American Public Education, Inc.

Good afternoon, ladies and gentlemen. Welcome to the APEI fourth quarter 2022 results conference call. At this time, all participants are in a listen-only mode, and please be advised that this call is being recorded. After the speaker's prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad, and if you would like to withdraw your question, simply press star 1 again. And now at this time, I'll turn things over to Mr. Ryan Koren, ADP of Investor Relations. Please go ahead, sir.

Thank you and good afternoon, everyone. Welcome to American Public Education's conference call to discuss fourth quarter 2022 financial and operating results. Joining me on the call today are Angela Seldon, 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 EBITDA, as well as other earnings guidance, expectations regarding initiatives to improve NCLEX pass rates and reposition Rasmussen University for growth, plans and expectations with respect to other recent, current, and future initiatives, including with respect to leadership and future competition, demand or expectations for non-military enrollment at APIS, and for 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 changes in management, our ability to meet regulatory and accredited requirements such as NCLEX pass rates and retention rates, regulatory matters such as the impact of amended 9010 rules or dependence on effectiveness of our ability to attract students who persist and are likely to succeed in our institution's programs, changing market demands, impacts of increases in labor costs and enrollment trends, the reduction, elimination, suspension of tuition assistance, challenges with integrating acquisitions, competitive pressures, and those described in our presentation, today's press release, the company's Form 10-K 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 as 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. Good afternoon, and thank you for joining our call to discuss 4Q22, and full year 2022 results for American Public Education. As you can see from today's APEI press release, we met or exceeded 4Q22 guidance for enrollment, revenue, and adjusted EBITDA results. Rick Sunderland, APEI CFO, will discuss the 4Q22 financial results in further detail and first quarter 2023 guidance during his remarks. I would like to start by providing some commentary on the state of APEI and our education units and what we see for 2023. There are three key themes. First, momentum continues to improve at three of APEI's four education units, where fully staffed, dedicated, and permanent leadership are present. For the full year 2023, we expect revenue growth, EBITDA increases and margin expansion at APUS, Hondros College of Nursing, and Graduate School USA. Second, 2023 will be a year of rebuilding at Rasmussen University to replenish leadership and drive enrollment momentum for long-term sustainable growth and profitability. Rasmussen's online total enrollments were positive in Q123 for the second consecutive quarter. However, Rasmussen's cohort-based on-ground nursing and residential health care enrollment declined in part in 4Q22 due to tightened admissions policies and enrollment caps in some markets. We believe this is having a disproportionate and negative impact on starts in both the first quarter and first half of 2023, which in turn will impact full year 2023 revenue and EBITDA. We have put several initiatives in place to help drive enrollment and reduce costs to position the university for overall future growth and success, which I'll describe shortly. However, the nursing enrollment declines will weigh on APEI's overall financial results for 2023. We believe that these enrollment challenges were in part directly related to both the unexpected departures of some key leaders at Rasmussen in late 2022, coupled with the organizational realignment during that same period, which contributed to stalling the momentum that the university had started to see with the positive starts posted in early 4Q22. While we have successfully filled some roles, we have active searches to fill critical open positions where we still have interim leadership in place. Third, despite the short-term nursing enrollment challenges at Rasmussen, we remain positive on the sector and on RASISN, which we believe is a unique asset in this sector. The ongoing imbalance of supply and demand for clinical labor continues to result in severe financial, operational, and clinical challenges for health systems. The Bureau of Labor Statistics forecasts annual shortages of over 225,000 nurses each year for the next eight years. making nursing a highly desirable field for the foreseeable future. As such, we continue to see Rasmussen as a valuable long-term asset for APEI. Further, its highly leveraged operating model provides an attractive financial profile as we grow enrollments to continue to address this chronic national healthcare need. Next, I will offer some commentary on each of our education units. At APUS, we expect revenue growth, strong cash generation, and adjusted EBITDA margin expansion in 2023. We continue to see growth in military enrollment as the Army enrollment portal issue is behind us, and we believe other institutions may have exited or are de-emphasizing Army soldier education which has been and continues to be an important student population at APUS. Additionally, we have seen green shoots in APUS's veterans and non-military net new registrations as President Nuno Fernandez and the APEI marketing team have introduced higher impact marketing initiatives at lower costs. While these non-military enrollments are still a small portion of the APUS business. This is encouraging progress. Having been on board for six months, Nuno and his new team are focused on increasing brand awareness, student retention and graduation, margin expansion through an improved student experience, selective price increases, lower advertising spend, and increased marketing efficiency. APUS's fundamentals are strong, and it remains a strong and steady generator of cash for APEI. At Hondros, under Harry Wilkins' now full-time leadership, the strong finish to 2022, with four Q22 all-time high student starts and total enrollment, provides a solid jumping-off point for accelerating growth in 2023. Hondros opened a new Detroit, Michigan campus, with an initial cohort of 30 students in 4Q22, and we expect enrollment there to increase quickly during the coming quarters due to strong demand in that market. In 2022, cost pressures based primarily on availability of and demand for nursing faculty impacted profitability, so Hondros has initiated a price increase in 2Q23 to help offset some of those costs. Student persistence is also a key focus at Hondros in 2023. We expect stabilizing costs, continued enrollment momentum, and scale to drive improvement at Hondros. At graduate school, after acquiring the business in January 2022, we built momentum throughout the second half of 22 and finished 4Q22 with high double-digit revenue growth and that solid revenue momentum is carrying into 2023. 2022 is a year of transformation and turnaround for graduate school. With much of that work behind us, we thank Steve Summers for his strong leadership as interim president while stabilizing graduate school in 2022. In January of this year, Pepe Carreras started as permanent president and Steve has returned fully to APEI as SBP of Corporate Strategy and Development. For 2023, we expect solid mid to high teen percentage growth at graduate school and improving adjusted EBITDA. Momentum is strong and we continue to position graduate school as APEI's platform for career learning. Now I'd like to make some additional comments about Ratheson. As a reminder, During 4Q22, Rasmussen began to implement an important organizational and operational realignment in an effort to achieve three things. To drive sustainable growth for both its on-ground nursing and allied health programs, as well as its fully online programs, dedicate resources more directly to improve NCLEX first-time pass rates, and reduce operating costs. Just prior to the organizational realignment, Rasmussen delivered in 4Q22 its first quarter of year-over-year new student start growth in six quarters. In addition to the several unexpected leadership departures, which we believe are having a negative impact on 1H23 starts, John Locke, who we announced as president but hadn't yet started, notified us last week that for personal reasons, he would be unable to join Rasmussen as expected. Rasmussen is now continuing its national search for a permanent leader. In the interim, Javier Meares, retired president of University of Maryland Global Campus, will continue as acting president. Importantly, Rasmussen was able to successfully rehire a 16-year Rasmussen veteran of admissions and enrollment as its chief operations officer after a four-month hiatus. He was a key contributor to driving the 4Q22 start at Rasmussen before his departure, and we can already see his positive impact again at the university. Overall, we have come to believe that many of Rasmussen's challenges over the past year can be attributed to unexpected openings in key leadership during a period of significant change. As we turn our attention to improving nursing enrollments and NCLEX pass rates, from April of 2020 until July of 2022, under the direction of Rasmussen Nursing Leadership, campuses delivered the majority of coursework and labs online due to their COVID-19 protocols. This drove in total enrollment growth to record highs due both to online accessibility for students to enroll and progress, and ease for faculty to teach and support clinicals. In July 2022, as we previously shared in prior earnings calls, when pre-licensure nursing education returned on ground, Rasmussen introduced enrollment caps in select markets, including to ensure students would have the proper clinical experience and also experienced higher costs for in-person faculty to oversee those clinicals. Initiatives were implemented in 4Q22 to improve student outcomes. First, Rasmussen launched a new Center for Educational Readiness to better align faculty and clinicals to student requirements for progression and completion. Second, Rasmussen established a Center for Nursing Excellence focused on supporting student preparedness for NCLEX first-time pass rates. In its work, the Center has gathered new insights as to the lower scores at certain campuses and has put in place several initiatives to improve scores and drive student success. The center has also introduced greater rigor to entrance exam requirements and has re-implemented on-ground proctored testing environments to ensure assessment integrity. This tightening of admissions and progression standards have, however, contributed to the near-term declines in new enrollment starts and pre-licensure nursing retention. Due to the cohort-based enrollment model, these initiatives are contributing to near-term negative impacts on enrollment, but we believe we have a long-term but gradual positive impact on NCLEX first-time pass rates. These unexpected circumstances in 1Q23 contributed to a total enrollment drop from 2022 ending enrollment of about 15,600 to approximately 14,300. The impact of this decline on APEI's 2023 revenue and adjusted EBITDA is expected to be significant, and we will not see the improvement in 2023 that we had signaled in the September 2022 supplement. As we think about the financial results of Rasmussen, it's important to understand that its considerable campus-based operations and high fixed cost structure create a highly leveraged operating model that scales both up and down. At current enrollment levels, these fixed costs are weighing on near-term profitability. As such, we are pursuing actions to improve Rasmussen's financial results, including implementing selective price increases in Q123, focusing on enrolling students at locations and in programs, including online, that don't have enrollment caps or restrictions, and continuing brand building for our online enrollment momentum. Finally, it's important to note that since APEI's acquisition of RASISN, due to the Department of Ed's imposed growth restrictions, RASISN has not yet been permitted to open new locations. Once these restrictions expire, we intend to pursue additional growth opportunities. Clearly, 2023 is now a rebuilding year at RASISN in terms of on-ground nursing, and allied health enrollment and collects first-time pass rates and profitability. I want to take a moment to thank the incredibly dedicated faculty and employees at Rasmussen who are working tirelessly on behalf of students and their success to move the university forward despite these short-term setbacks. In summary, in 2023, Three of APEI's four education units are poised for growth and margin improvement, and we are tackling near-term challenges to set Rasmussen on a path to sustainable growth and profitability for the bright future that we ultimately expect. We believe APEI remains solidly positioned to execute on its strategy and to experience future momentum. I would now like to turn the call over to Rick Sunderland, to review our fourth quarter results and first quarter outlook in further detail.