Adtalem Global Education Inc

NYSE:ATGE

Earnings Call Transcript 2021-Q1

[Operator]

Hello, and welcome to the Adtalem Global Education First Quarter Fiscal Year 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Maureen Resac, Vice President, Treasury and Investor Relations. Ms. Resac, please go ahead.

[Maureen Resac, executive]

Thank you. With me today from Adtalem's leadership team are Lisa Wardell, Chairman and Chief Executive Officer; Mike Randolfi, Senior Vice President and Chief Financial Officer; and Stephen Beard, Chief Operating Officer.

I'd like to remind you that this conference call will contain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 with respect to the future performance and financial condition of Adtalem Global Education that involve risks and uncertainties. Actual results may differ materially from those projected or implied by these forward-looking statements. Potential risks, uncertainties and other factors that could cause results to differ are described more fully in Item 1A, Risk Factors, of our most recent annual report on Form 10-K filed with the SEC on August 18, 2020 and our other filings with the SEC.

Any forward-looking statement made by us is based only on the information currently available to us and speaks only as of the date on which it was made. We undertake no obligation to publicly update any forward-looking statements, whether written or verbal, that may be made from time to time, whether as a result of new information, future developments, or otherwise, except as required by law.

During today's call, our commentary will refer to non-GAAP financial measures, which are intended to supplement, though not substitute, our most direct comparable GAAP measures. Our press release, which contains the GAAP financial and other quantitative information to be discussed today as well as reconciliation of GAAP to non-GAAP measures, is available on our website. Please note that all financial results and comparisons made during today's call are on a continuing operations basis, exclude special items and are in comparison to the prior year period, unless otherwise stated. Telephone and webcast replays of today's call are available for 30 days. To access the replay, please refer to today's press release.

And with that, I'll now turn the call over to Lisa.

[Lisa Wardell, executive]

Thank you for joining us on our call today. I will begin by discussing the highlights from our first quarter before turning to our performance in our business segments and our strategic outlook, and we'll provide an update on our announcement to acquire Walden University. I will then turn the call over to Mike to discuss our financial results before we open up the line for questions.

We entered fiscal 2021 with significant momentum, delivering exceptional results in the quarter with revenue growth of 5.4% and EPS growth of nearly 130% compared to the prior year. A key highlight of our results is our double-digit new and total student enrollment growth, driven by double-digit growth at Chamberlain and mid-single-digit enrollment growth within our medical and veterinary schools. Further, we saw solid performance in our financial services vertical with mid-single-digit revenue growth and a doubling of operating income, led by strength in OnCourse Learning. The result of our focus on strong student outcomes, strategic marketing investments, new product offerings and operational execution demonstrate that our workforce solutions strategy that we rolled out at our 2019 Investor Day is working.

While clearly, there were disruptions throughout our business from COVID-19, our teams pivoted to leverage our online and virtual technology capabilities and adjust offerings for our students, customers and employer partners, which helped mitigate the negative impact and allowed us to generate strong results this quarter.

Turning to our agreement to acquire Walden University, which we announced in September. As you may have seen in our 10-Q filing, we provided an update on the acquisition. On September 16, 5 days after signing the agreement, Laureate disclosed to us of the receipt an inquiry from the U.S. Department of Justice regarding the content and cost of Walden's Master of Science in Nursing program and the availability of clinical site placements for this program. We have exercised our rights under the purchase agreement and launched our own investigation into the allegations, which we intend to complete prior to any closing of the transaction.

As you know, we take these matters extremely seriously, and we're committed to doing what's right for our company, our students and academic institutions and our shareholders. We have experience with these types of matters. Should our investigation into the Walden matter substantiate the allegations contained in the DOJ inquiry, we will pursue all options available to us to protect the interest of our stakeholders.

In the meantime, we continue to believe in the strategic and financial merits of the acquisition, and we're continuing to work to satisfy the closing conditions of the purchase agreement and ensure our ability to fully realize the synergies we identified when we announced the transaction. Laureate indicated in their 10-Q filing earlier today that Walden University had strong results and enrollment growth this past quarter.

With regard to our legacy institutions. As noted, our strategic refinements and investments in new program offerings and marketing are generating the returns we predicted when we made the investments in previous quarters. Our continued focus on driving superior academic outcomes for learners is evidenced by recent data published by the Department of Education, which show that for fiscal year 2017, Adtalem's institutions had a combined 3-year cohort default rate of 3.1%, which is well below the combined rate for private for-profit schools of 14.7% and is less than half of the rate for private not-for-profit schools of 6.7%. Strong academic outcomes are critical in ensuring our students realize their professional ambitions and that taxpayers realize the superior return on investment for taxpayer's funding of Title IV funds.

With the calendar year 2020, first time NCLEX pass rate of 92% for Chamberlain through June 30, a 2018 to 2019 first time NAVLE pass rate of 88% at Ross Veterinary Medicine and a 95-plus first time residency match rate at Ross Med and a 92% first time residency match rate at AUC of the 2019-2020 graduates, our students are well positioned to be successful in their professions.

While there has been a chronic shortage of health care professionals for some time, the burdens of that shortage became even more evident during the pandemic. We are addressing this important need with the over 2,700 newly minted Bachelor of Science nurses and over 800 physicians graduating from our institutions this past year.

Turning to our exceptional first quarter results. We delivered revenue of $268 million and EPS of $0.78, supported by strong growth in both verticals. In our medical and health care segment, we are working to fill the supply-demand gap for health care professionals by getting our students back to in-person clinical experiences. As of today, as a result of our strong institutional relationships, I would note that across our medical schools, in-person clinicals are back at over 90% of our site.

At Chamberlain, we focused on strengthening student outcomes, leadership capacity and our brand health over the past several years, and those initiatives are producing the results we're seeing today. Demand for our offerings has increased with this quarter representing the largest enrollment in Chamberlain University's history. During the September session, new student enrollment increased 13%, while total student enrollment increased almost 12%. I would note that this is the fifth consecutive session of record-setting new student starts at Chamberlain University.

The strength in Chamberlain's results was driven by our brand value proposition and continued focus on student outcomes across the portfolio. On-campus contributions to growth in the quarter included the San Antonio campus, which opened in October last year, cap increases at the Las Vegas and Troy, Michigan campuses, increased mid-session starts and the expansion of our evening and weekend programs that were launched in September of 2019. However, over 50% of the growth came from existing programs at nearly all of our campuses. It is important to note that 16 of our 22 campuses do not have caps on enrollment. Online contributions to growth were driven by increases in our graduate programs, partially offset by declines in our RN to BSN program, understandable given that frontline markets are challenged with the work demands of the pandemic.

Our students' academic success speaks to the strength of our programs with calendar year 2020 first time NCLEX pass rates of 92% through June 30, in line with the national average, and S&P overall pass rates of 90%. We are seeing our students continuing with their studies despite the challenges this pandemic has presented. In fact, over the last 12 months, over 13,500 students have earned a degree from Chamberlain. Further, advances in telehealth have accelerated as person-to-person interactions have been universally limited. We expect demand for telehealth services to remain elevated over the long term. As such, we're focused on further developing our existing capabilities in this space to ensure the continued success of our students in a post-pandemic environment. We continue to strengthen our virtual healthcare curriculum at Chamberlain as well as at our medical schools.

In summary, Chamberlain graduates more individuals with nursing degrees than any other school in the U.S. Chamberlain has strong academic outcomes, an experienced leadership team, a recognized brand and a solid digital marketing position. This positions Chamberlain well to both grow enrollment and deliver strong operating margins, whether through our on-site campuses or our online programs. It's clear that the strength of Chamberlain, coupled with strategic investments in marketing and brand awareness over the last 1.5 years, have resulted in Chamberlain being the first choice for many students.

Our medical schools also achieved strong enrollment growth during the quarter. In the September session, AUC generated double-digit new student growth, and Ross Med grew more new student enrollment in the high single digits, which reflects strong academic outcomes, investments in leadership talent and refinements to marketing and recruiting that leverage the strength of our brands and academic outcomes.

As many of you will recall, in 2017, the impact of Hurricanes Irma and Maria caused severe disruptions to both Ross Med and AUC. Since prospective students select their medical school about a year prior to attending, this impacted new student enrollment growth for some time. We have focused our efforts over the last year on continuing to enhance the student experience and academic support as well as refining our marketing and recruitment to new students, which is now driving higher new student enrollment. At this point, I'm pleased to note that we have put the hurricane impact behind us.

Ross Med continued to drive strong student results with a first-time residency match rate of 95% and the USMLE Step 1 first-time pass rate of 97% in 2019. AUC has maintained its solid first-time residency match rate of 92% and a USMLE Step 1 pass rate of 94%. These outcomes are critical as USMLE performance and residency match rate are 2 determinants for student choice of medical school attendance.

AUC and Ross Med are uniquely positioned to address the physician shortage across the nation as their 3 annual enrollment cycles create additional opportunities for students to matriculate at more frequent intervals. This enables us to drive qualified graduates into the workforce throughout the year. At the beginning of the pandemic, more than 900 students and graduates attained residency positions in the United States and Canada, with more than half already graduated and therefore, immediately able to contribute to the fight against COVID-19.

We have also been successful in leveraging our strong clinical relationships to ensure that our students will be able to complete all of the clinical experiences that are needed to participate in the residency match process. As a result, since June, we have had over 2,300 medical students engaged in clinical training online and in person across our network of clinical sites.

In addition to filling nursing and physician workforce shortages, Adtalem is committed to continuing to increase diversity in the health care workforce. Since September 2018, we have enrolled over 580 HBCU and HSI graduates in our medical school program. But to further strengthen that pipeline, beginning in fiscal year 2019, Ross Med partnered with several minority serving institutions to create a prescriptive path to medical training for their graduates. This increases opportunities for aspiring medical students to pursue careers in the field while helping to improve the participation of physicians of color, especially in primary care medicine. The initiative was expanded further in fiscal year 2020. And as of September 30, 2020, Ross Med had a total of 10 historically black college and universities and Hispanic-serving institution partners, relationships that we are now working to extend to AUC.

Ross Med had a strong quarter, due in part to the fact that the progression of students have been minimally impacted by the pandemic, and students have been able to successfully move forward to complete required clinical semesters without disruption. Ross Med's strong relationship with the island nation of Saint Kitts and Nevis has resulted in the university being able to safely bring designated cohorts of students back to the island to complete clinical and lab courses at our facility. Demand for veterinary professionals has surged as many people nationwide are working from home and spending more time with their pets. This has exacerbated an existing veterinarian shortage and underscores why it's even more critical to supply qualified veterinarians to the workforce. Based on these results and operational improvements, we expect growth of our medical school enrollment to continue.

Turning to Financial Services. We continue to invest in our infrastructure and processes to position the vertical for long-term growth. ACAMS held a virtual 3-day Las Vegas conference that began on September 29, and attracted over 1,500 paid attendees. Through the success of this conference, we see a strong opportunity to launch new global programs, including multilingual offerings in areas where we might have previously been limited due to the constraints of in-person conferences. Further, these conferences serve as an important opportunity for CAMS certificate holders to earn continuing education credits in a virtual environment without disruption to their certification. We have focused on attracting proven talent to the ACAMS organization. In addition to Dr. Justine Walker, who joined our team earlier this year as ACAMS' Head of Global Sanctions and Risk, we hired David Karl, Vice President of Global Sales at ACAMS. David comes with over 15 years of experience, leading international sales organizations in the financial services sector, including digital banking, payment services and fraud as well as money transfer and remittance service sectors.

During the first quarter, ACAMS rolled out a web-based compliance training program for Dutch banking group, ING, in partnership with ElephantThink. ING, which has a presence in over 40 countries serving over 38 million customers, places great emphasis on compliance, know your customer and enhanced due diligence training. Additionally, other Dutch banks have cohorts going through a similar training program, and the initial feedback has been very positive. As a result, we believe we have developed a best-in-class product for training frontline employees that can be replicated and rolled out for other employer partners.

Furthermore, ACAMS recently has been awarded contracts by the U.S. embassy in Panama and the European Bank of Reconstruction and Development to deliver training to government officials on anti-money laundering. In addition, we are in the process of developing and launching a number of products aimed at countries that are or will be going through mutual evaluation, a peer review performed by the Financial Action Task Force, whereby the country is provided an in-depth analysis of its system for preventing criminal abuse in its financial system. We believe this is a market where we have the expertise and right to win.

As we have discussed previously, we continue to raise awareness around the global issue of human trafficking. FAST, Finance Against Slavery and Trafficking, together with ACAMS, launched a new modern-day slavery and human trafficking prevention certificate. This is the first of its kind certificate, which has been very successful with over 4,000 professionals from over 120 countries enrolled in the course as of the end of the first quarter.

At Becker, approximately 90% of testing centers are now open and operating near capacity, resulting in a substantial recovery from Q4 to Q1. Despite the impact of COVID-19, we captured growth within Becker's B2C channel, which largely offset declines in Becker's B2B channel. The growth in B2C reflects investments that we previously made in improving our e-commerce and digital marketing capabilities, while we believe the declines in the B2B channel reflect delayed in deferred hiring at accounting firms. We continue to innovate on how we bundle, position, price and promote each of Becker's offering. We expect this innovation to position us well as we scale up our continuing education business, which still -- while still nascent, has shown strong growth.

OnCourse Learning delivered increases in both B2C and B2B offerings, driven by execution to capture the demand as new loan originators enter into a strong mortgage market. Despite the uncertainty around the election and the regulatory landscape, we do not foresee significant headwinds in the mortgage industry in the near term. OnCourse Learning is also continuing to invest in and develop its training products for the banking and credit union sector where we continue to gain traction.

Regarding the election, we will continue to work across the aisle on bipartisan issues such as one health, mental health support for frontline workers during the pandemic and our work with HBCUs and HSIs as we address the health care profession's diversity gap. These issues are critical to the country's broader health care system and the populations it serves. Our efforts on bipartisan issues, combined with our work to address the health care workforce shortages and our contributions to a diverse health professions workforce, make us a very valuable partner to any administration.

In summary, we are well on the path to continue to grow long-term revenue in the mid-single digits and earnings per share in the low double digits. Mike will discuss our fiscal year 2021 guidance, which reflects the strength we expect for the remainder of the year.

Overall, we'd like to thank our teams for their remarkable efforts and strong execution during the pandemic as they focus on our students and our employer partners with resiliency and dedication. At the same time, we are capturing benefits from our strategic marketing initiatives and cost efficiency measures. These efforts drilled this quarter's strong results. As the year progresses, we remain focused on continuing this momentum to drive forward our workforce solutions provider strategy and accelerate growth to foster superior student outcomes and generate shareholder value.

With that, I will now turn the call over to Mike to discuss our financial highlights.

[Michael Randolfi, executive]

Thank you, Lisa, and hello, everyone. We reported strong results for the first quarter of fiscal year 2021, with revenue increasing 5.4% to $268.2 million and earnings per share from continuing operations, excluding special items, growing 129% to $0.78. Highlights of our results include double-digit new and total student enrollment growth, a steady return to clinicals within our medical schools and solid revenue growth in the financial services vertical, all while continuing to drive superior academic outcomes.

The revenue and earnings per share growth were heavily influenced by our prior strategic investments in marketing, continued operational execution and expanded offerings across both verticals. We are now seeing the returns on those investments with significant increases in new student enrollments. Operating income and margin performance also benefited from ongoing cost efficiency initiatives and lower on-campus variable expenses, given our campuses were not fully opened during the first quarter.

Cost of educational services decreased 11.2% or $14.3 million to $113.7 million in the first quarter of fiscal year 2021 compared with the prior year, driven by lower variable costs associated with online delivery of instruction due to COVID-19, increased cost efficiencies across all institutions and lower bad debt expense.

Student services and administrative expense was $100.2 million in the first quarter essentially flat when compared with the prior year. Investments to support future enrollment growth, primarily at Chamberlain, were offset by the impact of lower travel-related variable costs as well as other expense efficiency initiatives.

Consolidated operating income, excluding special items, increased 97.7% to $54.4 million in the first quarter of fiscal year 2021, driven by increased revenue across the organization, coupled with lower variable cost of instruction and efforts to increase efficiency. Net income from continuing operations, excluding special items, was $41.2 million compared with $18.9 million in the prior year. And diluted earnings per share from continuing operations, excluding special items, was $0.78 compared to $0.34, a 129% year-over-year increase.

Turning to our segment results for the quarter, starting with Medical and Healthcare. Revenue for the quarter was $218.8 million, a 5.5% increase compared with the prior year. The increase was driven primarily by strong total student enrollment growth at Chamberlain, partially offset by lower clinical and housing revenue at our medical and veterinary schools due to campus closures related to COVID-19. While clinical largely resumed during the quarter, as of today, we are not yet back to 100%. With respect to Chamberlain, revenue increased 14.8% compared with the prior year period, and new and total student enrollment for the school increased 13.2% and 11.9% in the September session, respectively.

In addition, the September enrollment at Chamberlain represents record total student enrollment for the school. The strategic investments and operational refinements we have made over the course of the last year are significantly influencing Chamberlain's enrollment growth, supported by strong underlying demand for nurses.

Revenue in the first quarter for the medical and veterinary schools decreased 6.5% compared with the prior year, driven by the impact of COVID-19 that reduced clinical and housing revenue. As Lisa mentioned, we saw strong new and total student enrollment within our medical schools, underscoring the continued strength in our academic outcomes, which highlights the quality of our programs as well as the effectiveness of our strategic marketing and recruitment initiatives.

For the September session, Ross Med grew new student enrollment in the high single digits, AUC grew new student enrollment in the double digits, and Ross Vet maintained its high level of total student enrollment which is currently at capacity for the September session.

Medical and Healthcare segment operating income, excluding special items for the first quarter, was $53 million, a 85.2% increase compared with last year. This improvement was supported by strong revenue growth at Chamberlain as well as strategic and operational improvements that have allowed us to leverage our scale within the segment. We have also experienced reduced travel, lower campus instruction cost and declines in discretionary spend throughout the segment, partially offset by lower clinical and housing revenue.

Turning now to Financial Services -- to our Financial Services segment. First quarter revenue was $49.4 million, an increase of 4.9% compared with the prior year, driven by growth at OnCourse Learning. Becker revenue was flat, while ACAMS revenue was down approximately 7%, as both continue to experience lingering impacts from COVID-19; specifically for ACAMS, the inability to conduct live conferences. OnCourse Learning growth was driven by our team's strong ability to capture the higher demand associated with the strong mortgage market. Specifically, OnCourse Learning was extremely responsive in scaling prelicensing education webinars and online instructor-led training in lieu of traditional on-site instruction, which allowed for a seamless transition to accommodate our B2B clients' growing needs.

Becker's revenue was flat on a year-over-year basis, with strength in both CPA B2C as well as our continuing education offerings, offset by reduced CPA B2B sales. Enrollment in test prep offerings by accounting firms were reduced due to lower levels of hiring. ACAMS revenue declined due to the absence of in-person conferences, which is partially offset by virtual conferences. One of our largest conferences of the year is Las Vegas, which this year was conducted virtually. This conference was a success with over 1,500 paid attendees. While we're seeing -- while we are seeing great interest and attendance at our virtual conferences -- while we are seeing great interest in attendance at our virtual events and comparable margins, virtual conference revenue per attendee is substantially lower than in-person conference revenue per attendee. Until we can safely resume in-person conferences, we are likely to see pressure on conference revenue.

Excluding special items, operating income in the Financial Services segment in the first quarter increased 111.5% to $8.7 million. The increase in segment operating income was driven by an increase in operating income across all of our financial services businesses, led by revenue growth at OnCourse Learning and lower variable cost and efficiency measures at Becker and ACAMS.

Turning now to our balance sheet and financial position. Net cash provided by continuing operations for the first quarter totaled $84.7 million, a 153% increase compared with the prior year. Our capital expenditures for the quarter totaled $14.4 million. As a result, we generated free cash flow of $70.2 million compared with $23 million in the prior year period. The increase in free cash flow is largely driven by increased earnings and the benefit of working capital timing. On a trailing 12-month basis, we generated $152.6 million of free cash flow. We define free cash flow as cash provided by continuing operations less capital expenditures.

We closed the first quarter with cash and cash equivalents of $561.2 million and outstanding bank borrowings of $293.3 million. We remain committed to a thoughtful approach to capital allocation, which includes achieving a modest level of leverage, investing in our business for growth and returning cash to shareholders. We believe the current price of our equity is well below its intrinsic value.

As we look at anticipated cash generation in fiscal year 2021, coupled with our cash needs, we anticipate repurchasing up to $100 million of shares during the remainder of the fiscal year. As Lisa mentioned, we remain on track to achieve our long-term goals of mid-single-digit revenue growth and low double-digit earnings per share growth during the strategic planning horizon.

For fiscal year 2021, we expect to benefit from strong execution from prior investments while still recovering from the impacts of COVID-19. We anticipate revenue this fiscal year to increase 5% to 7%, and earnings per share, excluding special items, to grow 25% to 30% based upon our September 30 share count.

As we look to the second quarter, in which we expect to continue to have lingering impacts from clinicals that are still at only 90% capacity, lower housing revenue and the absence of in-person conferences, we anticipate the year-over-year revenue growth rate in Q2 to be similar to the growth rate in Q1.

Regarding earnings per share for the second quarter, it is important to note that we are further increasing our marketing investments to continue to drive January and May enrollments. We also expect higher variable expenses associated with bringing students back to campus and additional costs associated with providing a safe environment in the context of COVID-19 as we begin to move back to in-person instruction across both segments. To that end, we expect second quarter earnings per share to be sequentially somewhat lower in Q2 than Q1.

Long term, we will continue to target enhanced operating leverage through the execution of our workforce solutions provider model, driving margin expansion as we further grow our offerings through online and hybrid learning modalities and increase enrollment in customers. Given variable cost associated with increased students and customers are relatively low, we expect this will support margin expansion over time.

With this, I will now turn the call over to the operator for Q&A.

[Operator]

[Operator Instructions] Our first question today is coming from Greg Pendy from Sidoti.

[Gregory Pendy, analyst]

You mentioned earlier in the call, and I thought it was interesting, that just there's been a lot of strength, I guess, on the veterinarian side, especially in the demand side. Can you talk about maybe what the starting salaries are? I know, under prior -- assuming gainful employment were to come back under a new administration, how that segment is maybe prepared if that role were to come back similar to the way it was in place, I believe, pre-2018?

[Lisa Wardell, executive]

Yes, sure, Greg. And I noticed we talk about people spending more time with pets. People are also buying and purchasing and getting a lot of pets during this time. So I think that bolstered demand, too. As you know, we've always had really robust demand. In terms of gainful employment, we do not believe that, that is going to be an issue for the vet school because we've done a lot of work with our employee partners between sort of when this was first an issue, 4, 5 years ago to now, particularly Banfield, Mars Healthcare, et cetera. We produce a graduate about -- between 8% and 10% of the veterinarians in the U.S. came through Ross Vet. And so we have good relationships there.

When we started on this journey of working on the starting salaries, it was probably about $82,000 or so, closer to an average of $90,000 now. And in some of our employee partners, it's $112,000, $115,000, just based on the demand. But in terms of gainful employment, really important to know that the reason the vet school was in that position is because the 5 years of apprenticeship, if you will, is not considered the same way under the previous rules as a residency would. When a physician is in a residency, they get paid less. When they come out, obviously, they get paid much more. Same with vets, but that has not been taken into account. And so we've been very active and successful in helping both sides of the aisle. But certainly, the administration, the former administration, the current administration and wherever that administration ends up going forward in helping them understand that, that is the reason that the calculations would now put vets in a similar position to physicians, if you will.

And so -- and the graduate program, a program with much more robust starting salaries now, we believe we're in great shape as it relates to any regulatory changes in that regard.

[Operator]

[Operator Instructions] We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

[Lisa Wardell, executive]

Thank you. And thank you for joining us today on our call. As always, if you have any questions, please give me a call. Thank you very much. Have a good day.

[Operator]

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.