American Public Education, Inc.

Good day and thank you for standing by. Welcome to the American Public Education Report's second quarter 2021 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star and then the number one on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. Thank you. I would now like to hand the conference over to your speaker today, Mr. Rick Sunderland, Chief Financial Officer. Please go ahead.

Thank you, Operator, and good evening, everyone. Materials that accompany today's conference call are available in the events and presentation section of the API website. Please note that statements made in this conference call and in the accompanying presentation materials regarding American public education, its subsidiaries, or Rasmussen University that are not historical facts may be forward-looking statements based on current expectations, assumptions, estimates, and projections about American public education and the industry. These forward-looking statements are subject to risks and uncertainties that could cause actual future events or results to differ materially from those expressed or implied by such statements Forward-looking statements may be able to be identified by words such as anticipate, believe, seek, could, estimate, expect, intend, may, plan, should, will, would, and similar words or their opposites. Forward-looking statements include, without limitation, statements regarding the impact of recent disruption to the Army's tuition assistance programs, expected growth, registrations and enrollments, revenue, net income, earnings per share, and EBITDA, expected benefits of the acquisition of Rasmussen University, the closing of the acquisition and its timing, expected financial results for Rasmussen, future impacts of the COVID-19 pandemic, the ability to transform the student experience and deliver a return on learners' educational investment, the impact of organizational changes, the ability to maintain an attractive risk profile, plans with respect to recent, current, and future initiatives, and future demand for online and nursing education. Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including risks related to actions taken by the Department of Defense or branches of the U.S. Armed Forces, including actions related to the disruption and suspension of tuition assistance the effects of an API's response to the COVID-19 pandemic, including impacts on the demand environment as the pandemic abates, the acquisition of Rasmussen University, changes to and expectations regarding our enrollment, registrations, and the composition of our student body, and the risk factors described in the risk factor section and elsewhere in the company's quarterly report on Form 10-Q filed with the SEC today. in the company's most recent annual report on Form 10-K, and in the company's other SEC filings. The company undertakes no obligation to update publicly any forward-looking statement for any reason, unless required by law, even if new information becomes available or other events occur in the future. I'll now turn the call over to our CEO, Angela Selden.

Good afternoon, and thank you for joining our call to discuss American Public Education's second quarter earnings, along with an update on our business momentum. Today, I'll cover four topics before turning the call over to our CFO, Rick Sunderland, who will review some key financial metrics and results. First, I will provide an update on the Rasmussen transaction. Next, I will discuss momentum at APUS, including an Army portal update, sharing context regarding the continued impact the outage has had on both our enrollment and cash collections. I will also share some actions we have taken to re-accelerate momentum along with efforts underway to shore up cash flows. Third will be an update on Hondros nursing momentum. And last, I will share plans to begin providing you with a longer-term outlook so you can better measure quarterly and annual performance in the context of our strategic goals. Turning to page four, I'd like to discuss the Rasmussen transaction. We remain on track to close the Rasmussen transaction in the third quarter of 2021. As we have shared previously, Rasmussen University has approximately 18,000 students with a roughly 50-50 mix of nursing and non-nursing students and 40% of non-nursing students in health sciences. When we announced the transaction in October 2020, we shared that Rasmussen's fiscal year 2020 year-end results ending September were $256 million of revenue and approximately $40 million of adjusted EBITDA. On a trailing 12-month basis and unaudited financials through June of 2021, Rasmussen generated $273 million of revenue and $46 million of adjusted EBITDA, demonstrating continued growth and margin expansion of about 120 basis points. For the six-month period ending June 30, 2021, Rasmussen grew revenue over 9% to $137 million from $126 million, and adjusted EBITDA grew to $22 million from $18 million. Upon closing, Rasmussen will become a wholly owned subsidiary of APEI. We have worked together collaboratively with Rasmussen on integration planning, and a smooth transition remains job one so as not to disrupt Rasmussen's momentum. As we have become more familiar with the Rasmussen team, its leaders, and the business, we are extremely pleased that the institution we're acquiring is not only as originally understood but even better in many respects. We continue to explore synergy opportunities from the transaction. Our initial expectation of $5 million of synergies in the first 12 months following close now appears to be modest, and we expect we should exceed that amount. We could not be more excited to welcome Rasmussen into the APEI portfolio. Moving to page five. Let me turn to the status of the Army's new tuition assistance portal, IgniteEd, which allows enlisted soldiers to utilize their earned tuition benefit for serving our country. As we shared with you on our May earnings call, in late January 2021, the Army notified all higher education providers that its prior tuition assistance or TA system, Go Army Ed, would go offline for approximately three weeks starting on February 12th and would be replaced with the new system, Army Ignite Ed, on March 8th. Army IGNITE-Ed was indeed brought online on March 8, but experienced data transfer issues and was taken back offline thereafter. Five months after the old TA system was taken offline, the new TA system, IGNITE-Ed, was brought online on July 19. Since then, only portions of the new system appear to be operating successfully. IGNITE-Ed data requirements continue to change, and the new manual processes are flooding the Army's on-base General Services counselors. Thus, since early March, only APUS students willing to forego actual TA certainty continue to enroll with an exception to policy or ETP. As a result, Army registrations were down 26% in 2Q versus a 51% increase in the second quarter of 2020. Please keep in mind, however, that 2020 had also experienced a COVID-related increase. We have seen our July 2021 and August 2021 starts also affected, where Army enrollments were down 21% versus last July, and August enrollments will also be adversely impacted, down by approximately 4%. In addition to enrollment challenges, the portal outage has also affected our ability to collect outstanding balances from the Army through the system. Today, this balance approaches $17 million in unpaid tuition. As the largest educator of Army soldiers, we have been and continue to work with the Army to share files, test and validate the system, and continue to collaborate. We continue to work intensely to reach soldiers and help them register, many of whom contacted us previously and deferred enrolling due to the uncertainty around their eligibility for tuition assistance. As we look to September, which is traditionally one of our strongest months, we are working to generate a bounce back in registrations as soldiers look toward the fall enrollment period. We can't yet fully forecast the lingering effects into the fourth quarter. Unfortunately, what was originally explained as a transition period of three weeks and an outage period has turned into be already a five-plus month period. Despite this setback, we expect that this is a one-time event that essentially shifts many of the lost enrollments out by about a half a year. Overall, total net registrations of 82,600 in the second quarter of 2021 were down 8% versus the same period in 2020, at the low end of our guidance. However, to put that in perspective, that is still up 9% versus the second quarter of 2019, or about 4% on a two-year CAGR basis. Outside Army, military segments including Navy and several others remain strong. We have seen a moderation in demand across non-military student segments, which we believe is caused by students taking a pause in their education due to positive economic trends and a general decision over the summer to engage in other areas of life previously put on hold by the COVID pandemic. With respect to the third quarter, we expect that registrations will be down 8% to 13% to between $78,500 and $83,000, which would still be up versus the third quarter of 2019 by 2% to 8% despite the sharp impact from the portal outage. As we move to page six, Even as the Army portal issue starts to moderate and we remain optimistic that we'll return to growth at APUS, we felt compelled to take swift action to improve APUS enrollment momentum for the remainder of 2021 and to improve the foundation for longer-term growth. First, Dr. Wade Dyke, President of APUS, has asked Harry Wilkins, Hondros CEO, to assist APUS in further modernizing enrollment and admissions, much like he has done recently when he returned to Hondros to transform and grow the institution over the last two years. Harry has deep familiarity with APUS, having served from 2001 to 2013 as advisor, trustee, and CFO before beginning his first term as CEO of Hondros. Harry has deep familiarity with the APUS operating model, the systems, and the value levers to pull that can improve enrollment momentum. Harry's focus will be on both near-term growth initiatives and building a healthy, sustainable, student-centric admissions and enrollment processes. APUS has also engaged an outside consulting firm to support Harry and the entire APUS team with resources to carry out this important work. At Hondros, Harry has built a strong team and a solid operating model, so the APEI Board of Directors and I have gotten comfortable with this near-term need to split his time between Hondros and APUS. In parallel to the growth initiatives that Harry and team are working on, we have implemented cost reductions across APUS and APEI commensurate with the lower enrollment to bolster EBITDA and cash flow in 2021 and beyond. in order to make up for some of the loss of cash flow from Army. These plans include a modest but strategic reduction in headcount, along with other non-labor cost savings that are expected to result in between $5 and $6 million in savings and approved EBITDA for the balance of 2021. We are taking a very ROI-focused approach to ensure that we're investing in the most productive areas that preserve our academic and student service strengths. Last, APUS has just hired a veteran leader to head up corporate partnerships. This individual has in past roles secured meaningful corporate partnerships with some of the most widely known consumer brands. We look forward to the impact of his contributions. Let's turn our attention to Hondros on page 7, which continues to perform at a high level. Total enrollments in second quarter increased 36% to almost 2,400 students, driven by strong growth in both the PN and ADN programs. The ADN RN program has continued to perform strongly, up 45%, in part driven by the launch of our direct entry program in the fourth quarter of 2019, as well as continued momentum in our PN program, which acts as a feeder to the ADN program. For the third quarter of 21, we expect total enrollments to be up 19% to over 2,300 students versus a year ago. Hondros continues to be profitable both for the quarter and year to date. While we have seen third quarter new student enrollment soften, in part we believe due to the prospective students choosing to defer enrollment to enjoy summer activities, the early metrics for the fourth quarter show resurgence in enrollments. This term is shaping up to be the best ever with strong new student growth, which would be on top of 34% growth in the same term of 2020. Further supporting our enthusiasm for HONDRO's continued enrollment growth is that the Indiana Board of Nursing increased the cap on student enrollment at our Indianapolis campus by 100% to 60 from 30, and we'll have the opportunity to request an additional increase in February of 2022. The first cohort of students to graduate and sit for the NCLEX exam resulted in a 100% pass rate, further demonstrating the high quality of our PN program. Enrollment at our recently opened Akron, Ohio campus is now ramping, and as we shared with you during our May earnings call, we are in the process of obtaining the approvals to open a campus in the Detroit, Michigan area, which could be open as soon as 3Q of 2022. As I mentioned in my opening comments, we're enthusiastic about the continuing transformation of our company and our institutions and the closing of the Rasmussen acquisition. To help you track our performance and our trajectory over time and hold us accountable to our goals, we intend to host an Investor Analyst Day in the late fourth quarter or early in 2022 to provide you with our longer-term strategic outlook and financial and operating metric targets. As part of this, we also anticipate harmonizing our KPIs across the institutions and business units so that we're speaking consistently about those metrics. We're excited about our plans and look forward to sharing more with you in the coming months. Now let me invite Rick to discuss some key financial metrics from the quarter and our guidance.