American Public Education, Inc.

Education, Inc. second quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. And if you would like to ask a question at that time, please press star one on your telephone keypad. I would now like to turn the conference over to Brian Pernovo, Investor Relations. You may begin.

Thank you, Sarah. And good afternoon, everyone. Welcome to American Public Education's conference call to discuss second quarter 2024 results. Joining me on the call today are Angela Seldin, President and Chief Executive Officer, Rick Sunderland, Executive Vice President and Chief Financial Officer, Steve Summers, Senior Vice President and Chief Strategy and Corporate Development Officer. Materials for the call today are available in the quarterly reports section of the APEI's website. Statements made during this conference call and any accompanying presentation regarding APEI and its subsidiaries that are not historical facts may be considered forward-looking statements based on current expectations, assumptions, estimates and projections. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Forward-looking statements may sometimes be identified by words like anticipate, believe, seek, could, estimate, expect, can, may, plan, potentially, project, should, will, would and similar or opposite words. Forward-looking statements include, without limitation, statements regarding expectations for registrations and enrollments, revenue, earnings and adjusted EBITDA and other earnings guidance, repositioning Rasmussen University for growth, changing market demands and our ability to satisfy such demands and other company initiatives, including with respect to future competition and demand, cost savings efforts. 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 today's presentation and in the release. Management believes that the presentation of non-GAAP financial information provides useful supplemental information to investors regarding its results of operations and should be and should only be considered in addition to and not as a substitute or superior to any measure of financial performance prepared in accordance with GAAP. Now I'd like to turn the call over to APEI's CEO, Angela Soden. Angela, Angie, please go ahead.

Thank you, Brian. Good afternoon and thank you for joining American Public Education's second quarter 2024 earnings call. For those of you new to APEI, our four post-secondary institutions are among the largest in the country in educating adult learners with an emphasis on educating those in service to others, namely new nurses, active duty military, veterans, first responders, and the federal workforce. On an annual basis, APEI provides online and campus-based post-secondary education and career learning to approximately 125,000 adult learners worldwide. Our mission is to power, purpose, potential, and prosperity to those in service to others. On today's call, we will cover in more detail the following good news highlights. First, in Q2 2024, this marked the seventh consecutive quarter where APEI's adjusted EBITDA has met or exceeded guidance. Overall, APEI revenue grew .9% -over-year to $152.9 million. We saw significant improvement in APEI's adjusted EBITDA, which grew 24% to $10.9 million, primarily driven by -over-year operating expense at both Rasmussen and APEI corporate. Adjusted EBITDA margin expanded by 118 basis points to .2% when compared to Q2 2023. Next, I'm pleased to report that Rasmussen has achieved its first -over-year positive revenue and enrollment quarter since our acquisition in 2021, and as we had signaled earlier this year. And finally, we are reiterating our full-year guidance of revenue between $620 and $630 million in revenue and adjusted EBITDA between $60 million and $70 million. Now I'd like to provide more detail about the results and trajectory of our education unit, starting first with Rasmussen. I'm very pleased with the progress we have made to stabilize and put Rasmussen back on a trajectory for revenue and enrollment growth and positive EBITDA. Second quarter enrollments, which we shared in our last earnings call, were 13,600, down just 2%. More importantly, third quarter enrollments, which we are sharing for the first time today, grew slightly on a -over-year basis to 13,500 students, powered by double-digit growth in our nursing and health sciences online programs, and is the positive turn in the business toward which we've been working. This is particularly noteworthy as Rasmussen decided to suspend new enrollment in its two Wisconsin campuses, which operate in small markets, while it continues to optimize the campus footprint to improve profitability and to strengthen margins. While we don't typically report starts, I think it's important to note that start growth was nearly 10% in the quarter and reflected positive -over-year start growth in both the Rasmussen online and Rasmussen campus portions of the business. The continued momentum in enrollments also corresponds with growth in revenue, where Rasmussen revenue was up 2%, which is also the first time since APEI's acquisition and is indicative of the path to continued growth and profitability. EBITDA for the Rasmussen segment was negative in the quarter, but the loss narrowed to minus $4.7 million from minus $7.1 million in the prior year period. In conjunction with the expected growth in enrollments in the second half, we continue to expect Rasmussen to move into positive EBITDA territory in the fourth quarter of 2024, which sets us up for a much stronger profit picture in 2025. In terms of student outcomes, we again produced strong end-crest pass rates in the second quarter, where 22 of 25 programs are meeting the required thresholds -to-date. Now I'd like to turn our attention to APEI's online university serving military and veterans, APUS. In 2Q24, overall net course registrations increased .7% year over year, reflecting the strong retention of returning students. Revenue at APUS was higher due to the overall growth in registrations as well as higher average revenue per registration from last year's modest tuition and fee increases. As APUS has invested in 2024 to strengthen its online curriculum, implement a faculty pay increase for part-time faculty, invest in IT infrastructure optimization, and better align its marketing spend, 2Q EBITDA margin was slightly lower year over year. Looking ahead to the third quarter, we would expect EBITDA margins at APUS to be similar given those same factors. At Hondros, as previously reported, 2Q24 enrollment remained strong. We also saw growth continue in 3Q24, with enrollment increasing more than 10% year over year to 3100 students, even against a strong 17% comp a year ago. Demand remained strong for both the PN and ADN nursing program, with the new Detroit campus performing very well. Legacy campus also contributed to growth, including Indianapolis, where we still operate with enrollment cap as a new program despite exceptional NCLEX pass rates. Starts at Hondros remain robust, and we continue to be pleased with the growth we are seeing. In 3Q24, Hondros has relocated one of its Ohio campuses and has experienced some unexpected infrastructure setbacks in that location, which we expect will result in some temporary but limited impact to enrollment at that one location. Overall, with the stabilization of enrollment and continued improvement in EBITDA at Rasmussen, at APEI we are now delivering positive growth in revenue, adjusted EBITDA, and margins on a consolidated basis. Before turning the call over to Rick Sunderland, APEI CFO, I'd like to frame where we are as an enterprise, and provide some specificity as to where we're headed. With the stabilization of Rasmussen well underway, including line of sight to continued enrollment and revenue growth from that unit, we see margins at Rasmussen shifting from negative to positive in the fourth quarter, setting the stage for 2025 and beyond. Rasmussen also expects to expand its campus footprint for the first time in over five years, once the Department of Education growth restrictions are lifted, which will allow us to expand our impact in addressing the large demand for nursing and other clinical roles in our overstretched health care system. We fundamentally believe in our vision that education can transform lives, advance careers, and improve communities. Our four education units were built for service-minded students, offering accessible and affordable higher education and training across a diverse subject. At APEI, we have carved out distinctive market positions. American Military University, or AMU, is the number one provider of higher education to the U.S. military, and has been named the top choice nationwide for veterans using their GI Bill benefits. Honduras College of Nursing focuses on educating pre-licensure nursing students at eight campuses, and is the one provider of pre-licensure PN education in the state of Ohio. Both Honduras and Rasmussen continue to tackle the chronic nursing shortage by graduating thousands of new nurses each year, where the demand for nurses is expected to grow significantly to $3.3 million in 2031, an increase of 195,000 and an additional 203,000 job openings each year when retirement and workforce exits are factored in. Overall, higher education remains a critical accelerator for anyone seeking employment in the U.S. with an increasing amount of working adult students driving the higher education market, which is expected to reach approximately $173 billion by 2030. We are proud that APEI's affordable, -to-earn focus enables students to experience a strong, lifelong return on their educational investment. With that, let me turn the call over to APEI's CFO, Rick Sunderland.

Thank you, Angie. Total revenue in the second quarter was $152.9 million, up $5.7 million, or .9% from the prior period. Second quarter revenue growth was driven by increased revenue at AQS, Honduras, and Rasmussen, partially offset by a revenue decline at graduate school, which was approximately $1 million less than our guidance. Total cost and expenses in the second quarter decreased 61.8 million, or 29.1%, compared to the second quarter of 2023, which included a non-cash impairment charge of $64 million to reduce the carrying value of our youth segment, goodwill and intangible assets, and the corresponding tax impact. Cost and expenses for the second quarter as compared to the prior period, excluding loss on leases, severance costs, and information technology transition services costs in 2024, and goodwill and intangible asset impairment charges in 2023 increased $0.7 million, primarily to increases in other technology and marketing expenses. Second quarter diluted loss per common share improved significantly, and was a loss of $0.06, compared to an adjusted net loss of $0.25 in the prior quarter, which excludes the $64 million goodwill and intangible asset impairment. For the quarter, adjusted EBITDA increased 24% to $10.9 million, compared to $8.8 million in the prior year period. The second quarter results were at the high end of guidance and represented an adjusted EBITDA margin of 7.2%, as compared to 6% in the prior year quarter. At AQS, second quarter revenue increased .7% as compared to the prior year to $77 million due to a .7% increase in net course registrations driven by an increase in registrations by military-affiliated students utilizing VA benefits, and tuition and fee increases in the second and third quarters of 2023. In total, EBITDA margin at AQS was 25%, compared to 28% in the prior year. The change in EBITDA margin was primarily due to increased information technology, employee compensation, and advertising costs. At Rasmussen, second quarter revenue was $53 million, an increase of 2%, compared to the prior year due to an increase in tuition in the first quarter of 2024, partially offset by a .2% decrease in total student enrollment. The decline in total student enrollment was driven by an .8% decrease in on-ground enrollment, partially offset by a .2% increase in online enrollment, which has the lower revenue for students as compared to the prior year period. As Nancy mentioned, the -over-year enrollment declines have narrowed in each of the past five quarters, and third quarter total enrollment is up slightly. In the second quarter, Rasmussen's EBITDA improved to a loss of $4.7 million, compared to an EBITDA loss in the prior period of $7.1 million, representing an approximate 33% -over-year improvement after adjusting for last year's goodwill impairment, this year's loss on leases. At Honduras, second quarter revenue was up 15% to $16.4 million, as compared to the prior year period due to continued enrollment growth and the 2023 tuition increase. For the quarter, Honduras' total enrollment grew .4% to approximately 3,300 students, the third consecutive record-setting quarter for enrollment. For the quarter, Honduras' EBITDA loss was a loss of $0.4 million, compared to positive EBITDA of $0.1 million in the prior year period. Revenue at graduate school, included in corporate and other, was $6.5 million, compared to $7.5 million in the prior year period. For the quarter, graduate school EBITDA loss was $0.7 million, compared to positive EBITDA of $0.8 million in the prior year period. At June 30, 2024, total cash, cash equivalents and restricted cash was $156.2 million, an increase of $11.8 million from year-end 2023. For the six months ended June 30, 2024, cash flow from operations increased 16% to $33.2 million, compared to the prior year. CapEx for the first six months was $11.4 million, and free cash flow, defined as adjusted EBITDA less capEx, with $16.6 million, compared to $9.2 million a year ago. Principle on API's term loan at June 30 was $96 million. With unrestricted cash of $130 million, API continues to be net cash positive. Additionally, there are no barrings under API's $20 million revolving credit facility, which remains fully available. Turning now to the third quarter 2024 outlook. APS total debt course registrations are expected to be flat to slightly down compared to the prior year period, between $90,500 to $92,300 registrations. We believe the softness in third quarter APS registrations is largely attributable to changes in marketing spend in late 2023, which typically has a two to three quarter lag in registration numbers. Appropriate adjustments are being made to marketing spend to correct this decline. At Rasmussen and Hondras, third quarter student enrollments are actual because of the quarterly start to these schools. At Rasmussen, third quarter on-ground enrollment decreased minus 5% to approximately 6,030 students, while total online student enrollment increased .7% year over year to approximately 7,440 students for an aggregate enrollment of approximately 13,500 students. This represents a slight increase when compared to the third quarter of 2023, and it's the first quarter of positive -over-year enrollment growth since the acquisition. At Hondras, third quarter total student enrollment increased 10% year over year to approximately 3,100 students. In the third quarter of 2024, consolidated revenue is expected to be between $152 million and $155 million. The company expects net income to common shareholders to be between a loss of $1.2 million and income of $1 million, or between a loss of $0.06 and income of $0.05 per diluted share. Adjusted EBITDA is expected to be between $9 million and $12 million in the third quarter of 2024. Our full-year guidance is unchanged with anticipated consolidated full-year 2024 revenue in a range of $620 million to $630 million. We expect our adjusted EBITDA to be between $60 million to $70 million per year. The second and third quarters tend to be seasonally low quarters, with a notable increase in adjusted EBITDA in the fourth quarter, especially as Rasmussen continues ramping in the fourth quarter. I will now pass it back to Angie to offer some closing remarks, after which we will begin our question and answer session. Angie?

Thank you, Rick. During this quarter, we continue to execute our strategic initiative to grow enrollment at APUS and stabilize and increase profitability at our other units. We are further encouraged by the performance at Rasmussen, as enrollment numbers have stabilized and had the first -over-year improvement since our acquisitions. Market fundamentals continue to support our business strategy, with increasing growth in higher education and online education markets, and significant government education benefits for military and veterans. With our nursing, we are well positioned to capitalize on this growth. As we move ahead in 2024 and continue to execute on our key milestones, I believe that we have built a foundation of a business that can continue to deliver to its students value, to its stakeholders' value, and to their communities' value for years to come. And with that, I would now like to hand the call back to the moderator to begin our question and answer session. Operator?

Thank you, Angie. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, simply press star one again. Please ensure that your line is not on mute when called upon. Your first question comes from the line of Raj Sharma with B. Riley. Your line is open.

Yeah, thank you for taking my questions. I wanted to understand a little bit, maybe get some color on Rasmussen. I see the improvement in the enrollment is now almost flat, projected to be almost flat next quarter. Where, you know, can this business, what can this business do and is capable of specifically, you know, not as much in the year on year growth from here, but really on the EBITDA margins, you know, you're getting, you had negative nine this quarter in the EBITDA margins. You know, what could these get to in the second half and more sort of longer term, fiscal 25, 26 relative to where they were, you know, when you purchased Rasmussen or what the original capability of the operation is. Thank you.

Raj, thank you very much for that question. Lang C, question with many component parts to it. So let me start by saying as we signaled, we believe 2H24 is where Rasmussen will turn to positive adjusted EBITDA. And we see line of sight to that. We're excited about that. Several of the things that we believe will have a positive effect on 2025 include the completion of our exiting of the third party IT agreement with and we expect to see meaningful savings on a full year run rate basis in 2025 as a result. And certainly as we turn the corner on the enrollment to positive momentum in the fourth quarter and in 2025, we believe that that will have a meaningful improvement in our adjusted EBITDA for each new dollar of revenue. We're now more than covering the fixed costs and that has a very significant effect on our adjusted EBITDA in 2025 and beyond. We're not presently giving guidance on 2025, but I'll turn it over to Steve with any other comments he'd like to share. Yeah,

Raj, I'll just say some context around there, right? In the industry in general, nursing schools and schools similar to Rasmussen operate in the 10, 15, 15 plus percent range. We're obviously working to improve that quarter to quarter. Angie signaled that we're going to be profitable in terms of EBITDA in the fourth quarter. So I think it's reasonable to think that over time we can get to five to 10 percent margins over the next one to two years as you think about us inside the industry. That would be very consistent. And I think as you look forward to the third, I think you asked about the second half as well, the third quarter and then the fourth quarter, right, will still be negative in the third quarter. But on a two-h basis, we would expect it to be positive overall for the second half and the fourth quarter itself. So hopefully that gives you a little bit of context around, and I think the trend that has been in place for the 12 plus months is sort of directing in that general zone.

Got it. And then could you talk a little bit about the APIS enrollment trends and is this sort of flat to down a little expected? Is that seasonal? And where do you see over all those trends in enrollment?

I'll start, Raj, and then I'll have Rick provide more detail. In Rick's remarks, he did discuss the decision in the fourth quarter of 23 to dial back investments in marketing in certain segments of APIS. And there's a two-quarter lag that we see in terms of those investments turning into enrollment. So as we approach 23, we are seeing the effect of that reduction in marketing spend, which has since been course corrected and we expect in the future quarters for that enrollment momentum to return. So Rick, I'm going to turn it over to you for more detail.

Yeah, that's exactly right, Raj. And there is that lag. So I would suggest that if things function as we expect, then we expect they will. The course correction we're making now or have been making recently will play out in the numbers over, say, a two or three quarter lag. That's just the way the business functions. We remain strong in my comments. I talked about the strength of the military affiliates, and we remain strong in the veterans community. And quite frankly, our market share in active duty military is the highest it's ever been. And so we have continued strength there. The marketing will resolve over one to two quarters, maybe three.

Yeah, I think what I'll also say is that the margin optimization efforts that were underway last year help us now understand the sensitivity around marketing spend. And so now that we understand that, we can be a lot more thoughtful in how we invest our marketing against certain channels and segments going forward. And so we've tested that and we now know where those boundaries are. And we also are seeing, in particular, growing strength in the veterans market. It's something that we've been leaning into and wanting to see momentum built. And so we're quite pleased with the results we're seeing with veterans.

Great. Thank you for answering my questions. That was very helpful. I'll take it offline. Thank you. Okay. Thanks, Rush.

Once again, if you have a question, it is star one. Your next question comes from the line of Stephen Sheldon with William Blair. Your line is open.

Hey, team. You have Matt Filick on for Stephen. Thank you for taking my questions. Wanted to start with one on the foliar guidance. I'm wondering if you could talk about some of the factors that would need to play out to push you toward the upper end of the guidance range, particularly for the revenue guide, which seems to assume a decent quarter over quarter step up in the fourth quarter based on the three Q guide. No, there's some seasonality at play there, but any additional color would be helpful.

Yeah, I'll turn it over to Rick. This is Rick.

I'll start in that energy. You can fill in. Well, if you want to push up through that range, things that we would have to go favorably would be a quicker, call it uptake on the marketing spend at APU. We talked about what has been observed as a typical lag between altering a spend, total dollars or allocation among segments, and then the resulting improvement in registrations. If that accelerates, then of course that would push revenue up higher in the range. We're seeing strength at Rasmussen. We've got the turn, a slight improvement year over year, and that momentum will continue. I think Angie commented on the strength of the start numbers, which is a leading indicator as it relates to total enrollment. That strength could accelerate or build on itself to push us up. Then you drop down to Hondros. They've got a new program that they're introducing. That's a new program. We don't have any observable experience in medical assisting as to how that enrollment pattern will ultimately play out. That could go up or go down. It's a new program. Then graduate school, we've got Steve Summers who's in the room here, who's back and while it's a smaller piece of the overall enterprise, it certainly had an impact on the Q2 reported results. Then of course the opposite could be true. An uptake of a million or two there in the federal workforce would obviously be very helpful against the range. I'll pause there and let Angie add to the comments.

I think that's a pretty good synopsis. The last thing I would say is that we passed along price increases, certain segments across APUF, Hondros, and Rathbunsen. Assuming that those price increases continue to hold without degradation in our student enrollments, that'll also play favorably in the overall revenue that we would expect for the full year.

Got it. That's a helpful call. Thank you, Angie and Rick. Then had another one on NCLEX scores. Imagine this is tougher to call, but do you have any rough estimate on when you might have all of your nursing programs with first-time NCLEX pass rates that exceed state nursing board standards? I know you continue to make good progress on that with the variety of initiatives you have underway, but any sense of timing on completely resolving those first-time NCLEX pass rate issues at the remaining campuses?

Sure. The one campus that we are paying attention to is in Illinois, where we have done significant amount of renewing of faculty. We're upgrading the curriculum that campus was operating with an older version of the curriculum that was not aligned with the next-gen NCLEX testing. We believe that the turn on NCLEX scores in Illinois will be slower than the two other remaining campuses. We are incredibly happy with the NCLEX results that we're posting now. All of our BSN programs, all of them are above the standard, all but one in our ADN program, which had been an area of challenge for us in the past, and two of our PN programs. We're just very, very pleased with the incredible turn that Rasselston has demonstrated in terms of improving its NCLEX pass rate.

Matt, Steve, let me just say one more comment to that. If you went back in terms of the number of programs that are passing today, year to date, 22 out of 25, that is now higher than it was in the prior two years before we acquired the business. We've obviously made a lot of improvement in the near term, but now we are on a path to a better result on a longer trend basis as well.

Perfect. That's great color and great to see the continued progress there. Thank you.

Your next question comes from the line of Jasper Bipp with Truist Securities. Your line is open.

Hey everyone. Apologies if anything has been answered already. I joined a little bit late from another call. Just wanted to ask about Rasselston nursing. I guess is there any update on the RU campuses from last quarter? I think there's also potentially a bill in Illinois that can help you a bit with the campus you mentioned on the last answer. Any change there?

Sure. Jasper, I'm not exactly sure what specifically you mean relative to the Florida campuses. I'll say that we're very, very pleased with the state standard for the year to date measurement period. So we're very, very pleased with the incredible turnaround that we've had in NCLEX performance in Florida. Can you repeat that? If that doesn't answer your question, is there something more specific here you had in mind?

No, no, that's helpful. I think last quarter there was basically a technical thing where you had a really old cohort that triggered some of those campuses going on probation and it sounded like everything was

moving in the right direction. Yeah, that's right. We've been really happy with the results of pushing through and putting every single program campus combination in the green.

Okay, great. The second part of the question was, I think there was a bill in Illinois that could give you some relief on a you mentioned the campus a little bit longer turnaround time there. I think that bill might have afforded you you know, time to set up the relevant thresholds. We're just kind of curious if there's any update there or that's still kind of in the works through their legislature.

Yes, that still remains in place and so that relief affords us a two-year measurement period. We certainly aren't going to wait until the end. We're working very aggressively and as I did mention, I think before you join the call here, we've done two major things in Illinois to accelerate our performance in those campuses, including basically a replacement revitalization of the several of the faculty there. And importantly, we are modernizing the curriculum. Illinois, for a technical reason, a board of nursing reason had required us to be operating with a curriculum that was older than the version of curriculum we had been offering in our other campuses. We were able to work with the nursing to allow them or have them allow us to modernize that curriculum. So now we're moving that curriculum to the next gen version, which is the version for the new exam. And we have a high degree of confidence that the new faculty, the dedicated attention from our nursing leadership and the new curriculum will allow us to see significant improvements in our Illinois campuses in the future.

Well, that's very helpful. Thanks for taking questions.

Thank you. This concludes our question and answer session. I now like to turn the call back over to Angie for closing remarks.

Thank you, operator. I'd like to thank each of you for joining our earnings conference call. We look forward to continuing to update you on our ongoing progress and growth as we continue our rapid pace of operational execution. If we were unable to answer any questions, please reach out to our IR firm MZ group who would be more than happy to assist.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect your lines and have a wonderful day.