American Public Education, Inc.

Good day and welcome to today's American Public Education, Inc. second quarter 2022 results call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer session. I would now like to turn the call over to Ryan Coren, head of investor relations. Please go ahead.

Thank you and good afternoon, everyone. Welcome to American Public Education's conference call to discuss second quarter 2022 financial and operating results. Joining me on the call today are Angela Selden, President and Chief Executive Officer, Rick Sunderland, Executive Vice President and Chief Financial Officer, and Steve Summers, Senior Vice President and Chief Strategy and Corporate Development Officer. Materials for the conference call today are available under the events and presentation section of the APEI website. Please note that statements made during this conference call and any accompanying presentation materials regarding APEI and its subsidiaries that are not historical facts may be forward-looking statements based on current expectations, assumptions, estimates, and projections about APEI and the industry. In some cases, forward-looking statements may be identified by words such as anticipate, believe, seek, could, estimate, expect, can, may, plan, should, will, would, and similar words or their opposites. Forward-looking statements include, without limitation, statements regarding expected growth, registrations, and enrollments, revenue, net income, earnings per share, and adjusted EBITDA, as well as other earnings guidance, expected benefits of the acquisition of Rasmussen University, plans with respect to recent, current, and future initiatives, including with respect to synergies and headcount, and future demand or expectations for online enrollment and nursing education. Forward-looking statements are subject to risks and uncertainty that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, among others, risks related to the effects of and the company's response to the COVID-19 pandemic, changing market demands, 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, challenges with integrating acquisitions, regulatory matters, competitive pressures, and those described in our presentation, today's press release, the company's Form 10-Q file with the SEC today, and 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. This presentation contains references to non-GAAP financial information. A reconciliation between the non-GAAP financial measures we use and the most directly comparable GAAP measures is located in the appendix to our presentation and in our earnings release. Management believes that our presentation of non-GAAP financial information provides useful supplemental information to investors regarding our results of operations and should only be considered in addition to and not a substitute for or superior to any measure of financial performance prepared in accordance with GAAP. I will now turn the call over to our CEO, Angela Selden. Angie, please go ahead.

Thank you, Ryan, and thank you all for joining us today and for your interest in American public education. Today, I will begin my remarks about important initiatives and actions to build the next chapter in APEI's history while continuing to provide an exceptional return on educational investment for our service-minded students. Several important developments have occurred since our last earnings call. We will share more details throughout our remarks today. However, in summary, we have welcomed new leadership to APEI. Yesterday, we announced the new president of American Public University System, Nuno Fernandez, who is currently president and CEO of Latin America's largest OPM, Alumno, which at its peak has served 300,000 students. During his tenure at Alumno, Nuno has also served as COO, CMO, and SVP of enrollment. On Friday, we announced the appointment of Craig McGibbon, APEI's new chief information officer. Craig has deep familiarity with APEI, having been engaged as consultant for the CTO for the last 18 months. Last week, we publicly launched the search for Rasmussen University's next president after Tom Schlegel departed, and while Javier Meares, formerly president of the University of Maryland Global Campus, continues as acting president. We are also continuing our focus on expansion. Our Hondros, Michigan campus is in its final stages of approval with over 500 people planning to attend our open house and sufficient inbound interest without marketing to fill our initial cohort without having launched any additional spend. Rasmussen's accreditation visit for its Doctor of Physical Therapy or DPT program has successfully completed and we expect a candidacy report from its programmatic accreditor later this month with final approval meetings scheduled in late October 2022. And nursing leads since July 1st have increased over 40% over the prior year period at Rasmussen. This is the result of both our terminating the portion of Rasmussen's contract with Collegius, the third-party outsourcer, regarding media buying and channel execution and transferring those duties to APEI. We have also invested an additional $3.8 million in marketing behind this early success. And finally, we are executing against new business model innovation. We are pleased to announce the first phase of a partnership with a large national health provider who aims to fund nursing education for Hondros ADN RN students. Certainly, our business also faces some headwinds, which we have already begun to tackle. Namely, enrollment momentum and faculty availability in the Rasmussen Prelicensure Nursing Program. Rasmussen's enrollment momentum in Bloomington, Minnesota has been limited by self-imposed enrollment caps. As we discussed in our last earnings call, primarily due to lack of faculty availability for clinical. About 3% of Rasmussen's Q3 2022 enrollment decline can be attributed to this self-imposed cap. Rasmussen increased select clinical wage rates to ensure adequate coverage for faculty. And as a result of the prior year NCLEX scores for Rasmussen's Bloomington ADN program, Rasmussen entered into a consent with the Minnesota Board of Nursing that among things establishes the same faculty to student ratios for that program that Rasmussen had previously implemented in order to bring NCLEX scores back to the Minnesota threshold of 75%. Rasmussen's 2022 decline in EBITDA is primarily a consequence of three factors. The year over year revenue decline, an increase in the marketing spend, as I noted previously, and an increase in talent costs, which includes the increase in faculty costs, along with aligning Rasmussen's executive compensation and workforce benefits with the APEI plan. As a result, we intend to take $12 to $15 million out of our non-variable costs across the entire APEI enterprise in the next 90 days. nearly three times the original incremental year two synergy estimate that we stated prior from the Rasmussen acquisition. Our synergy expectations were initially $5 million in year one recurring and an additional $5 million recurring in year two. These actions are outside of direct academic delivery costs and outside revenue generating parts of the business. and instead are focused on realigning the organizational structure, eliminating redundancies, and optimizing certain functions. We are working to complete our realignment changes by the end of 2022 so that the results can fully benefit our 2023 operating and financial results. The limited implementation of the Deloitte version of the Army Ignite ad platform at APUS has prompted the Army to choose to move to a new portal with a provider currently serving the Air Force called BAMTEC. This cutover is currently scheduled for late August. APUS has been identified as an acceptance test partner and is working collaboratively with the new platform provider on automating some data transfer to minimize manual input required from soldiers or bases. For the second quarter of 2022, APEI's revenue was roughly $150 million, up 92% compared to the prior year period, as we added RASISN during the third quarter of 2021. We remain focused on educating the service-minded students and believe we are still well positioned to take advantage of the sizable nursing education shortage in the United States as the number one educator of pre-licensure nurses, as well as building upon our number one position with the active duty military and veterans. Turning to page four, let's discuss APUS's results in further detail. APUS saw strong net course registrations from active duty military, particularly from the Army, which was up 38% in the current quarter as compared to the prior year period, and is our largest active duty military branch. active duty military overall was up nine percent in the second quarter of 2022 compared to last year registrations for most of the other military branches were negatively impacted in q2 by the rapid pivot of those services to training and combat ready status due to the outbreak of the conflict in the ukraine overall apus experienced increased net course registrations of one percent in 2Q22 compared to 2Q21 as our veteran and non-military saw a pullback consistent with softness in the broader higher ed market in the first half of this year. Our status as the number one provider of higher education to active duty military has effectively provided an offset to the broader market conditions and allowed for an overall net registration increase year over year. To help us enhance our focus on continued growth and execution, As I mentioned before, I'm very pleased to announce the hiring of our new president at APUS, Nuno Fernandez. Nuno comes to us from Alumno where he was president and CEO of the largest OPM in Latin America and among the top three globally in number of managed students. During his almost 10 years at Alumno, the last three of which he was president and CEO, he was instrumental in driving growth from approximately 100,000 students in 2012 to almost 300,000 students in 2020. His simultaneous focus on student success significantly improved student retention and graduation rates to some of the best in the region. We believe Nuno's strong background and experience make him a perfect fit for APUS, and we are excited about the growth trajectory APUS can accomplish under his leadership. We would also like to thank Dr. Kate Satz for her 18-year commitment to APUS and her service during the last 10 months as acting president of APUS while we completed this search. Separately, at the end of August, the Army IGNITE-Ed portal, the system soldiers use to request tuition assistance, will be transitioned to a new provider while simultaneously receiving an upgrade to the system. Even as the Army IgniteEd portal has improved throughout 2022, Army recently announced that it will again make a change and transition to an upgraded Army IgniteEd 2.0 portal for courses beginning on or after October 1, 2022. BAM Technologies will be the new service provider of AIE 2.0, and the expected go-live to the upgraded system is August 23rd. While this represents a second transition in 18 months, We believe that there are several important and significant differences between the upcoming transition versus the complications experienced during the 2021 transition for IBM's platform to the current Deloitte-hosted platform that we'd like to point out here. First, BAM Technologies is a proven service provider with significant experience working with the military. It has been operating a similar system for the US Air Force, which it has been servicing for over 15 years. Unlike during the transition in 2021, where there was zero overlap between IBM and Deloitte during this process, Deloitte will remain on contract through March 2023 to facilitate the transition and could continue as a service provider should any unforeseen issues arise. Unlike the 1.0 Deloitte system, which required quite a bit of manual intervention on the part of the Army Education Service Officers on bases, We have been informed that those manual interventions have been eliminated in the 2.0 system and we welcome this clear upgrade. We can tell you that these manual interventions accounted for roughly 30% of all issues encountered in the 1.0 system. Lastly, in conjunction with the transition to 2.0, APUS has been designated as a user acceptance test or UAT partner. This affords us the ability to see the system prior to rollout and work closely with BAM Technologies to help contribute to ensuring the system operates as intended and the transition is smooth. Overall, we are cautiously optimistic about Army and BAM Technologies' ability to implement the 2.0 system in a timely manner with as little disruption as possible and see the move away from the previous provider as a positive for Army soldiers and APUS alike over the longer term. Looking ahead, we still expect to be impacted by the tight labor market on the non-military registrations, although we anticipate the impact will be offset or mostly offset by strong continued military growth. Thus far, all branches of the military, except for Coast Guard, are up year over year through the first two months of the third quarter. Overall, we anticipate net course registrations at APUS of between 0% to plus 5% in the third quarter of 2022, versus a difficult third quarter 21 comparable period when the Army portal resumed functionality at that time last year. This translates to a range of 83,100 to 87,200 net course registrations in the third quarter of 2022. It is important to note that this forecast does not take into account any potential impact related to the transition to the new service provider and upgraded technology of Army IgniteEd 2.0. Now let's turn our attention to Rasmussen on page five. Performance at Rasmussen and 2Q was not where we expected it to be and was impacted by a few factors and reflects some challenges in specific markets. In particular, our northern region and more specifically our metro Minneapolis market experienced sharply lower nursing starts. As we discussed earlier in my remarks during the last quarterly earnings call, Our nursing enrollment momentum in the northern region was affected by the lack of available adjunct faculty to support in-person clinicals. As a result, we implemented self-imposed enrollment caps to ensure we had the appropriate faculty to student ratios, which resulted in lower nursing starts and caused nursing enrollment to contract to 8,200 in the second quarter of 2022 as compared to 8,300 in the prior year period. or down 2%. If we were to exclude the impact of our self-imposed enrollment cap, we would have generated positive overall nursing starts year over year. We are working diligently to solve the adjunct faculty shortage, including by introducing variable wages for challenging clinical time slots, and have seen increased interest from adjunct faculty. Rasmussen will work to continue optimizing the dynamic wage model and ensure faculty shortages don't arise in the future. In addition to the faculty challenge, a few of Rasmussen's ADN program locations continue to experience first-time NCLEX pass rates below applicable state thresholds, which we believe was in large part a symptom of instruction having moved online for a number of months due to COVID. We'd also note that this was not a phenomenon unique to Rasmussen as NCLEX first-time pass rates across the country dipped in recent quarters. This is also a key reason why we are metering enrollments in Minnesota so we can deliver on state NCLEX outcomes. Spending a moment on grassroots and non-nursing, enrollment saw an 11% decline in the second quarter compared to the prior year. This decline was less than what we experienced in the first quarter but still down compared to our pre-licensure nursing and active duty military registrations, which remain fairly well insulated from the broader higher education trends. Despite this, there were a few bright spots to report on the non-nursing side, such as increased year-over-year starts in our School of Design, up 15%, our School of Education, up 12%, and our School of Technology, up 9%, albeit each from a small base. Overall, however, the continued tight labor market and higher wages impacted prospective student interest levels during the first half of the year, leading to RASISN non-nursing enrollment performance that we believe is generally in line with the broader private for-profit education sector. Shifting to changes in the business and as indicated during last quarter's call, we made a strategic decision shortly after the acquisition of RASISN to further our strategy by centralizing our marketing and enrollment services at Rasmussen. Part of this shift was migrating the work managed by the third-party provider Collegius to our in-house marketing operation, which began to take effect July 1st. We began the migration earlier than expected, and we are already seeing some early signs of positive results along with increased efficiency. With these early results, we have increased our marketing investment by $3.8 million at Rasmussen, predominantly focused on pre-licensure nursing in our growth market. While this transition will benefit us with lower marketing costs, it was done so that we have full control of our marketing and enrollment operations. Results through the end of July are showing good momentum, and these efforts have begun drawing higher lead volume overall, with nursing leads up 40% quarter to date versus the same period last year. With the use of more advanced capabilities, we have greater control over optimizing our media across geographies, programs, channels, and audiences. Early signals show an increase in capturing more demand from our primary markets, and we are purposefully optimizing for our highest LTV programs on campus nursing. Additionally, our campuses are showing increased interest in nursing since these activities were brought in-house. We set an ambitious internal goal for new starts in the fourth quarter and are tracking towards meeting these targets. Based on our current plans, we anticipate that Rasmussen's nursing enrollment will turn positive by the second half of 2023. In addition to the marketing change, since our last earnings call, longtime CEO Tom Schlegel has departed. We thank Tom for his service to Rasmussen and APEI. As we have officially launched the search for the new president of Rasmussen, early views of prospective candidates are encouraging, and we are particularly focusing on finding a growth-minded leader to help Rasmussen prioritize its core programs and reestablish enrollment momentum, especially in our highest LTD nursing programs. In the meantime, the Rasmussen business is in good hands with Javier Meares, as its acting president until the permanent position is filled. Javier has extensive experience in higher education with over 45 years driving innovation and change in campus-based and online modalities, including eight years, most recently, as president of the University of Maryland Global Campus. For the third quarter, our guidance is for Rasmussen's nursing enrollment to be down approximately 8%, and non-nursing enrollment is expected to decrease by about 8% in the third quarter as well. compared to the prior year period due to general student behavioral trends in the United States. Let's turn our attention to Hondros on page six. At Hondros, we are seeing positive enrollment momentum. Enrollment is up roughly 3% to 2440 in Q22 versus the prior year period, and we are expecting a 4% increase in the third quarter of 2022. While we have seen some slowing down in the growth trajectory, This is partly caused by COVID, as we saw almost 2% of students delay their resumption of classes after the July 4th holiday because of contracting COVID. The cost of tuition remains the number one reason prospective students don't enroll in our Hondros program. And this is why we are very pleased that we have signed a phase one agreement with a large national healthcare provider to facilitate providing access and education to more students through an arrangement of tuition sponsorship in exchange for a multi-year work commitment. As we begin to operationalize this program, we expect normal course challenges that are excited about this inaugural partnership and are encouraged by conversations we are having with other prospective partners. These partnerships will be beneficial to all parties as they enhance enrollment growth at our nursing programs, help fill the workforce shortage in the healthcare system, and provide reduced education costs plus an entry into a career with a specified employer for our students. Hondros has also seen early interest from prospective students in the Detroit location despite no marketing effort other than the Michigan Board of Nursing unexpectedly publishing our new location on their website. We have submitted all approval requests and are awaiting responses from the state nursing board to get our first cohort signed up at the brand new campus. The strong continued interest at the Indianapolis campus and now the strong early interest in Michigan shows that demand is present for our high quality pre-licensure offerings and measured expansion should lead to the scale necessary for Hondros to return to strong profitability. For the third quarter, we expect Hondros enrollment to be 2,410 students, up 4% from the prior year period. Finally, I would like to briefly mention that at graduate school, we continue to make progress in our effort to reposition and turn around that business and position it to be API's platform for career learning and workforce training. I would now like to turn our call over to Rick Sunderland to review our second quarter results and third quarter outlook in further detail.