interested in doing what we do and I think more people are seeing value in working with their hands and so I think there are a number of things that are frankly, working in our favor and.
We anticipate that that should continue for quite some time, just because there is strong demand out there and you constantly are seeing articles about the need and demand for people that work with their hands. So a lot of things are certainly working in our favor that's for sure.
And then on the cost side, how are you doing in attracting and.
Retaining staff.
Yes. Good question. The good news is we're doing better our turnover in staff is down year over year. We are seeing frankly more applicants per person that we're looking for so we think that bodes well that means maybe the employment market is softening for some.
We are seeing stronger demand and more interest and things have definitely stabilized from where they were.
Okay.
That's great for me. Thank you I'll jump back in the queue.
Thanks, David.
Thank you.
And our next question will come from Alex Paris from Barrington Research. Your line is open.
And again, please check your mute button to make sure that youre not muted.
And Mr. Paris, we're unable to hear hear you if you're able to disconnect and try dialing back and using the call me feature will go to your question next.
And speakers. Please standby, we'll move to our next question.
And our next question is going to come from Eric Martin Newsy from Lake Street Capital markets. Your line is open.
Hey, congrats on the good numbers and the strong outlook I wanted to drill down on the new student starts you talked about kind of just the overall appetite for folks question, maybe the value of a four year degree just within your.
Program. So I'm wondering if you could stratify into kind of the transportation and skilled trades versus healthcare another or are you seeing equally across those two different categories.
Yes, we are actually seeing it across all of our programs. Obviously some are stronger than others, but you don't see a difference between whether it's a health care program, who are skilled trades program or an automotive program. They are all up.
Last year, which is really promising sign as well as geographically, we don't see any softening in any particular markets as well.
And then as far as the centralized financial aid.
Conversion of enrollment to start is that having some impact or not really.
Got it.
Not having the impact on our starts I mean, I think if anything we started more students as we mentioned that we anticipated. So we still are working out some bugs in that area to make that more efficient, it's not nearly where we want it to be but our objective is to make the whole process around financial aid much more user friendly for our students and their families.
And we're going to continue to work in that direction.
And Eric to highlight what Scott mentioned in our earnings release, we do disclose the transportation was up seven 6% in health care was up five 8%.
Okay I appreciate the clarification there.
The cash Brian.
We finished September at $70 million, you did say that that includes the $10 million that we spent for Latam, but you expect to get that back and then turn that into investment in levittown with the sales leaseback and if there is some atlanta build out in there, but how do we think about kind of a normalized cash.
Cash balance post the puts and takes for Levittown, and Nashville investment and remaining Atlanta investment.
Alright so.
At year end, obviously, we're going to put out.
But what our Capex is going to be which is going to be significant last year with the announcement with Houston and building out Nashville and Philadelphia.
What I'll say is for the fourth quarter, even with significant capital expenditures and like we mentioned that we're going to be looking to do a sale leaseback for it.
They get to get the purchase price for <unk>.
Our cash balance will be similar to the nine months. So it will be approximately $70 million, we're anticipating even with the capital expenditures in the fourth quarter.
Got it.
Okay and then.
The tuition.
I know, it's probably planning stages for 2024, but you benefited your revenue growth has benefited from tuition increase this year, what's the plan for next.
But we're looking at tuition increases right now there will be tuition increases it may not be across the board as it was in.
This year, but we're looking by program that ones that have significant enrollments with smaller gaps. So we're analyzing that today and we will have tuition increases probably it could be anywhere from 2% to 5%.
Okay. Congrats again on the quarter, thanks for taking my questions.
Thank you.
Thank you and as a reminder to ask a question. Please press star one one.
And our next question will come from Raj Sharma from B Riley.
Your line is now open.
Hi, Thank you for taking my questions.
Again solid performance congratulations.
Thanks Raj.
Oh sure I wanted to ask you about just sort of the overall operating margin.
How should we look at.
Given the transition to the hybrid model.
Overall operating margin increase to change going forward can you talk about that.
What you see would you expect and also related to that are the operating costs per quarter, we had higher cost per quarter. This year are we tracking to.
Your model.
And what should we see that going forward.
Sure. So I mean, certainly our objective is to move this company to a higher profitability than where we are today with getting it up to the mid teens EBITDA margin and a couple of years as we highlighted in this current year. We had some increased costs as we make some of the investments that we believe are necessary to help us achieve those.
Goals and with the new program Replications, and new campuses and as we increase our top line more we will start seeing more drop to the bottom line, but you really arent going to probably see significant amounts until the latter half of next year going into 2025.
So certainly from quarter to quarter with there could be some variances, but theres no reason why this company won't be in the mid teens from an EBITDA perspective.
In the coming years.
Great.
Your question and we are tracking towards our internal plan instructional was increase but we were budgeted to increase and the good news a lot of that was due to our increased population and merit increases and marketing actually our marketing was down from our original budget simply because of the delays in some of our raw.
Program Replications since it got delayed we cut back the marketing there, but even though we were over for the year, we're on plan with that.
As I think I've said in my prepared remarks marketing is still doing very well we have flat cost for starts so we're not paying a lot more.
We're not paying more for that incremental more students.
And should we see the operating expenses again in the mid Ninety's going forward every quarter.
Year will put out.
For next quarter, our guidance, but.
Yes, we'll still we're still transitioning to a hybrid model. So we'll still have some cost there. So the savings won't be as material for 2024, and similar with our rollout of our new financial aid model, we're probably not going to experience some savings in 2024 as well.
Got it and then just.
Following.
Just moving on.
The two campuses you get Atlanta campus and in the Houston, One could you talk about so we should start to see first quarter second quarter and the new <unk> new year would be the start of Atlanta enrollments can you give an idea of what sort of revenues and EBITDA contribution youre.
Expecting from Atlanta, and then relative to that the Houston.
Is that that's largely primarily only in auto and industrial.
School.
And is that a similar sort of.
Topline and bottom line contribution.
Yes, so basically both.
Both reflect the new model that we have for new campuses are Raj. So as we said as we lay out in our investor presentation. These campuses should ramp up to low $20 million of revenue and about $5 million of EBITDA about three years or so after opening up three three to three and a half years after open.
Being up so we anticipate that to be the same yes. They are both focused on automotive and skilled trades basically these new models these new campuses.
We've taken the best of what we've got as far as highest profitable programs in greatest demand for those marketplaces. So they really should.
Serve those areas as well and as we say.
As I, just said it will be low twenty's and revenue in about five to 6 million of EBITDA. Each once they are up and running right.
This week, we will have a new Q3 investor presentation Youll see the new updated latter model included in there for 2024, so 2024.
Yes.
Minor.
Might've growth and revenue growth.
<unk> robust revenue and you'll have EBITDA losses, which will be added back.
The first year of opening in our adjusted EBITDA.
Houston would have no revenue in next year, though that will open up in 2025.
You want to add Philadelphia is almost like a new campus at today, Philadelphia excuse me as our only campus with one program, that's automotive and we've been serving the Philadelphia market for over 60 years, when we moved to the new facility and that starts up and running in the first half of 2025, we will have the benefit of having an electrical program.
<unk> and HVAC program in our welding program as well to complement the auto and as I said, we've been in that market for 60 years. Good name name brand recognition and we know from our research that those three additional programs are in strong demand. So it's almost almost like opening up another new campus frankly in that marketplace.
Alright, great. Thank you for answering my questions.
This offline. Thank you good luck.
Thanks, I appreciate it thanks guys.
Thank you as a reminder to ask a question. Please press star one one.
Thank you.
And I am showing no further questions from our phone lines I would now like to turn the conference back over to Scott Shaw for any closing remarks.
Thank you operator, we want to thank you for joining us today and for your continued interest and support our performance through the first nine months of 2023 demonstrates that we are achieving our objectives and we remain steadfast on continuing our growth we have a dedicated team and their efforts in pursuit of excellence allow us to help our students achieve.
Their career goals, we look forward to updating you on our full year 2023 results. During Q1 of 2024 until then have a happy Thanksgiving and a safe enjoys holiday season. Thank you everyone.
Crystal actually somebody did just pop in.
As Scott was.
Closing out does he still available.
<unk>.
One moment, yes, yes.
Yes.
Yeah.
And part of me that we will have a question from Robert Popolo from Epic Partners. Your line is open.
Hi, Scott sorry about the.
A last minute entry here.
Sure.
Two quick congratulations by the way excellent excellent growth.
Two questions first.
As you look at capital expenditures.
The guidance this year, 30% to $33 million.
Can you distinguish between growth capital expenditures and maintenance capex or can you.
I don't expect <unk> will be growth, but.
Perhaps atlanta too but.
Was curious if you could.
Shed some light there.
Sure. So typically we look at 1% to 2% of revenue.
As far as what would be maintenance capex and all the rest is growth. So you can see that the vast vast majority of our capex. This year as well as what will happen next year for all focus on growth opportunities, which is why we feel really good about our growth opportunities in general because not only as we've mentioned getting good organic.
Growth, but we're going to be able to add and replicate some of our most successful programs into other markets as well as entered new markets completely like Houston. So.
We believe these are really solid investments right. So added a $33 million about $25 million is really growth related to Atlanta and program expansions.
Okay.
Great. Thank you.
Follow up question.
<unk>.
And perhaps I missed it but in previous quarters, there's been discussions about stock repurchase plans.
Authorizations, and so forth and how much had been purchased.
Any updates.
As it relates to that.
Yes sure.
<unk> was we didn't make any new purchases and as we continue to drive I think performance. Our objective is to drive the stock price up.
Through those initiatives and so to the extent, we see greater opportunity or the board decides that there is an opportunity to buy back stock, we certainly will do that.
But right now.
Using these resources to.
On.
Leave a good solid growth for our company.
Since we announced the plan to repurchase plan, we repurchased one 7 million shares for a little over $10 million.
Super Thank you very much.
Great. Thank you.
Thank you Crystal.
Thank you and thanks again.
I still wish you have a happy Thanksgiving and a joyous holiday season. Thanks, everyone.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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