American Public Education Inc
NASDAQ:APEI
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American Public Education Inc
Earnings Call Analysis
Summary
Q3-2023
In the third quarter of 2023, APEI reported a revenue increase to $150.8 million, a marginal rise of 1% year-over-year, with adjusted EBITDA almost doubling to $18.1 million from $9.5 million previously noted. Excluding a one-time, noncash investment loss, net income was $400,000 versus an expected loss. A standout performer, American Public University System (APUS), increased revenue by 11.2% to $76.4 million, driven by higher course registrations among military students, and achieved a 65% increase in EBITDA. Conversely, Rasmussen University saw a revenue dip of 15.4% to $52.1 million, attributed to a 10% decline in enrollment, specifically in high-revenue nursing programs. Hondros College revenue rose 20.4% to $37 million, while the Graduate School saw a 10% increase to $8.7 million. Overall, cash and equivalents stood strong at $155.2 million, despite a $99 million term loan. Looking ahead, APEI projects 2023's full-year adjusted EBITDA forecast to be approximately $50 million, affirming both commitment to educational excellence and financial health.
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Ladies and gentleman, thank you for standing by. My name is Saurav, and I will be your conference operator today. At this time, I would like to welcome everyone to the APEI Reports Third Quarter 2023 Results Conference Call. [Operator Instructions]
I would now like to turn the call over to APEI, Investor Relations, Christopher Symanoskie. Please go ahead.
Thank you, and good afternoon, everyone. Welcome to American Public Education's conference call to discuss third quarter 2023 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 Somers, Senior Vice President and Chief Strategy and Corporate Development Officer.
Materials for today's call are available under the Events Presentations section of the APEI website. Statements made during this conference call and any accompanying presentation regarding APEI and its subsidiaries that are not historical facts may be forward-looking statements based on current expectations, assumptions, estimates and projections. Forward-looking statements may sometimes be identified by words like anticipate, believe, seek, could, estimate, expect, can, may, plan, should, will, would and similar and opposite words. Forward-looking statements include, without limitation, statements regarding expectations for registration and enrollments, revenue, earnings and EBITDA and other earnings guidance, recent current and future initiatives to improve NCLEX pass rates at Rasmussen University and reposition it for growth and profitability and other company initiatives, including with respect to leadership changes, future competition and demand and our cost-saving efforts.
Forward-looking statements are subject to risks and uncertainties that could cause actual future events to differ materially from those expressed or implied by such statements. These include, among others, the risks and uncertainties related to our ability to meet regulatory and accreditor requirements, including the 90-10 rule and the impacts thereof. Our dependence and the effectiveness of our ability to attract students who persist and are likely to succeed. Federal appropriations and other budgetary matters, including government shutdown, our ability to effectively market our program expand into new markets, the reduction, elimination, suspension or disruption of tuition assistance, changing market demands, economic and market conditions, challenges with acquisitions, our ability to meet our cost-saving goals, our debt and preferred stock and other risks and uncertainties described in our presentation. Today's press release, our Form 10-K for 2022 or Form 10-Q filed earlier today and other SEC filings.
The company undertakes no obligation to update publicly any forward-looking statements for any reason unless required by law. 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 of 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, 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, Chris. Good afternoon, and thank you for joining our call to discuss our third quarter 2023 results for American Public Education. APEI's performance during this quarter reflects continued positive enrollment and positive revenue trends at APUS, Rasmussen University Online, Hondros College of Nursing and Graduate School USA.
Also, our previously announced operational improvements were completed in this quarter including improved marketing efficiency and the rightsizing of our cost structure, both now in better alignment with current levels of enrollment and revenue at Rasmussen.
With Q3 APEI revenue above the top end of the range at $150.8 million and adjusted EBITDA of $18.1 million, which exceeded the top end of guidance by nearly $8 million. We once again delivered on our guidance for revenue and adjusted EBITDA. When combined with our outperformance in this quarter, today, we are providing full year 2023 adjusted EBITDA guidance of approximately $50 million.
I'd like to start my detailed discussion about our education units by focusing first on Rasmussen. From a management standpoint, Rasmussen is now operating with a complete management team for the first time since 2Q of 2022. This has brought much needed focus, stability and leadership to the university. The leadership team has focused on continuing the now 5 quarters of sequential enrollment growth at Rasmussen Online, while also accelerating campus program growth and diversification. PN and BSN nursing program growth, along with other Allied Health program growth begins to mitigate an almost exclusive historical concentration in ADN nursing. More targeted programmatic marketing is starting to pay dividends as we have greater visibility and improved processes and efficiencies in identifying and attracting new students. The efforts are yielding promising results.
In addition to the Q4 non-nursing enrollments increasing overall by 5%, BSN starts are up over 20% in the quarter, and campus-based allied health starts are up over 30%. While the nursing program growth is measured against smaller basis, the early signs are encouraging. As has been the case for several quarters, our primary enrollment challenge at Rasmussen has been the decline in ADN nursing enrollment, which had been the majority of nursing students at Rasmussen with its peak occurring in 3Q of 2021.
Despite the positive PN and BSN, ADN nursing enrollments were down in the quarter to 4,000 students from 5,800 in the prior year, which was the primary contributor to the overall year-over-year decline of 10% in enrollments to 14,100 students. As discussed extensively in prior calls, much of the decline in ADN nursing enrollments has stemmed from both voluntary and imposed enrollment caps for the ADN program in large part brought on by NCLEX scores, below state standards, which resulted primarily from educational obstacles brought about by COVID.
I am pleased to report, however, that we continue to make meaningful progress on improving NCLEX results. Based on the Q3 NCLEX scores, Rasmussen reported that 20 of 24 of its nursing programs were above the state threshold pass rates including 8 of 10 ADN programs, 7 of 7 BSN programs and 5 of 7 PN programs.
This reflects the second sequential quarter of NCLEX score improvements. We believe that this marked improvement is a direct result of some new actions and initiatives put in place by the new Rasmussen leadership team, including new nurse faculty onboarding and continuing development. Student success coaches installed at campuses and faculty champions assigned to recent grads to support their NCLEX preparations.
We also believe that by diversifying our pre-licensure nursing student enrollments across the PN, ADN and BSN program, along with the institutional focus on strong NCLEX exam outcomes, Rasmussen can return to overall pre-licensure nursing enrollment growth in a more balanced, less concentrated way. And although we are not providing specific 2024 guidance, we still anticipate that Rasmussen enrollments will continue to stabilize, and we expect year-over-year overall enrollment growth in the second half of 2024.
At APUS, growth from active duty military and veterans is driving overall net registration results. Military registrations were up 12% in the third quarter, and veterans were up 5%, which reflects the continuation of our military registration growth that began in mid-2022. We attribute this not only to the strong franchise that AMU has built over many years, but also in particular, to our unwavering service to the U.S. Army through its 2 registration portal transitions in 2021 and 2022.
We partnered with its Army Soldier students to continue to provide their education when many other schools were operationally or financially unable to comply. And we believe this commitment has resulted in some of the growth and market share gains we are experiencing. The increase in APS' enrollments in revenue combined with 2022 cost reductions and improvements in marketing efficiencies and have resulted in improved margins once again in the third quarter.
Overall, APUS delivered Q3 EBITDA of $23.3 million resulting in a 30% margin in the quarter. At Hondros, we enrolled nearly 3,100 students for the first time in Hondros history in the fourth quarter of 2023 as we continue to see strong demand for its PN and ADN nursing programs in this market. We remain pleased with the performance of our new Detroit campus, also see growth in most of our legacy campuses and are seeing new growth in Indianapolis as caps there have been raised.
Despite the strong enrollment and revenue growth that Hondros has exhibited over the last 2 to 3 years, profitability has not kept pace, primarily due to sharp increases in nursing faculty pay and new campus startup costs.
As previously discussed, Hondros implemented the tuition increase in early 2023 and also reduced head count in Q3 in order to rightsize its operating costs. Despite past cost challenges, we expect a positive fourth quarter EBITDA contribution from Hondros. We are also pleased to report continued improvement in Hondros' RN NCLEX scores, now within 0.5 point of the Ohio standard.
Turning our attention to graduate school. It has experienced 10% revenue growth in the third quarter, driven by higher enrollments and an increased number of signed contracts. However, the government's continuing resolution or CR, in response to the threat of the September government shutdown caused some training to be canceled or postponed by agencies, which softened strong enrollment momentum we experienced earlier in the quarter. Graduate school should still deliver higher revenue and margin for the full year 2023 as compared to 2022, which given its highly seasonal nature is how we evaluate its business performance.
On a consolidated basis, with the continued growth profile of APUS, Rasmussen Online, Hondros College of Nursing and Graduate School USA, we generated $15 million of free cash flow and increased our cash position to $155 million in the quarter. The continued growth in both cash flow and cash is due largely to lower advertising spend and in part due to the rightsizing of the cost structure at Rasmussen, Hondros and APEI to better align with the current revenue profile of the businesses.
These actions are expected to reduce run rate expenses by $15.5 million per year, which should provide us the opportunity to continue to reverse the profit declines at Rasmussen and increased overall profit and margin at APEI. With an intentional focus of returning Rasmussen into profitability and growth while delivering continued results improvements at the other entities.
As Rick will discuss shortly, and as I mentioned in my opening remarks, combining our Q3 outperformance with our guidance for the fourth quarter implies a full year 2023 adjusted EBITDA of approximately $50 million.
Overall, I'm grateful for the tremendous work our leaders and our teams are doing across our institutions to deliver on our educational promise to APEI's more than 106,000 students, including active duty military, veterans, new nurses and other students while also driving strong revenue growth.
We look forward to building on the many successes of this quarter as we strive to achieve excellence for all stakeholders. With that, I would like to turn the call over to APEI's CFO, Rick Sunderland.
Thank you, Angie. Third quarter 2023 financial results. Looking at third quarter 2023 financial results, total revenue for the quarter was $150.8 million, up $1.3 million or 1% from the prior year period due to increases in revenue at 3 of our 4 education units. The net loss per diluted common share of $0.27 includes a $5.2 million noncash investment loss on a minority equity investment made by APEI in 2012. The loss is the result of the investee entering into an agreement to be sold at a price that results in no proceeds to the equity holders.
Excluding the $5.2 million noncash investment loss, net income available to common shareholders was positive $400,000 compared with guidance of a loss of $5. 7 million to $4.3 million, while adjusted net income per diluted share was $0.02 compared to guidance of a loss per diluted share of $0.32 to $0.24. For the quarter, API adjusted EBITDA is well above our previously issued guidance.
On a consolidated basis, adjusted EBITDA was $18.1 million compared to $9.5 million in the prior year period. The current quarter results represent an adjusted EBITDA margin of 12% compared to 6% in the prior year quarter, reflecting the strong revenue growth at APUS, Hondros and graduate school as well as improvements in operations, particularly around marketing spend. Previously announced efforts to rightsize our overall cost structure are leading to improved profitability. The reduction, for example, is expected to reduce pretax labor and benefits costs by $6.2 million, net of severance in 2023 and is expected to reduce labor costs by $15.5 million on an annualized basis.
At APUS, revenue was $76.4 million for the third quarter, up 11.2% compared to the prior year, due primarily to continued growth in net course registrations for military students utilizing TA and VA and the impact of the April and July tuition and fee increases.
APUS continued to do more with less, achieving registration growth of 8% year-over-year with advertising spend that was $1.7 million lower than the prior year. Year-to-date at APUS, advertising expense is $4.4 million lower than the prior year period. APUS EBITDA for the quarter was $23.3 million compared to $14.1 million in the prior year, an increase of 65%.
EBITDA margin for the quarter increased to over 30% compared to 21% in the prior year period. As a result of the delay in Army payments in 2021 and in 2022. In 2023, APUS collected approximately $18 million in payments related to these earlier years. With the recent changes to [Technical Difficulty] education's method of calculating 90/10, this additional $18 million of cash collections in this year, I will note, because we were accommodating the Army and the Department of Defense will likely make it harder for us to meet the 90/10 threshold in 2023.
We understand the importance of complying with the regulation, and we are taking actions and working to satisfy the 90/10 standard in 2023. The calculation of 90/10 requires a complicated cash basis analysis with many inputs. And for 2023, we currently project it will be close. However, the calculation will not be made until after the end of the year based on annual numbers.
I would also refer you to our disclosures in the 10-Q. At Rasmussen, the rate of decrease in revenue is less in the third quarter than it was in the second quarter. Rasmussen University third quarter revenue was $52.1 million, a decrease of 15.4% compared to a decrease of 18.7% in the second quarter. This decline was primarily due to a 10% decrease in total enrollment and the ongoing shift in student mix toward lower cost online courses, which was partially offset by tuition increases in certain programs earlier this year.
On a percentage basis, revenue declined more than enrollment due to the mix shift away from nursing, which is at a higher revenue per enrollment. Rasmussen's EBITDA loss for the quarter was a loss of $5.3 million compared to an EBITDA loss of $1.9 million in the prior year quarter. However, while Rasmussen still operated at a loss in the quarter, the loss, excluding goodwill impairment charges, decreased on a sequential basis from $7.1 million in the second quarter and $6.9 million in the first quarter of 2023. While EBITDA margin for the quarter -- for the third quarter was negative 10% compared to negative 14% in the second quarter, excluding the impairment charge.
The reduction in Rasmussen EBITDA and EBITDA margin is due to the decrease in enrollment in revenue and the fixed cost structure of its campus-based operations. Included in Rasmussen third quarter EBITDA loss is $800,000 of severance expense related to our previously disclosed reduction in force. We don't anticipate further severance-related expense in the fourth quarter of 2023 and should get the full benefit of a full quarter of labor savings in the fourth quarter.
At Hondros, revenue was $37 million, an increase of 20.4% compared to the prior year period, driven by higher total enrollment at higher tuition levels. Hondros EBITDA was negative $300,000 compared with negative $1.1 million a year ago. While still negative 2%, EBITDA margin at Hondros improved by over 750 basis points year-over-year. Increased bad debt expense and ongoing start-up costs from new campuses impacted Hondros' EBITDA in the quarter.
Graduate School revenue included in Corporate and other was $8.7 million, up 10% compared to the prior year, while EBITDA was positive $1.6 million in the quarter. Graduate School is highly seasonal with the second and third quarters delivering the strongest results. The threatened government shutdown in September negatively impacted revenue momentum at the end of the third quarter and has continued into the fourth quarter pending a resolution to ongoing government funding.
Despite that uncertainty, we still expect revenue growth, positive EBITDA and margin expansion on a full year basis in 2023 compared with 2022 at graduate school.
Total cash and cash equivalents at September 30, 2023, was $155.2 million, an increase of $25.7 million from year-end 2022. Restricted cash at September 30 was $27.3 million and continues to be almost entirely comprised of a restricted certificate of deposit that secures a letter of credit for Rasmussen with the Department of Education. We believe we have satisfied the Department of Ed requirements for release of the letter of credit, but has not yet been released, and there is no known time line for the release by Ed at this time. The increase in cash was due primarily to payments from Army received during the 9 months, which increased to $51.3 million in 2023 of which approximately $18 million related to periods prior to 2023, offset partially by the use of cash at Rasmussen and Hondros and to other changes in working capital.
APEI's remaining principal on the term loan is approximately $99 million at September 30, with unrestricted cash of approximately $128 million, APEI is net cash positive. Additionally, there were no borrowings under APEI's $20 million revolving credit facility, which remains fully available at this time.
Turning now to the fourth quarter 2023 outlook. APUS, total net course registrations are expected to be between 88,900 and 90,700 registrations, an increase of between plus 2% and plus 4% over the prior year period. At Rasmussen and Hondros fourth quarter student enrollments are actual because of the quarterly starts at the schools. At Rasmussen, fourth quarter total non-nursing enrollment increased 5% to approximately 8,400 students while total nursing student enrollment decreased 25% year-over-year to approximately 5,700 students for an aggregate enrollment decline of approximately 10% year-over-year to approximately 14,100 students.
At Hondros, fourth quarter total student enrollment increased by 19% year-over-year to approximately 3,100 students, the highest enrollment ever at Hondros. In the fourth quarter of 2023, consolidated revenue is expected to be between $149.3 million to $151.3 million. The company expects net income to common shareholders of between $1.3 million and $2.7 million or between $0.07 and $0.15 per diluted share.
Adjusted EBITDA is expected to be between $14.9 million and $16.9 million for the fourth quarter of 2023. In closing 3 of our 4 education units continued to experience growth in revenue and EBITDA. The improvement at Rasmussen continues under the leadership of experienced industry executives known for their successful track record. As we strive to restore growth and profitability to Rasmussen, it is crucial to recognize that our portfolio encompasses various learning modalities and diverse academic programs with a special emphasis on military, veteran and nursing students. This diversification is a positive that ensures our presence in essential growth areas within the higher education market.
With that, operator, we would like to open the line for questions.
[Operator Instructions] Your first question comes from the line of Jasper Bibb with Truist Securities.
I was just hoping you could share any early insights from the new leadership team at Rasmussen, now that they've got their feet under them on the plan to return that business to profitable growth over the next couple of years? .
Hi Jasper, it's Angie. Thanks for the question. We're very pleased with the stability, the focus and the prioritization of the key areas of growth and operational efficiency that Paul and the leadership team have brought to Rasmussen. They're focused on growing non-ADN campus program enrollment and RAS online enrollment. They're keenly focused on improving NCLEX pass rates focused on not just identifying but capturing cost savings, improving retention, specifically in our online programs, improving the program mix online, for maximization of profitability and ensuring that we continue an open dialogue with our state nursing boards and our programmatic accreditors to ensure positive momentum in the regulatory activities over the next couple of years.
Appreciate the detail there. Do you think you're finished realigning the cost structure at Rasmussen or is there potentially more to do there over the next quarters? .
Also a great question. I think we will continue to hone and refine the cost structure. I would say the biggest opportunity continues to be in making sure that our marketing investments are focused in the right markets or MSAs are also focused on the right programs and the right campuses. And so we are continuing to refine the channel mix along with optimizing the lead to conversion rates in each one of our markets. We are also continuing to focus on the markets that are most important to us, and we will continue that in 2024.
And then maybe pivoting to APUS. [indiscernible] to follow-up on the 90-10 discussion. Like this year sounds like it's going to be close. Obviously, the rule is 2 consecutive years of noncompliance. I was just hoping maybe you could outline what operational tweaks you can make there to reduce the risk of a potential violation this year or in 2024.
It's Rick. The most obvious and most important, of course, is focusing on cash-based students and sources of cash payments. And the team is very focused on that. That's obviously impacting the 10 part of the 90/10 calculation.
And [indiscernible] APUS margins super impressive in the quarter, now at 30%. Like do you think this is a sustainable margin figure going forward? Or how should we think about the cadence of APUS margins over the next couple of quarters? .
Jasper, it's Rick. I do think we can sustain those margins. But at that margin level, I would say, it provides a lot of opportunity and flexibility to invest in additional growth areas in that business, and we're going to look to do that. As Angie said, related to Rasmusen we want to continue to look at how we spend our marketing dollars. I think you noted in your quick note, thank you for that, some cost efficiencies, if you will, in that area.
We're growing that business with fewer dollars, but we also look to where we can take those dollar savings and invest to continue to drive the revenue growth and we would like to sustain those margins at higher revenue levels.
Yes. Last question for me. Just maybe following up on that marketing point. I was hoping you could maybe outline some of the tweaks you've made there. It seems like you're seeing improvement across all of the portfolio of schools, but maybe specifically, I'm interested in the changes that were made after you in-source that function at Rasmussen? .
Great question. I would start by saying we are building marketing plans for Rasmussen bottom-up, campus by campus, channel by channel and ensuring that we're looking at the conversion rates of each of those different marketing levers and also the markets that we're investing in. So we have prioritized the markets where we have the most potential for enrollment momentum. And we have, as you can see in our results, have saved some money by slowing down the investments in some of our other markets as we test basically the resilience of the marketing investment changes over the next quarter or 2.
So we're really focused on which channels, which programs, which markets and also specifically training our admissions folks to be sure that we are taking every precious lead and converting them into new students.
Definitely makes sense.
Our final question comes from the line of Raj Sharma of B. Riley.
Could you talk a little bit about -- a little bit more about the Rasmussen, the changes, the NCLEX scores been really good improvement and the self-imposed enrollment caps, and I know you talked about growth in the second half.
Can you talk about these measures? And when do you think those caps could be lifted? I know you also addressed that in your ADN commentary, but also when do you think we could expect to see profitability. Is there a time line for resolution on profitability? .
Yes, I'm going to try and answer all of your questions, but you may have to [indiscernible] because you had several bundled into that question there. So let's start with results. We're really pleased with the 2024 nursing program NCLEX score improvements. There has been a lot of work done by our [indiscernible] Vice President of Nursing, including strengthening the faculty onboarding and the faculty training. We've installed student success coaches at campuses specifically focused on NCLEX preparation. We have introduced specific remediation strategies for students who have already graduated, and as you may or may not know, we also know that the national averages for NCLEX scores have gone up with the new exam, which was implemented in April.
So overall, we are pleased with how we are pacing against the national averages. So I think there's been a lot of really systematic operational improvements have been made to help us see improvements in our overall NCLEX pass rates at each of our campuses and programs.
Your second question was about enrollment caps. As we mentioned, I believe it was in the queue. We had in past years, talked about the concentration of ADN enrollments in the Bloomington campus. And today, that campus now represents less than 2% of all of our enrollments, that's a campus that continues to experience self-imposed caps.
We are working tirelessly to be sure that we can demonstrate improved NCLEX scores. Unfortunately, Bloomington is one of the 2 ADN programs that did not have a passing score in the quarter. And so we continue to be sure that we are not enrolling more students in the Bloomington campus until we know that we've got an end that allows us to deliver a high-quality educational experience for students and one that will allow them to pass the exam.
As it relates to Illinois, the other place where we have enrollment caps. As we discussed briefly on our last call, we're very pleased with legislation that was recently enacted in Illinois. It takes effect in January of '24, allows our Illinois program to remove, be removed from any probationary status from an NCLEX perspective for 3 years. So we believe that, that's going to help us with accreditation, state approvals. And as a result, will allow us to both enroll -- continue to enroll students in the ADN program and also allow us to add new programs to our Illinois campuses.
And you had another question about profit, but I don't remember -- I don't remember what the third question was. So if you could repeat it, I really appreciate it.
Yes. Sure, of course. I know you mentioned that enrollment in Rasmussen were going to be up year-on-year second half. Is that only -- is that only nursing or also nonnursing and then my next question was could you tell us when you would be profitable in Rasmussen? .
So we are seeing improved enrollment in all categories except for ADN. In all nursing except for ADN in all of our allied health. So those are all of our campus-based programs and we're seeing positive growth in our online program. So only the ADN remains the area of Rasmussen that is not yet growing.
As it relates to your question, we still see and expect to have positive overall enrollment growth in the second half of '24. And we would expect profitability to follow that positive enrollment growth. Certainly, we want to make sure that depending upon when that occurs, we take in an seasonality, but we expect to see profitability following that turn back to positive enrollment momentum.
And then just last question on Hondros. We were almost profitable in the quarter and then last quarter, and then you were not profitable this one. Is there any expectation that we should get to Hondros being profitable sometime soon [indiscernible] What is holding you -- what is holding Hondros back in achieving profitability on a segment basis? .
Good question. I'll start and then, Rick, I'll let you follow-on. As I mentioned in my comments, we do expect Hondros to be profitable in the fourth quarter. We want to be sure that we can offset the cost of opening new campuses. And as a result, we really believe that as we enter 2024 and beyond that the focus on marketing spend and the savings from a head count perspective will help us with the predictability around continued profitability at Hondros.
The other thing I will say is that where we had to recalibrate our nursing faculty salaries in the last year. We do not expect to see that continuing to grow at the pace that it has in prior years. We are not experiencing the same challenges around recruiting and retaining nursing faculty that we saw a year ago. And so we believe that, that stabilization will allow us to create more predictability around what our nursing faculty costs are going to be.
There are no further questions at this time. I would like to turn the call back over to Christopher Symanoskie, Investor Relations.
Thank you, operator. That will conclude our call for today. Thank you for your participation and your interest in American Public Education. Good evening, everyone.
Ladies and gentlemen, that ends today's conference call. You may now disconnect.