Aspen Group Inc

Good afternoon. Welcome to Aspen Group's fiscal year 2021 second quarter earnings call. Please note that the company's remarks made during this call, including answers to questions, include forward-looking statements which are subject to various risks and uncertainties. These include statements relating to the expansion of the highest LTV programs, revenue estimates and trends, future earnings and cash flow, G&A trends, including our main Phoenix campus and other campuses, and initial operating losses at our new campuses. Enrollment growth, the impact on bookings, our estimates concerning LTV and ARPU, the impact of the COVID-19 vaccine rollout on future class starts in the fourth quarter and future accounts receivable estimates. Actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. A discussion of risks and uncertainties related to Aspen Group's business is contained in its prospective supplement in the 10-K files with the Securities and Exchange Commission and in the press release issued this afternoon. Aspen Group disclaims any obligation to update any forward-looking statement as a result of future developments. Also, I'd like to remind you that during the course of this conference call, the company will discuss adjusted net income and loss and adjusted EPS, loss per share, EBITDA and adjusted EBITDA, which are non-GAAP financial measures, in talking about the company's performance. Reconciliation to the most directly comparable GAAP financial measures are provided in the tables in the press release issued and the 10Q filed by the company today. There will be a transcript of this conference call available for one year at the company's website. Please note that the earnings slides are available on Aspen Group's website, ASPU.com, in the presentations page under Company Info. Now I will turn the call over to Michael Mathews, Aspen Group's Chairman and Chief Executive Officer.

Good afternoon. Today we delivered record revenue for the second quarter of $17 million. This record performance beat the top line consensus revenue estimate of $15.6 million by $1.4 million or 9% and was an increase of $4.9 million year over year or 40% top line growth. Achieving a $17 million revenue quarter in Q2 was a function of three key factors. First, as we reported last month, we achieved record quarterly enrollments at both universities. We had over 2000 quarterly enrollments for the first time at Aspen University. Additionally, USU delivered 649 enrollments which was an increase of 65% year over year. Last year, we kept marketing spending relatively flat throughout the 2020 fiscal year. While this year, we planned and have executed significant increases in advertising spending in our highest LTV units, which are our USU, primarily FNP business, our Aspen BSN pre-licensure unit, and our Aspen doctoral unit. So driving record enrollment growth in these three high LTV units was one key factor in the revenue beat. The second key factor is the revenue growth of our two highest LTV businesses, USU, primarily FNP, and Aspen's BSN pre-licensure business achieved a key milestone as those two businesses now delivered 50% of the company's revenue in the quarter. The third key factor of the revenue beat was favorable seasonality. Our second quarter has historically been a strong seasonal quarter for both enrollment and revenue, given students have a back-to-school mentality in the months of August through October. Course starts in the second quarter were stronger than expected across every unit of the company, which we estimate delivered over $300,000 of incremental revenue for the quarter versus our internal forecast. The result of this $17 million quarter combined with the stronger than planned first quarter performance of $15.2 million now implies a full year revenue total of $67.7 million or 38% growth. Given that consensus revenues in the second half of the fiscal year is currently $35.6 million, specifically Q3 consensus is $16.6 million and Q4 is $19 million. While the company only provides full-year revenue guidance, we believe it is important to highlight and confirm the typical seasonal effects we will see in the third quarter that are reflected in the third quarter analyst consensus revenue forecast. Accordingly, we are confirming the existing consensus revenue estimate of 16.6 million for Q3, given the usual seasonal effects we see in Q3 as it falls during the holiday months. But in addition to the usual seasonal slowdown in Q3, we're also seeing slightly lower course registrations than seasonally expected in our Aspen Nursing plus other units. And we believe COVID, what we call wave two, is partly a factor given that all the states in the country are now affected, not just some of the major metros. There's no question our predominant student demographic of RNs has been especially overwhelmed over the past few months. So this isn't unexpected. You may recall we saw a similar effect in March and April Q4 during COVID wave one, where for a six week period, we saw a slowing of enrollment only to have enrollments bounce back in May and June Q1. With the rollout of vaccines and as we move through the winter season, we are anticipating the same enrollment and course registration trend and recovery in our fourth quarter. So in summary, we saw more favorable seasonal enrollment and revenue in Q2 than expected, and we're seeing expected seasonality in Q3 with some additional slowness in course registrations due to short-term COVID effects, which net-net will deliver total revenues for the two quarters in line with our expectations. Coming back to the advertising spending discussion, this quarter was a step up in spending we have been planning. Recall that in Q1, we grew our enrollment advisor staff by 23%. from 96 EAs to 118 EAs, adding EAs across every unit of the company, completed in anticipation of this spending increase. We grew our advertising spend this quarter by approximately $700,000 sequentially from $2.5 million to $3.2 million, with the majority of the increases in spending directed to our three highest LTV units. which is USU, primarily FNP, and Aspen University's BSN pre-licensure and doctoral unit. Three important comments to make about this growth spending. First, given our business plan is to maintain the company's compound annual growth rate or CAGR over 30% for the coming years, we cannot continue an essentially flat advertising spend rate as we accomplished last fiscal year. Second, As you know, there is a lead-lag relationship between marketing spend and revenue growth. While we do not plan on seeing the benefit in the form of revenue in the current quarter, this increased investment will set up the company for strong enrollments and revenue growth in our upcoming Q4 and fiscal 2022. Third, note that approximately 25% of the $700,000 sequential advertising increase was directed to our two new pre-licensure metros, Austin and Tampa. As a result, we're making strong progress in generating leads and first-year prerequisite student enrollment in both metros. In summary, even given the $700,000 sequential advertising spend increase, total marketing as a percentage of revenues only increased to 21%. as compared to our last fiscal year average of 19%. Jumping to our operating metrics for the quarter, the company's bookings increased 34% year over year to $42.1 million, which delivered a company-wide average revenue per enrollment, or ARPU, of $15,825, an increase of 12% year over year. The company's weighted average cost per enrollment, or CAC, declined 5% on a sequential basis from $1,203 to $1,143. Therefore, the marketing efficiency ratio, or MER, representing revenue per enrollment over cost per enrollment for both of our universities remained above 13 times. Finally, the company's overall active student body grew 24% year over year, from 10,718 to 13,238, with our nursing active student body growing sequentially by just over 1,000 students to 11,442, or 86% of the company's total active student body. I'll complete my remarks today by giving an update on our BSN pre-licensure business. As everyone is aware, our Phoenix Metro campuses have grown very rapidly over the past three years. As of the end of the second quarter, we had nearly 500 students in our final two-year core program, which drives revenues of approximately $20,000 per year per student in those final two years compared to $7,000 per year per student in year one of the program. In addition, We currently have enrolled approximately 1,800 first year prerequisite students in the Phoenix Metro. In order to ensure these students have very short wait times to begin in their core program, we will be moving to double cohorts in our main Phoenix campus by the airport starting this coming February. So rather than starting 30 students into the core program each semester, as a reminder, we have six semester starts per annum. We will increase that capacity by approximately 50% to a total of approximately 45 students each semester start. This will increase our annual revenue run rate at our main Phoenix campus by approximately $1.8 million starting in our fiscal fourth quarter. As a reminder, in Q1, our EBITDA margin for our Phoenix pre-licensure business was 37%. and as Frank will walk you through momentarily, in the second quarter that EBITDA margin increased into the 40s percentile. So this incremental revenue is projected to cause that margin to increase further in the coming quarters. In fact, it's no longer out of the realm of possibility that our Phoenix pre-licensure business could ultimately reach a 50% EBITDA margin. Another way we look at this, With this incremental 1.8 million of annualized revenues in our Phoenix pre-licensure metro at a margin in the 40s, that incremental margin will nearly overcome the projected aggregate first-year operating losses of our two new metros we recently launched in Austin and Tampa. Finally, I've been receiving a number of inquiries on our pre-licensure expansion plan for calendar year 2021. We're planning to announce our next pre-licensure Metro toward the end of the fiscal year once we receive all regulatory approvals. We're very far along with this next Metro and decided for competitive reasons to hold back on announcing until we're about to begin marketing in the spring. On the corporate front, Frank has been heading up the build out of a corporate service center in our new Tampa location. This service center brings together many of the functions that support the internal operations of the company, namely accounting and accounts payable, human resources, payroll, and treasury functions, and allows for improved operational synergies and cost savings. Over the last year, we have moved a number of these positions from New York to Tampa in an effort to take advantage of the lower cost and have recruited very successfully in the Tampa area. Frank will be relocating to Tampa to work day to day with this group and to continue its progress. Finally, you may see some small stock sales in the coming weeks by Frank, and these will be to facilitate his move to Tampa. That completes my remarks. Now I'll turn the call over to Frank to review our financial results for Q2.

Thank you, Mike, and good afternoon, everyone. I'll begin by reviewing our financial results for the 2021 fiscal second quarter, providing input on our financial progress, including some commentary on the unique non-cash financial events which transpired during the quarter. To begin, as Mike indicated, revenue in the second quarter increased 4.9 million or 40% over the prior year to a record $17 million. Revenue increased 1.8 million or 12% over the prior quarter. The second quarter is typically a seasonally strong quarter for Aspen Group, and this was no exception. Year to date, we have seen consistent momentum in our enrollment. One of the major drivers of this demand is the tailwind caused by the one million nurse shortage in our economy, combined with a deficit of available seats in nursing school programs across the country. we see no evidence that this need for nurses will abate. Additionally, in Q1 and Q2 of this fiscal year, we felt enrollment tailwinds that have been augmented by the impact of COVID. In particular, two population groups, first young adults who have lost jobs in the service industry and are now looking at a new career in nursing, and come to Aspen for a pre-licensure BSN degree. Second, for nurses working on the front lines of the pandemic, an increasing number of these nurses are now looking to attain a family nurse practitioner degree and work in more controlled and higher paying private clinics. As a result, these two degree programs continue to be two of our fastest growing programs. They are also our two highest LTV programs. As Mike mentioned, combined revenues from USU, which is primarily our family nurse practitioner program, and our Aspen University BSN pre-licensure program accounted for 50% of total company revenue in the quarter. Aspen's nursing plus other and doctoral units accounted for the remaining 50% of revenue for the quarter. Given the strong demand backdrop, our effective marketing campaigns, and increasing enrollment from our two new campuses, we expect revenue from these two businesses to increase to over 50% of total company revenue in the second half of this fiscal year and continue to grow as a percentage of total company revenue in the coming years. This growth strategy of poking investment resources into these two businesses while maintaining a steady flow of students into the other core Aspen programs will, over time, deliver stronger growth in revenue and provide gross margin expansion. With our stated goal of opening two new pre-licensure BSN campuses every year over the next five years and the intention to embed FMP immersions in select metros, these programs are the principal drivers of our long-term growth. The success of these two programs will place Aspen on a trajectory to achieve higher revenue, earnings, and sustainable free cash flow in the future. Aspen Group's gross profit in Q2 increased to 9.3 million from 7.6 million a year ago. The gross margin reduction from 63% to 55% was a strategic decision to invest in marketing and build an even stronger pipeline of students across our highest LTV programs and to begin marketing spending to support our two new campuses in the Austin and Tampa markets. Marketing spend, which increased year over year by 1.6 million this quarter, was 21% of revenue, up from 17% in the year ago quarter and 18% in the prior sequential quarter. As Mike mentioned, that increase was predominantly due to the sequential advertising spend increase of $700,000. The efficiency of our advertising spend is and will continue to be a primary factor in delivering gross margin expansion over the long run. It should be highlighted that advertising spending represents approximately 95% of total marketing spend. We continue to be able to source students in our highest LTV programs below the cost to acquire a student in our traditional ASPEN nursing and other business. This creates significant leverage as these higher LTV programs grow as a percentage of total revenue, especially when you consider the lifetime value of a family nurse practitioner student is 2.6 times higher and the LTV of a pre-licensure student is 4.3 times higher than that of a traditional Aspen online nursing and other student with an LTV of $7,350 per student. As I stated earlier, we expect our two highest LTV businesses, USU, which is primarily a family nurse practitioner business and pre-licensure to increase beyond the 50% level of total company revenue in the coming quarters. As a result, we anticipate achieving gross margin levels above historical levels as our new campuses mature and revenue and profitability from these programs continue to grow. Aspen University marketing cost was 20% of Aspen University revenues for the second quarter of 2021 versus 16% for Q2 last year, while USU marketing costs equaled 18% of USU's revenues for second quarter 2021 versus 11% in Q2 last year. Total cost of revenue, including depreciation and amortization, increased from 35% to 43% due to the increased marketing spend, which I just spoke about. Instructional costs increased from 2.2 million or 18% of revenue to 3.7 million or 22% of revenue. The increase in instructional cost is due to the hiring of new full-time and adjunct faculty to support enrollment increases across both universities and faculty and campus leadership for our new pre-licensure campuses in Austin and Tampa. Aspen University's instructional costs represented 20% of Aspen University's revenue for the quarter, while USU's instructional costs and services equaled 26% of USU's revenue for the quarter. For Consolidated Aspen Group's second quarter, G&A was $11.3 million, an increase of $4.1 million over the prior year. For the quarter, this represented 66% of revenue compared to 60% in the prior year second quarter. The first and primary reason for this increase was $1.2 million of accelerated stock-based compensation from the vesting of two tranches of performance-based equity grants in the second quarter. On our first quarter earnings conference call, I provided details on AGI's four-year performance-based bonus program. The plan is structured to align leadership's performance with the interest of shareholders which is to drive sustainable shareholder value. The plan calls for the vesting of restricted shares at price target thresholds when AGI's common stock trades at or above specific price thresholds for 20 consecutive trading days. As a reminder, the total grant was 375,000 shares. Vesting is set accordingly. 10% at $9, 25% at $10, and the remaining 65% vests when the stock trades at or above $12 for 20 consecutive trading days. Two of these vesting thresholds were achieved in the second quarter. On August 31st, the $9 or 10% tranche vested at $12.78, and on September 2nd, the $10 or 25% tranche invested at $12.99. The total non-cash stock-based compensation expense reported in the second quarter, again, is $1.2 million.