Q4 2019 Earnings Call

Incomes conferencing. The next available conference specialist will be with you momentarily.

Hmm.

The Conference Center May every name please.

David Brown.

Thank you good luck on for David.

The talent global education.

Fourth quarter earnings call.

Name of your company again.

IRA A.I.E.R.A.

Thank you so much please standby.

I higher level higher level of corporate allocation expense.

Now turning to our financial services segment fourth quarter segment revenue increased 18.1% to $55 million to $53.5 million compared with the prior year Becker accounting revenue grew 8.4% and 8-K M's revenue increased 26.8% excluding special items segment operating income in the fourth quarter grew 23.3% to $16 million.

Fourth quarter business and law revenue was $66.1 million, a decrease of 11.1% or 3.7% on a constant currency basis compared with the prior year.

Despite the decrease in revenue fourth quarter segment operating income excluding special items grew 2.4% to $15.3 million.

The increase in operating income as a result of reductions and back office and administrative costs.

Our effective income tax rate from continuing operations, excluding special items was 15.1% for the fourth quarter and 16.2% for the full year.

Now turning to our balance sheet and financial position cash flow from continuing operations for fiscal 2019 totaled $226.4 million compared with $221.3 million in the prior year, our capital expenditures for fiscal 2019 totaled $64.8 million compared to $66.5 million in the prior year.

We closed the fourth quarter with cash and cash equivalents of $299.4 million and outstanding bank borrowings of $407 million.

We remain committed to maintaining a healthy balance sheet and ensuring we have ample resources to support our growth strategy.

Share repurchases remain an integral part of our capital allocation strategy and our strong balance sheet continues to allow us to pursue this.

During the quarter, we repurchased 1.7 million shares at an average price of $45.35.

For full fiscal year 2019, we repurchased 5.3 million shares for $252.9 million at an average price of approximately $47.65 per share.

I'll move to our full year 2020 outlook.

We expect 2020 revenue to increase 5% to 7%, including the impact of the encore starting acquisition.

We expect our effective income tax rate for the year to between 17 and 18%.

Earnings per share from continuing operations, excluding special items are expected to grow in the 7% to 9% range compared to the prior year also including the impact of OTO.

Lastly, full year capital spending is expected to be in the $45 million to $50 million range.

Going forward, we will only be providing specific guidance figures for the full year. As we believe this approach is better aligned with the long term view, we take in managing the business to create shareholder value.

That being said I would like to note that we are expecting more difficult earnings comparables in the first half of 2020 due to higher levels of marketing spend in the latter half of 2019 that will carry forward into 2020.

As we enter into fiscal 2020.

We are continuing to prioritize our capital deployment around investing in our core institutions and companies.

Returning capital to shareholders and evaluating disciplined strategic acquisition opportunities, all while maintaining our financial strength and flexibility.

With that I will now turn the call over to the operator for today.

Thank you, we'll now be conducting a question and answer session, if you'd like to be placed into queue. Please press star 100 telephone keypad, a confirmation tone will indicate your line is in the question queue.

You May press star two if you'd like to move your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star one.

One moment, please what we poll for questions.

Our first question today is coming from Jeff Mueller from Baird. Your line is now live.

Yes. Thank you. So I guess first I want to ask about the enrollment trends in the metals business.

I guess first focusing on the quarter.

And the trend year over year. This doesn't take was worse in meds that then it was on an adjusted basis I think it was 6% or so growth in January or the last intake and then similarly for Chamberlain I guess similar decline for the online only but the the mixed online on ground growth was was weaker than it's been in a while but then I'm hearing a lot of positives as it goes forward in terms of good academic results record apps for September and med.

New campuses and cap bumps for Chamberlain more marketing spend so just trying to understand.

Is there an explanation for why things were weaker this quarter should this quarter marked the bottom given those other factors just.

And any help there would be appreciated thanks.

Yes sure Jeff Thank you.

So let me start with med that couple of things to keep in mind. So if we look at our may semester, both new and total on the total side really that has to do with the lower student clinical weeks as those students are taking a longer time between basic science and clinical some of whom obviously were part of both AC and Ross med during the Hurricanes et cetera, but we are actively engaged with those students who.

Frankly, the data shows that it is a much more beneficial for them to those as quickly as possible as shorten that time between basic science and clinical we have a program in place with our gains and faculty and we're seeing some positive trends and positive changes, there, which gives us the confidence into the front half of 2020 and the fiscal year in terms of new students keep in mind. This time last year Ross Med did not have a permanent campus.

You know we moved there in January but as a result, some of that marketing I was certainly slowed as it's kind of difficult to have folks said the market to folks where they don't know what they are going to school. Obviously that has now changed and so if you then look at our accelerated marketing, which Patrick alluded alluded to in terms of the marketing expense in that front has led to the back half of 19 and the front half of 20 being front loaded. That's some of the reason for that is you know, there's a pretty long sale cycle into those students as they explore.

Medical school and that school. So when we look at that we obviously have visibility into the September class for med that we're confident in our revenue.

Growth projections for a format that going into a F Y 20, but certainly understand the question as it relates to that to that make class.

Moving to Chamberlain, a couple of things.

Again, obviously the July enrollment numbers are online only primarily RN to BSN talked about it before but I think there is a couple of pieces that we are actively now engaging and seeing the positive trends. So they're worth a mention here. One is obviously, we talk a lot about the <unk> pricing when we think about our advertise credit hour price, we just need and are doing a better job of communicating and better reflecting what students are actually plant Oh, excuse me paying and so while we don't want to be in the race to the bottom for the lowest lift price because we know that we view ourselves and know that we have quality you look at the end quick scores in the nineties and Thats. The case, we also want to make sure that the students understand that when we look at our grants and discounts et cetera, we really are competitive in that value for RN to BSN. So we've looked at how we communicate our pricing and our advertised credit hour. We have there also a frontloaded marketing in terms of inquiries and applications.

Specifically for online primarily RN to BSN, but across our online programs and we're seeing good trends and growth as we as we launch new programs such as the accelerated MSR.

We've improved messaging and then we're also improving persistence as we start looking at that total student across the online programs, particularly and RN to BSN again using that differentiated that we have that we have a lot of those students coming through our HTS or I should say, our employer hospital provider programs, and so being able to provide them the message around value and the improved kind of one on one advising experienced for the students, which is which is what Chamberlain. You know is known for and puts out in the marketplace and we're confident in a and moving that as we go into the fall.

Okay. Thank you and then my long preamble of a question for the first one this one of the shorter.

What does the guidance assume if anything for additional share repurchases.

Given that you bought quite aggressively this last quarter and remains an important part of capital allocation.

Sure So our guidance.

First on our share repurchases, we do feel that our shares are undervalued. We have got a good point of view or on our intrinsic value and we will continue to be opportunistic with that as we have.

To answer your specific question, we do revert more to a longer term guidance that we shared with you at Investor day about $100 million year, but again look at that more as a a floor and will continue to be opportunistic as appropriate.

But I guess, what I'm wondering is the 7% to 9% EPS growth in the guidance does that assume a $100 million of incremental share repurchase and fiscal 20, yes.

Thank you.

Thank you. Our next question today is coming from Jeff Silber from BMO capital markets. Your line is now live.

[noise]. Thanks, so much just wanted to focus on the entire portfolio I believe earlier this week Kaplan announced that they purchased a small business from you guys. One if we can get a little bit more color on that and I know there were some media speculation about potentially looking to divest Brazil. If you can comment on that as well I appreciate it. Thanks.

Yes, sure I'll start with Brazil, we obviously don't calm or comment on rumors in the market, but what I can do is tell you a little bit about how we're feeling about that business, obviously, given all of the macro headwinds there.

So first of all we've had a quarter now of our management transition our leadership change being complete it's going very well and I think that that is quite clear as we look at how that team was able to manage the cost associated with the revenue pressure that we're seeing there that that we don't control the macros.

Et cetera, and primarily that cost controls around centralized back office, obviously, we have some experience with that and in terms of the cost reduction processes, we went through and DVU and we were able to transfer that into Brazil, a in a way that did not take away from any sort of student stock service, we're seeing really good trends as it relates to distance learning since our soft launch a a little over a year ago, and then as well and if America as we look at a enrollment trends there they are very positive.

Between that and the distance learning so we feel that the the situation at the very least to stabilize obviously, there's currency et cetera are we also have a fee as that were waiting to be released but but again some of our programs. There. The majority of the high growth ones are not dependent on a on c. as to why we were we did feel it on the top line. There's no question last quarter and this quarter, we are managing to that as we move forward. So that is Brazil. Other question. Okay. Yes. So we had a medical test prep business quite small for us that we did divest up to two capline that primarily for US. It was important because of course Ross students and AC students would use that purpose to prepare for their licensing exams and being able to do that in a way that we got the ability to have those students still serviced through the Kaplan deal.

I was really what was it was good for us and it allows our financial serve our test prep team I should say to now focus purely on the financial services, which as you. All know is growing at quite a good clip. So while medical is a core for us the test prep business not not not so much on that side.

Okay I appreciate that color just one for Pat more on the guidance side.

I know you had previously used to give top line guidance and then changes in operating expense I'm just wondering on the operating expense side or on the margin side, what's embedded to get to your 7% to 9% growth in it yes.

I think we gave some.

Qualitative perspectives around from increased marketing spend but beyond that.

We're going to just provide what we do.

Okay, and then just sorry, just one more question on the quarter just looking at some of the details if I look at the home office expense, even taking out the settlement gain it looks like it was a very small number I think it's 1.2 million versus last year, a little over $9 million in the quarter is there something else going on there that we're missing I'm just wondering why it was so low this quarter. Thanks.

Thank you it's reflective of our continued offer efforts to reduce our stranded costs and be true to our commitment to reducing the 540% to 50% and we said over that 18 month, we've got about six months left on that so we're tracking right, where we need to be.

Okay. So in terms of again, I know, you're not giving specific guidance, but is that the kind of number we should expect on a quarterly basis I'm just trying to frame it.

It's a little bit lower maybe than what we expect on a go forward basis, but very representative of our ongoing focus on stranded costs.

Okay, Alright appreciate the help thanks so much.

Thank you.

Thank you. Our next question today is coming from Chris how from Barrington Research. Your line is now live.

Hi, good afternoon, everyone. Thanks for taking my questions.

First question, just starting off with eight cameras you mentioned the great growth.

Plus growth that you're seeing here, 26.8%.

Our year over year.

I don't can you break it down by region, you mentioned, the strong opportunity that you're seeing within Europe and Asia.

The different runway for growth that you're seeing within each region and then as we look at eight cams.

And then your recent acquisition.

What other opportunities are out there to round out the professional education portfolio and how should we think about in organic growth and the balance of the year and into next year.

Yeah, well, let's start with organic for eight comes as a as we mentioned we are seeing quite a bit of growth as it relates to Asia and Europe at U.S. is not growing but certainly a across those markets that tends to kind of move with the regulatory environments rates. If you think about your of all of the changes there on the Baltic nations anywhere that where there have been.

Significant issues, what we're seeing more growth and then in general as we start thinking about virtual assets and those types of cryptocurrency et cetera, and some of our subject matter experts that help align that with the Yamal and just in general financial crime concerns we were able to see good growth I think some of it also comes from I know some of it also comes from how we are seeing our conferences grow those are had record growth as we as we talked about last quarter and also this quarter I'm as we're going into F. Y 20. So we expect some continued robust growth there and I think that as again looking at organic now that we own encores financial some of that is going to be moving a cans products across other customer segments, such as in insurance mortgage et cetera that those customer bases that come to us through encores to answer your inorganic as as you know we.

We've had on Krish, but just a little over a month and so we will be spending some oh gosh time as we go into F. Y 20, it really making a use of those synergies and cross selling et cetera at between eight cans and of course financial that we're seeing great opportunities and a and synergy synergies there.

That's very helpful and my last question you had mentioned previously in the past the supply demand balance within medical and health care.

But more specifically as it relates to Chamberlain.

You mentioned, some new campuses that you plan on opening to support the high demand moving from Chamberlain to the overall portfolio beyond what you've already said.

Where should we think of where you are as far as optimizing your campus footprint and maximizing the efficiency gains that you see within that portfolio.

Yes, so starting with Chamberlain Oh, our latest campus to open a San Antonio we're recruiting for that November class, we have been talking about that for a while but that is now open and under recruit recruitments. So between that and the new programs that were offering and Chamberlain, we see a good path to growth for F Y 2020, and below beyond primarily in the online masters being celebrated MSR on a and then some of the doctorate programs that are growing.

What we always talk about and are seeing more and more as that we get greater online and growth as it relates to places where we have geographic expansion and so we expect to see that in San Antonio and the broader our region there in Texas as bad as that campus openings, we've certainly seen that in New Orleans at the Ashburn campus et cetera.

[noise].

Okay. That's helpful. Thank you for taking my questions we stand Pat.

You're welcome.

Thank you as a reminder, that is star one if youd like to be placed into question queue. Our next question today is coming from Corey Greendale from first analysis. Your line is now live.

This is logan vendor on for Cory Congrats on the quarter guys. Just had a quick one about Brazil, what should we assume is factored into the guidance from an enrollment perspective, and do you expect that you will need to continue doing more Scots chips or possibly some some price adjustments in order to keep enrollments stable and then finally, what are we assuming on currency.

I love It I'll take 'em enrollments, and then and then taking over to Patrick for for currency. So we clearly the different segments require different kind of discounting and pricing. So as we said before in terms of widen and widen online or distance learning, we do need to continue to discount to be competitive in the market, but we understand where that as we've seen it. This this quarter and manage to that quite well and as of as a result, I've got the erad enrollment numbers that are that we need. So we feel that that is stabilized across those segments and then of course, an ever Mac a weak demand we were able to to demand a different pricing because obviously that's top of the market and there we're seeing really good growth in that test, particularly in the south Palo campus, just because we have more ability to grow there as it's the newer campus out with with less enrollments. So very excited about that and some of the partnerships with a info man money at University of Sobon et cetera.

We see some good run rate there.

With respect to a foreign currency, we do think right now that the high is a little abnormally weak rather to the U.S. dollar where it has been but on a go forward basis, we haven't forecasted much improvement off of where it is today.

Okay, great. Thanks, guys.

Thank you.

Thank you Weve reached the end of our question and answer session I'd like to turn the floor back over to management for any further or closing comments.

Well. Thank you again, everyone for joining our call and as always if you have additional questions. Please feel free to reach out to me directly.

Have a good evening.

Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.