Perdoceo Education Corp

NASDAQ:PRDO

Earnings Call Analysis

Perdoceo's Forward-Looking 2024 Financial Outlook

Perdoceo Education Corporation reports a mixed financial year, with CTU's full-year revenue growing by 11.8% to $468.9 million, driven by higher student enrollments and recent acquisitions. Yet, the AIU System saw a 39.3% drop in student enrollments due to regulatory compliance changes, resulting in a 12.5% decline in annual revenue to $240.3 million. Despite these contrasts, overall student retention and engagement ended strong. For 2024, Perdoceo expects adjusted operating income between $170 million and $190 million, with a projected effective tax rate of 25.5%-26.5%. The company anticipates lower overall revenue but double-digit enrollment growth for AIU. A new quarterly dividend of $0.11 per share has been declared, supporting Perdoceo's balanced capital allocation strategy, which also includes a new $50 million stock repurchase program.

Enhancing Student Outcomes Amidst Regulatory Changes

Perdoceo Education Corporation concluded 2023 with a spotlight on elevated student retention and engagement, reflecting the highest results over the past few years. This momentum is anticipated to continue through 2024. The implementation of new regulations necessitated operational shifts at the American InterContinental University System (AIUS) during the year, which have now been largely resolved. These changes led to a planned 39.3% enrollment decline at AIUS but a notable 3.2% growth at Colorado Technical University (CTU). Furthermore, despite reduced marketing and admissions spend due to adjusted outreach processes meeting federal regulatory requirements, the company achieved efficiency gains in student enrollment onboarding. They also conducted share buybacks and disbursed $22.7 million in dividends, underscoring a commitment to shareholder returns.

Strategic Operational Focus and Technological Integration

Perdoceo's strategy entails refining marketing efforts with data analytics to attract students poised for success while aligning with federal outreach guidelines. The emphasis on robust corporate engagement programs and significant investments in technology such as advanced student tools and potential generative AI integrations indicate a focus on academic excellence and operational efficacy. These initiatives are core to driving improvements in student-focused operations.

Financial Highlights and Forward Momentum

The company reported positive financial results, exceeding expectations with a fourth-quarter net income of $17.2 million, or $0.26 per diluted share. Adjusted for significant noncash items, earnings were $0.27 per diluted share. For the year, operating income rose by 16.1% to $150.4 million, with adjusted operating income reaching $174.9 million, surpassing the forecasted $171 to $174 million. Annual net income also improved significantly, up to $147.7 million, a rise of nearly 29% from the previous year. Despite a fourth-quarter revenue decrease primarily tied to AIU's operational adjustments and CTU's academic calendar redesign, overall revenue growth for the year was realized. The company expects to minimize the lag effect of AIU's enrollment decline on 2024's performance and is poised to witness double-digit enrollment growth in the year ahead.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, everyone, and welcome to the Perdoceo Education Corporation Fourth Quarter and Full Year 2023 Earnings Conference Call. Today's call is being recorded. I would now like to turn the call over to Davis Snyder with Investor Relations. Please go ahead, sir.

[Davis Snyder]

Thank you, Lisa. Good afternoon, everyone, and thank you for joining us for our fourth quarter 2023 earnings call. With me on the call today is Todd Nelson, President and Chief Executive Officer; and Ashish Ghia, Chief Financial Officer. This financial -- this conference call is being webcast live within the Investor Relations section at perdoceoed.com. A webcast replay will also be available on our site, and you can always contact the Alpha IR 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 Perdoceo 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 these statements. These risks and uncertainties include, but are not limited to, those factors identified in Perdoceo's most recent annual report on Form 10-K and subsequent filings with 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 changed 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 measures. The earnings release that accompanies today's call contains financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures and is available within the Investor Relations page of the company's website.

With that, I'd like to turn the call over to Chief Executive Officer, Todd Nelson. Todd?

[Todd Nelson, executive]

Thank you, Davis. Good afternoon, everyone, and thank you for joining us for our fourth quarter 2023 earnings call. I'd like to begin by thanking our faculty, student support staff and all other employees for their ongoing commitment and [indiscernible] in serving and educating our students. We ended 2023 on a strong note as it relates to student retention and engagement, and I am proud of the entire Perdoceo team as they executed on our priorities and delivered on our commitment of further enhancing student experiences, retention and academic outcomes.

Before I go into some details for the fourth quarter and full year, here are some of the key observations and highlights. First, as we exit 2023, student retention and engagement are the highest that they have been over the past few years across both our academic institutions, and we expect to operate at these improved levels through 2024. Additionally, short-term operational changes that were undertaken at AIUS during 2023 to comply with new regulations are now behind us, and we have mostly reverted to normalized levels of operations beginning in the fourth quarter of 2023.

Next, 2023 ending total student enrollments reflected a 3.2% growth at CTU and as expected, a 39.3% decline at AIUS due to the operating changes undertaken. However, as Ashish will share with you shortly, we expect to mostly offset any lag impact of this planned decline on 2024 operating results.

Next, marketing and admission spend and commensurately, prospective student inquiry generation was lower in 2023 as compared to 2022 due to the short-term operational changes made at AIUS as well as adjustments made to our processes around generating prospective student inquiries in order to comply with updated expectations from various federal agencies around prospective student outreach. This impact was partially offset by increased operating efficiency within our student enrollment onboarding processes.

Our institutions remain focused on and continued these investments in personnel and processes to support their respective corporate engagement programs. Lastly, we used approximately $22.7 million of cash for dividends and stock buyback during 2023. Returning cash to shareholders via quarterly dividends is expected to be an integral and growing part of our capital allocation strategy.

Now to our operating results. Fourth quarter and full year results came in ahead of our expectations. We reported fourth quarter net income of $17.2 million or $0.26 per diluted share, while adjusted earnings per diluted share, which excludes certain significant and noncash items, was $0.27.

A quick note on total enrollments. At CTU, total student enrollments increased by 3.2% as compared to the prior year-end. At AIU System, total student enrollments decreased by 39.3% as compared to the prior year, which is in line with our expectations that we discussed on last quarter's conference call. AIU System mostly reverted to normalized operations during the fourth quarter, and as a result, we expect total enrollments in subsequent quarters during 2024 to experience double-digit growth as compared to the low point in the fourth quarter of 2023.

A few operational updates before I turn the call over to Ashish. First, aided by data analytics, we continue to adjust our marketing strategies to further improve our focus on identifying prospective students who are most likely to succeed at one of our universities as well as comply with updated expectations with various federal agencies around prospective student outreach. While these marketing adjustments may have impact on new student enrollments, improved student engagement across [ their average ] life cycle has mostly offset any negative impact on total enrollments.

Second, our enthused corporate engagement programs remain a focus and priority, and both institutions continue to make investments in staff and technology to further grow their programs in an efficient and effective manner. Third, we continue to place an emphasis on investing in and utilizing technology to elevate the academic experience of our students and improve the efficiency and effectiveness of our institutions' diverse student support functions. For example, we have made investments toward enhancing student tools, the student portal and the overall classroom experience at our institutions and are actively exploring the integration of generative AI into our institutions' various student processes. We continue to view technology as a catalyst and a differentiator for us to remain committed to making selective investments that deliver a more meaningful and relevant education experience for our learners.

2023 was a strong year of execution against our key objectives of enhancing student experiences, retention and academic outcomes. During the year, our institutions made further improvements to student-focused operations, all of which were ultimately focused on serving and educating our students in an effective and efficient manner.

With that said, I'd like to now turn the call over to Ashish for a deeper review of our operating performance. Ashish?

[Ashish Ghia, executive]

Thank you, Todd. I will review the full year and fourth quarter results and then discuss our balance sheet and 2024 outlook before handing the call back to Todd for his closing remarks. Please note all comparisons I discuss are versus the comparative prior year period unless otherwise stated.

Before I begin, a quick reminder about year-over-year comparability. Financial results for CTU reflect the acquisition that was completed in December of 2022, while AIU System results are now comparable versus the prior year quarter. Additionally, total enrollment numbers that I discussed or any enrollment trends that I refer to exclude learners pursuing non-degree-seeking professional development programs and degree-seeking nontitled or self-paced programs at our universities.

With that said, let us begin with an overview of our operating results. For the full year 2023, operating income increased 16.1% to $150.4 million. Adjusted operating income, which excludes certain significant and noncash items, was $174.9 million or 6.7% higher as compared to the prior year. This increase in adjusted operating income was primarily due to lower marketing spend across our academic institutions as well as organic revenue growth at CTU.

The lower marketing spend was due to: a, ongoing adjustments made to prospective student inquiry generation processes to comply with updated expectations from various federal agencies around prospective student outreach; and b, the necessary operational changes undertaken at AIU System. Please also note the full year adjusted operating income of $174.9 million exceeded our latest outlook range of $171 million to $174 million primarily due to better-than-expected student retention and engagement in the fourth quarter.

Net income for the full year was $147.7 million, or $2.18 per diluted share compared to $95.9 million or $1.39 per diluted share. Adjusted earnings per diluted share, which, again, we believe is more indicative of our underlying operating performance was $2.10 as compared to $1.63, reflecting an increase of 28.8%.

For the fourth quarter, adjusted operating income was $19.4 million as compared to $32.4 million in the prior year quarter, and adjusted earnings per diluted share was $0.27 as compared to $0.31. While this anticipated decrease was primarily due to lower revenue at our academic institutions, it was actually better than what we had expected. For the fourth quarter, revenue at CTU was lower due to the academic calendar redesign and the resulting lower revenue days, while revenue at AIU System was lower due to the peak impact of the operational changes made earlier in 2023 that was experienced in the fourth quarter results.

Full year revenue increased to $710 million as compared to $695.2 million, while revenue in the fourth quarter decreased by 16% to $147.9 million. Both institutions experienced sequential improvements in student retention and engagement throughout the year. The full year revenue comparability was also positively impacted by the academic calendar redesign CTU as well as the acquisitions completed in 2022 that were not part of the full comparative prior year period.

As it relates to total student enrollments, total student enrollments for CTU increased by 3.2% as of December 31. And as expected, AIU System ended the year approximately 39.3% lower. Despite a negative impact from the academic calendar as it relates to enrollment days, growth in total enrollments at CTU was supported by organic improvements in student retention and engagement. As it relates to the AIU System, lower total enrollments were in line with our expectations as discussed during prior quarter's earnings call. This decrease was driven by the short-term operational changes and adjustments within prospective student enrollment, marketing and outreach processes undertaken earlier in the year to ensure compliance with anticipated and final regulatory changes. While these operating changes and adjustments were necessary, we are pleased to share that, as planned, marketing and student enrollment activities have mostly reverted to normalized levels, and we expect AIU System to experience double-digit total enrollment growth in subsequent quarters during 2024 as compared to the fourth quarter of 2023.

Now to our segment results. Full year revenue at CTU increased by 11.8% to $468.9 million due to a positive timing impact from the academic calendar redesign and the 2022 acquisition as well as underlying organic growth in student enrollments. As expected, fourth quarter revenue at CTU was 3.6% lower than the prior year quarter due to a negative impact of the academic calendar on revenue earning days during the quarter. Operating income was $25.4 million for the quarter as compared to $34.1 million in the prior year quarter, while full year operating income increased by 1.7% to $144 million. Please note that the operating income for the quarter was impacted by certain nonrecurring charges related to recent acquisitions.

At AIU System, full year revenue decreased by 12.5% to $240.3 million, while fourth quarter revenue was $43.2 million or 36% lower than prior year quarter. Please note that the peak impact from the operational changes undertaken within AIU System was experienced in the fourth quarter of 2023. Operating income for the quarter was $0.6 million, while full year operating income increased by 35.9% to $45.3 million. Despite the revenue decrease, full year operating income increased primarily due to lower marketing and admissions expenses. AIU System will see some of this operating leverage reverse in 2024 as it reinvests in its marketing and admission functions. Overall, we ended the year on a high note as it relates to student retention and engagement, and as we enter 2024, we expect to operate at levels consistent with the second half of 2023.

Moving on to Corporate and Other. Operating losses for the quarter and the year were $10 million and $38.8 million, which improved 32.6% and 14.2%, respectively, as compared to the prior year periods. This improvement was driven by a decrease in legal fees primarily associated with the responses to the Department of Education relating to loan forgiveness applications by former students. Please refer to the disclosures regarding [ Board defense ] to repayment in our 10-K that was filed this afternoon for additional information on this matter.

Now turning to income taxes. For the fourth quarter, we recorded provision for income taxes of $5.2 million. This resulted in an effective tax rate of 23.2% for the quarter, bringing our annual tax rate to 23.1%. The effective tax rate for the quarter was positively impacted by approximately 3.7% as a result of the release of previously recorded tax reserves for uncertain tax positions. The full year tax rate was positively impacted by the tax benefits associated with the previously disclosed prior year ordinary loss attributable to the stock of a subsidiary, which decreased the effective tax rate by 2.4%. Finally, we expect that for full year 2024, our effective tax rate will be between 25.5% and 26.5%.

Now to our balance sheet and liquidity. For the full year 2023, cash flow from operations was $112 million versus $148.2 million in the prior year. We ended the year with $604.2 million of cash, cash equivalents, restricted cash and available for sale short-term investments. This represents an increase of approximately $86 million over year-end 2022.

Some of the key offsets to the positive cash flows from our academic institutions were $41.8 million of income tax payments, $22.7 million in return of capital to shareholders and $6.4 million of capital expenditures. Finally, we expect that our 2024 ending cash balance will continue to grow as compared to year-end 2023.

Capital expenditures for the full year were approximately $6.4 million or 0.9% of revenue. For full year 2024, we foresee capital expenditures to be approximately 1% to 2% of revenues.

Before I share the updated outlook, let me take a minute to discuss capital allocation. We were pleased to announce that consistent with our dividend policy, on February 5, the Board of Directors approved the fourth quarter 2023 dividend payment of $0.11 per share payable on March 15, 2024, to the holders of record of Perdoceo's common stock at the close of business on March 1, 2024. To provide context, on an annualized basis, this quarterly dividend represents roughly 27% of our trailing 12-month free cash flows.

Future quarterly dividend payments are expected to be paid out of the free cash flow for the relevant year, subject to Board approval and the company's available retained earnings, financial condition and other relevant factors. Subject to the requirements just mentioned, we expect quarterly dividend payments will be an integral and growing part of our balanced capital allocation strategy and generally expect to review quarterly dividend amounts on an annual basis.

Our balanced capital allocation strategy also prioritizes investments in organic projects, in particular, technology-related initiatives designed to benefit our students and maintaining a strong balance sheet while also evaluating diverse strategies to enhance stockholder value including acquisitions and share repurchases. In line with that strategy, we are pleased to announce that the Board has approved a new stock repurchase program commencing March 1, 2024, which replaces our existing repurchase program. This new program authorizes the company to repurchase up to $50 million of the company's outstanding stock.

Now let us discuss our outlook for 2024. We expect full year 2024 adjusted operating income to range between $170 million and $190 million. This compares to an adjusted operating income of $174.9 million in 2023. Adjusted earnings per diluted share is expected to range between $2.04 and $2.26 versus $2.10 in 2023. This outlook reflects our current belief that the high levels of student retention and engagement we experienced in the second half of 2023 partly supported by the positive impact from various student -- federal student aid initiatives will continue to persist into 2024. Full year revenue is expected to be lower than 2023 due to the impact of the academic calendar redesign at CTU, resulting in lower revenue days. As a reminder, CTU's academic calendar redesign may impact the comparability of revenue earning days and enrollment results in any given quarter but not necessarily in the same magnitude or direction.

At AIU System, revenue is expected to be lower in 2024 due to the lag impact of lower beginning total enrollments at AIU System. However, for 2024, AIU is expected to experience double-digit and total enrollment growth as compared to year-end 2023, primarily due to normalized levels of marketing and admission spend as well as organic growth driven by higher levels of student retention and engagement. We also expect CTU to experience total enrollment growth for the year-end 2024, primarily driven by higher levels of student retention and engagement as well as continued growth from their corporate engagement program.

For the first quarter of 2024, we expect adjusted operating income to be in the range of $43 million to $45 million as compared to $53.1 million in the prior year quarter, with adjusted earnings per diluted share to range between $0.53 and $0.55 per diluted share versus $0.58 in the first quarter of 2023. Please note that the academic calendar redesign at CTU will disproportionately impact the first half of 2024 as compared to the prior year. Also, the lag impact from lower beginning total enrollments at AIU System will be experienced more acutely in the first half of '24. As a result, we expect the 2024 first half adjusted operating income to be lower as compared to the first half 2023, while the second half is expected to show growth as compared to the 2023.

As disclosed in our Form 10-K filed today, the Department of Education has recently gone through and is going through additional negotiated rule-making processes while also updating interpretations and providing new guidance surrounding various other topics. While we continue to monitor and evaluate these rule-making initiatives as well as new or updated guidance coming from the department, any further operational changes that are necessary to ensure compliance with the department's rules and interpretations could have an impact on the outlook I just presented.

Our 2024 outlook also assumes ongoing investments in technology, data analytics, academic and student support processes. We believe these investments have been successful in positively impacting academic outcomes and student experiences. Additionally, we will also continue to increase the size of our institutions' corporate engagement teams. Please refer to our earnings release filed today for important information about key assumptions and factors underlying the discussion from today's call as well as the GAAP to non-GAAP reconciliations.

With that, I will turn the call back over to Todd for his closing remarks. Todd?

[Todd Nelson, executive]

Thank you, Ashish. In closing, I am proud of the way our company executed throughout 2023, and I'm pleased with the progress we are bringing into the new year. Our academic institutions remain focused on serving and educating students, and our investments will continue to [ prioritize ] student experiences and academic outcomes. I'd like to once again thank all of our students and staff for their hard work and education. And thank you again for joining us today.

[Operator]

Thank you, and that does conclude today's presentation. Thank you for your participation. You may now disconnect.