Perdoceo Education Corporation

Good afternoon and welcome to the Prodocio Education Corporation third quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press store then to. Please note this event is being recorded. I would now like to turn the conference over to Wyatt Turk. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us for our third quarter 2021 earnings call. With me on the call today is Todd Nelson, President and Chief Executive Officer, and Ashish Gia, Chief Financial Officer. This conference call is being webcast live within the investor relations section of ProdocioEd.com. A webcast replay will also be available on our site, and you can always contact the AlphiR group for investor relations support. Let me remind you that this afternoon's earnings release and remarks made today include forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934. These statements are based on assumptions made by and information currently available to Prodocio Education and involve risks and uncertainties that could cause actual future results, performance, business prospects, and opportunities to differ materially from those expressed in or implied by those statements. These risks and uncertainties include but are not limited to those factors identified in Prodocio's annual report on Form 10-K for the year ended December 31, 2020, and subsequent filings of the Securities and Exchange Commission. Except as expressly required by the securities laws, the company undertakes no obligation to update those factors or any forward-looking statements to reflect future events, developments, or change circumstances, or for any other reason. In addition, today's remarks refer to non-GAAP financial measures, which are intended to supplement, but not substitute, for the most directly comparable GAAP measure. The earnings relief that accompanies today's call contains financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP and non-GAAP measures is available within the Investor Relations page of the company's website. With that, I would like to turn the call over to Todd Nelson.

Todd? Thank you, Wyatt. Good afternoon, everyone, and thank you for joining us on our third quarter 2021 earnings call. I'd like to begin by thanking our faculty, student support staff, and all of our employees for their hard work, dedication, and diligence in serving and educating our students. In general, we are pleased with our third quarter results, during which we made adjustments to our marketing and admissions expenses while continuing to prioritize resources for technology and relevant student support processes that we believe enhance student experiences, retention, and academic outcomes. For the quarter, we reported net income of $27.8 million, or $0.39 per diluted share, while adjusted earnings per diluted share, which includes certain significant and non-cash items, was $0.45. It was also a busy quarter on the acquisition front. We completed two acquisitions, Digital Crafts, which closed on August 2nd, and more recently, Hippo Education, which closed on September 10th. Digital crafts provides individuals an opportunity in the technology area through reskilling and upskilling courses within the areas of web development, web design, and cybersecurity. HIPPO Education is a provider of continued medical education and exam preparation for medical professionals. These two recent acquisitions have significantly expanded our non-degree portfolio of professional development and continuing education offerings. Supported by our existing university operations, we believe these businesses will have several opportunities to grow their revenue. Ashish will provide more details around these acquisitions shortly, but for now, let us go back to our operating results. Some of the key takeaways and highlights for the quarter and year-to-date results. First, as discussed last quarter, we believe the prolonged pandemic and its resulting safety measures, as well as the macroeconomic and governmental responses, has impacted overall student engagement. we continue to see some student pause their academic programs or defer their decision to begin classes during the current quarter. We are cautiously optimistic that these trends will reverse and are already seeing some positive signs for our September and October sessions. Second, beginning in the third quarter and aided by data analytics, we made adjustments to our marketing strategies to further improve our focus on identifying prospective students who are more likely to succeed at one of our universities. We believe these adjustments, along with the enrollment trends I just discussed, will impact near-term student enrollments. However, in the long run, we believe these marketing adjustments will further enhance student experiences, retention, and academic outcomes. Third, the team did an excellent job in managing overall expenses, responding in part to recent student enrollment trends while continuing to prioritize resources for our student serving functions. Fourth, we continue to focus on our corporate partnerships programs at both institutions. And as previously mentioned, CTU's enhanced corporate partnership team is fully in place and is already engaged with employers to leverage their tuition assistance programs and provide a debt-free education to their employees. With that said, total student enrollments at September 30th, 2021 decreased by 0.9% compared to our September 30th of the prior year. At CTU, total student enrollments increased 7.5%, primarily due to its academic calendar redesign. As a reminder, CTU implemented a redesigned version of its academic calendar in early 2021, similar to what AIU implemented a few years ago. At AIU, total student enrollments decreased by 11.6%. We believe this decline was attributable to the factors I discussed earlier. Triton University, which primarily serves active duty and military-affiliated student populations, continued to be impacted by the transition of the Army education and registration portal and the subsequent technical challenges with the portal. Triton is working with student individually to minimize confusion and uncertainty. Before turning the caller to Sheesh, I'll now touch briefly on investments in technology and other student-facing functions. Our investments in machine learning and data analytics for the third quarter was largely a continuation from previous quarters. as we further expand their use across academics and advising functions. We also began a multi-year projection to implement enhancements to our student technology infrastructure during this quarter. This includes several upgrades to our mobile platform and virtual campus, as well as a redesign of our digital tool sets and technology that are utilized by our faculty and student support teams to serve and educate students throughout their academic life cycle. We are confident that these upgrades will further enhance student experiences, especially for our non-traditional adult learners, while driving efficiencies within the business. With that said, I would now like to turn the time over to Ashish for a deeper review of our operating performance in quarter. Ashish?

Thank you, Todd. I will now review our third quarter results and then discuss our balance sheet, capital allocation, and 2021 outlook before handing the call back to Todd for his closing remarks. Please note that all comparisons I discuss are versus the comparative prior year period, unless otherwise stated. Before I discuss our operating results, a quick note regarding year-over-year comparability and the operating income adjustments. First, operating results for AIU reflect the digital crafts acquisition commencing on August 2, 2021, and the operating results for CTU reflect the HIPPO acquisition commencing on September 10th, 2021. Second, as previously discussed, we no longer include adjustments for any expenses related to closed campuses when presenting adjusted operating income or adjusted earnings for diluted share because these expenses are no longer material. Third, we are also now adjusting for legal fees associated with certain matters All prior year period amounts have been recast to maintain comparability. And fourth, AIU's operating results are fully comparable to the prior year quarter as it relates to the Trident acquisition. With that said, let us begin with an overview of our operating results. Third quarter operating income was $37.9 million as compared to $32.1 million. Adjusted operating income, which excludes certain significant and non-cash items, and which we believe is more reflective of the underlying operating performance, increased 28.4% to $46.3 million for the quarter versus $36.1 million in the prior year. Net income for the quarter totaled $27.8 million, or $0.39 per diluted share. Adjusted earnings per diluted share, which again we believe is more reflective of the underlying operating performance, was $0.45 for the quarter as compared to $0.35. The improvement in adjusted operating income for the quarter was primarily due to the revenue increase at CTU as well as lower marketing and admissions expenses as compared to the prior year, which more than offset lower revenues at AIU as well as increased employee-related healthcare expenses. Now for some additional details surrounding our third quarter 2021 results. Revenue for the quarter increased to $174 million as compared to $169.1 million, with the revenue increase at CTU partially offset by the decline at AIU. As it relates to our segments, total student enrollments for CTU increased by 7.5% as of the quarter end, while third quarter revenue increased 5.9% to $104.8 million. Revenue and enrollment comparability were positively impacted by the academic calendar redesign. Operating income for the quarter grew 24.9% to $41.2 million due to revenue growth as well as lower marketing, bad debt, and admissions expenses. Turning to AIU. Total student enrollments as of the quarter end decreased by 11.6%, while revenue decreased by 1.6% to $68.9 million for the quarter. However, lower marketing and admissions expenses more than offset this revenue decline and resulted in operating income increase of 51.2% to $8.3 million for the quarter. In summary, we do expect total student enrollments to be impacted in the short term for the reasons Todd discussed earlier. And as a reminder, there is typically a lag impact on revenue from changes in total student enrollments. Moving on to corporate and other. Third quarter operating loss was $11.7 million compared to $6.4 million in the prior year quarter. This increase in operating loss was mainly due to legal fees associated with acquisition efforts and the responses to the Department of Education relating to the loan forgiveness applications by former students. Please refer to the disclosures regarding borrower defense to repayment in our 10-Q that was filed this afternoon for additional information on this matter. Now turning to income taxes. For the third quarter, we recorded a provision for income taxes of $9.6 million. This resulted in an effective tax rate of 25.6%. As a reminder, we began making quarterly estimated tax payments in the second quarter of this year and expect to continue doing so each quarter moving forward. Finally, we expect that for full year 2021, our effective tax rate will be between 26% and 26.5%. This full-year estimated rate is negatively impacted by the tax effect of stock compensation, increases in tax reserves for uncertain tax positions, and the tax effect of expenses that are not deductible for tax purposes. Now to our balance sheet and liquidity. Year-to-date net cash provided by operating activities was $144.2 million versus $137.8 million in the prior year. This increase was primarily driven by revenue growth at both CTU and AIU for the current year to date. We ended the quarter with $481 million of cash, cash equivalents, restricted cash, and short-term investments. This represents an increase of approximately $70.6 million over year-end 2020. Key drivers of cash through the third quarter were positive cash flows from our universities, which were partially offset by cash outflows related to federal income tax payments, capital expenditures, and the acquisitions of digital crafts and HIPAA education. Let us take a minute to discuss our acquisitions. As Todd mentioned, these acquisitions expand our educational offerings that provide upskilling, reskilling, continuing education, and exam preparation opportunities. The initial cash consideration for digital crafts was $16.25 million. For the trailing 12 months ended September 30th, 2021, digital crafts had unaudited revenues of approximately $7 million. The initial cash consideration for HIPPO education was $42 million. For the trailing 12 months ended September 30th, 2021, HIPPO had unaudited revenues of approximately $10 million. Capital expenditures for the third quarter were approximately $3.2 million, or 1.8% of total revenue. We continue to expect full-year 2021 capital expenditures to be approximately 2% of revenue as we invest in our technology infrastructure upgrade and relocate our Colorado Springs ground campus at CTU. Finally, let us discuss our outlook for the remainder of the year. We expect full year 2021 adjusted operating income to range between $167 million and $170 million from our previous range of $165 million to $171 million. This compares to adjusted operating income of $159 million in 2020 and equates to expected growth of approximately 5 to 6.9%. Adjusted earnings per diluted share is now expected to range between $1.60 and $1.63 versus $1.56 in 2020. This updated full-year 2021 outlook implies fourth quarter adjusted operating income to be in the range of $33.5 million to $36.5 million as compared to $41.3 million in the prior year quarter. which adjusted earnings per diluted share for the fourth quarter to range between $0.30 and $0.33 per diluted share versus $0.40 in the fourth quarter of 2020. Let me conclude by commenting on our balanced approach to capital allocation. We continue to focus on maintaining a strong balance sheet and adequate liquidity while investing in organic projects such as new academic programs at our universities and evaluating diverse strategies to enhance stockholder value including acquisitions and share repurchases. We completed two acquisitions during the quarter with a combined initial cash consideration of approximately $58 million, which was fully funded with companies' available cash balances. We are pursuing additional acquisition opportunities, similar insights to these two, and currently anticipate that we will complete another acquisition by the end of 2022. With respect to share repurchases, the company's current stock repurchase program, which was set to expire on December 31st, 2021, has been extended to February 28th, 2022 by the company's board of directors. At the current market price for the company's common stock, we believe repurchases enhance stock hoarder value and currently intend to pursue them when deemed prudent based on market and other conditions. As of September 30, 2021, approximately $22.9 million of the original $50 million authorization was available under the Stock Repurchase Program. Please refer to our earnings release filed today for important information about the key assumptions and factors underlying this outlook and other expectations discussed on today's call, as well as GAAP to non-GAAP reconciliations. With that, I will turn the call back over to Todd for his closing remarks. Todd?

Thank you, Ashish. Throughout the quarter, our team continued to display its steadfast commitment to serving students and educating students. We believe that investments in our student technology infrastructure, as well as our focus on serving and educating students, will further enhance student experiences, retention, and academic outcomes. We're excited about our acquisitions this quarter and look forward to further integrating them within our institutions. Thank you again for joining us today, and we now look forward to opening the line for any analyst questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And our first question comes from Alex Paris of Barrington Research. Please go ahead.

Hi, guys. Thanks for taking my questions. Hi, Alex. So, first off, Todd, you made some comments about you're making adjustments to marketing and admissions and student support and stuff. I have to admit that went kind of quickly for me. I was wondering if you could kind of go over that again and And then I have a few follow-up questions along that same line, you know, because you bring up the fact that it could impact enrollment because of these changes. There's lots of other things impacting enrollment right now, which I'll get to with my follow-up question, if I might.

Sure, absolutely, yeah. I think seeing this and also with several other education providers, with some of the I think the headwinds that have been created by the pandemic, in particular, the amount of stimulus dollars and other things available to students, what we've seen is there's been, as some of our students, a delay in their decision-making about when to actually start class. And so obviously, we thought the best thing to do since we saw that was to adjust some of our marketing expenses for that particular category of students. But as we continue to see how As we said, we started to see some positive signs in the September and October starts, and we'll continue to watch that. And if we feel there's that opportunity, we would probably start investing in that again. But for now, that was the adjustment that we're talking about.

And what is that specifically? Is it micro-targeting, spending your marketing dollars in other ways, or is it increasing the absolute dollars or both?

Yeah, I mean, it's, well, basically it's looking at the dollars and the profile of students and, you know, where you feel you're making the best investment given, again, you know, how those students are performing. And then as far as the same thing going forward, if, you know, we feel that those are performing better, then we'd want to invest more in those areas.

Gotcha. And does this mean there's going to be a ramp-up in marketing spending in the fourth quarter year over year or not necessarily?

Yeah, not necessarily. I think, again, one of the things that we're very proud of is that part of our organization, our ability to adjust and adapt quickly depending on what we're seeing, you know, going on in the external market. But, no, it doesn't necessarily mean that at all. But we've certainly adjusted, maybe.

Okay, and then softness in enrollment generally. You know, we talk about the effects of the pandemic delaying decisions for your new prospective students. It also, I think I heard you say, it sort of increases, it results in some increases in students stopping out, not necessarily dropping out, but taking a semester off, is that right?

Yeah, you know, what's happened is, again, you know, your students, your current students and potential students, if, you know, different external things are happening in their lives as far as where they are financially and other things, they may delay that decision to start. As we said before, we've continued to see good inquiry flow as well as application flow, but the actual show rate or the decision to actually start attending class, we've seen softness in that and then also some of those reenters and continuing students They're taking a little bit of time off. The good news is with our model, it's not necessarily an entire semester. It's just maybe a course or two or something like that.

Gotcha. And were there any fields of study at either AIU or CTU or both that were particularly hard hit or some certain programs standing out on the positive side?

Uh, no, I think, no, not necessarily. I think we, we saw several that, you know, um, that, that can seem very consistent and others with a little bit softer, but not, not anything that really was outstanding.

Okay. And then, uh, AIU was down. Part of that was Trident and their military exposure, uh, uh, due to the army technology portal for tuition assistance. Uh, having some troubles, and we've heard that from others in this space also. CTU is up, on the other hand, but you attribute that to the academic calendar redesign. Question is, would CTU also have been down had it not been for the academic calendar redesign this quarter?

I don't know. Ashish, do you have any information on that?

Yes, so while we have not explicitly calculated that, yes, it is impacted by the calendar redesign positively, and beyond that, a substantial portion is attributable to the calendar redesign. It is very hard to say exactly what would have happened without that, but you should attribute a substantial portion to the calendar redesign.

Fair enough, and thank you for giving us some revenue information on digital crafts and HIPPO. I know these are small ed tech companies privately held. What do they look like in terms of profitability? Are they breakeven? Do they produce EBITDA or do they take away from EBITDA at this stage?

Ashish, you want to go ahead and comment on that? I think you have that information.

Yeah, so while we, as you said, Alex, we have given some revenue information, we have not necessarily given any EBITDA information on these. For the most part, as you can imagine, these are small in size, so the EBITDA does not have any material impact or is not material to our overall operations, at least for the year 2021. Okay.

But I think we can probably say that they're at least cash flow neutral or slightly positive.

Sure, yes, it's about cash flow neutral. That is correct.

Okay, and then kind of coming up towards the end of my questions here, guidance assumptions, you know, based on the guidance that you just provided for the fourth quarter. Oh, before I get to there, you know, you did so much better on operating income, adjusted operating income and adjusted EPS in the third quarter, yet your guidance for the fourth quarter is different. probably equally below, you know, my estimates. Were there some pull-forward of revenues there? How should I think about that?

Ashish, any color you can add to that?

Yes. So, Alex, a few things here. First is on the outlook or the guidance, as you said, the CTU revenue, which was a big contributor for Q3, was positively impacted by the calendar redesign. So there's always some timings between quarters for that perspective. And then second, as we said, fourth quarter, as we pointed out, is an implied outlook. We had an original outlook range. And historically, too, we try to give a fuller outlook within the range. And we try to deliver and hopefully get beyond the outlook. But those are the two big kind of call-outs for the fourth quarter outlook.

And then just the last and related question.

do does your guidance that's implied for the fourth quarter benefit from any academic calendar redesign issues in the fourth quarter so we so in terms of the fourth quarter know the academic calendar so CTU has the academic calendar redesign there will always be some lingering effects each quarter yeah I use academic calendar is a little more stable right now So I would say for the most part, the fourth quarter will be less impacted with the academic calendar as compared to our third quarter, which was positively impacted.

Okay, that's great. Thank you for answering my questions, and I'll get back in the queue.

Thanks, Alex.

The next question comes from Dan Moore of CJS Securities. Please go ahead.

Hi, good afternoon. This is Brendan on for Dan. I just wanted to ask on stickiness or retention rates of the new students you've been bringing in since the pandemic began. Is there any discernible difference, good or bad, compared to your initial retention rates for new students compared to the two, three years prior to the pandemic?

Ashish, do you want to comment on that?

So in terms of the students that we are getting in, we have not seen any material difference in terms of the students that are coming in prior to the pandemic, post-pandemic. But as Todd and I pointed out, in general, we are seeing students take a pause from their academic programs. And they're not necessarily their students who start before or after, but in general, because of everything going on, we do see students taking a pause. But as we've also said, we are cautiously optimistic. And we do see some initial optimism on trends in the most recent months.

Okay, great. And then looking at just your cash, obviously it continues to build. Just how much is enough in your view? And then what's the downside to being more aggressive, you know, for returning cash to shareholders? Or are you mainly focused on M&A?

Yeah, well, I think, you know, again, our view of it is that, as we talked about, you know, on earlier remarks, and that is that, you know, from an acquisition point of view, there's some very good opportunities. We also feel that buybacks are also a good option for us, and that's going to be, you know, for the time being, our strategy going forward.

Okay, and then lastly, just I want to mention the all the focus on the 90-10 rule right now. Following the recent acquisitions, could you comment on where CTU and AIU are and relate to those thresholds on a pro forma basis?

No, we can't. But the best thing to do is, again, make sure that you look at our KNQ on whatever we have there. But, you know, that's not something that we typically provide prospectively.

Okay, great. Thanks.

This concludes our question and answer session. I would now like to turn the conference back over to Todd Nelson for closing remarks.

Again, we want to thank you for joining us for this quarter. We look forward to speaking again with you next quarter. Thank you.

Thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.