Adtalem Global Education Inc
NYSE:ATGE
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Adtalem Global Education Inc
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Greetings, and welcome to the Adtalem Global Education's Third Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce, John Kristoff, Vice President of Investor Relations. Thank you. You may begin.
Thank you, and good afternoon. Joining me today are Lisa Wardell, President and Chief Executive Officer and Patrick Unzicker, Chief Financial Officer and Treasurer.
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, in the most recent annual report on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission. Any forward-looking statement made by us is based only on information currently available to us and speaks only as of the day on which it is made. We undertake no obligation to publicly update any forward-looking statement whether written or oral that may be made from time to time as a result of new information, future developments or otherwise.
During today's call, we will refer to non-GAAP financial measures, which are intended to supplement, though not substitute for our most directly comparable GAAP measures. Our press release contains the financial and other quantitative information to be discussed today as well as a reconciliation of non-GAAP to GAAP measures and is available on our website. Telephone and webcast replays of today's call are available for 30 days. To access the replays, please refer to today's press release.
And with that, I'll now turn the call over to Lisa.
Good afternoon, and thank you for joining our third quarter fiscal 2019 earnings call. Our third quarter saw an overall increase in enrollments, growth across two of our three segments, a continued strong balance sheet and achievement of several strategic milestones. Despite these successes, revenue in the Technology and Business segments fell short of our expectations due to ongoing challenges, largely outside of our control in Brazil. These challenges include the government's delay of FIES funding at the end of March; increased pricing pressure, particularly in the online sector; and unfavorable currency exchange. As a result, we are adjusting our full year revenue expectations.
Despite the negative revenue impact, new student enrollment in Brazil increased in the double digits, illustrating the resiliency and demand for our services and our strong market position in that country.
During the third quarter, we continued to successfully execute on our overall operational efficiency to drive improved profitability and deliver against our bottom line target. As a result, we are reaffirming our earnings per share growth guidance for the fiscal year 2019. Later, Patrick will provide further details on our full year guidance. I want to emphasize that we remain fully committed to driving the top line and earnings growth to achieve the long-term goal we communicated previously.
At the beginning of fiscal 2019, we discussed our short and long-term goals for the Adtalem portfolio, and we have delivered many successes as we execute on our long-term strategy. We've streamlined the portfolio for the DVU and Carrington divestitures, relocated Ross University School of Medicine to Barbados, reopened the main campus of American University of the Caribbean School of Medicine on Sint Maarten and established the AUC UK satellite campus in partnership with UCLAN.
In addition, we improved student outcomes and focused our strategy on becoming a workforce solutions provider that serves employers and thereby drives student success and placement, as well as promotes ongoing learning and development.
We've also made some progress towards several of our near-term operational objectives. We delivered on earnings per share in line with our expectations and are maintaining guidance for the year, largely driven by successfully implementing our cost optimization initiatives.
As I will explain in depth momentarily, we also continued to see robust performance in both Becker and ACAMS. We have seen an increase in first-time residency attainment rates in both of our medical schools and also saw NCLEX pass rates improving at Chamberlain where campuses reporting year-to-date show us trending slightly above the national average.
Finally, we're thrilled at our pending acquisition of OnCourse Learning's financial services business, which we announced two weeks ago. This acquisition broadens professional education offerings to the banking, credit union, mortgage and insurance markets with leading market position over 1,700 courses and a favorable EBITDA margin profile. This will perfectly align us with our enterprise strategy, strengthening our position as a leading workforce solutions provider.
Let me now give a high-level overview of our segment results during the quarter. Enrollments in our Medical and Healthcare segment are mixed, with growth at Chamberlain bolstered by continued stress at our campuses and new partnerships offset by lower clinical weeks at the medical school. While we are focused on improving our near-term top line growth in the medical schools, I'm incredibly proud of the milestones we have accomplished here during the third quarter.
Ross Med's first-time residency attainment rate is over 90% for this year's medical students, making it more competitive for prospective students going forward. Ross Med has also established articulation agreements with Charles Drew University, Tuskegee University, Florida Agricultural and Mechanical University and Dillard University to increase the number of students we admit from these historically black colleges and universities.
In addition, Ross Vet has been granted a full reaccreditation by the American Veterinary Medical Association Council on Education. Ross Vet was initially credited in 2011, so this represents the first reaccreditation. Dr. Anne French from the University of Glasgow, Scotland will be joining Ross Vet in September 2019. Dr. French is acknowledged worldwide as a leading veterinary cardiologist. Our continued investment in the Ross Vet campus has seen the opening of the first phase of the academic hub, which offers additional study facilities for our students.
Meanwhile at American University of the Caribbean School of Medicine, we are already starting to see positive traction in our new partnership at the University of Central Lancashire in Preston, England, as well as momentum in attracting students from Canada and India. We had our highest-ever first-time residency attainment rate this March with 90% of students matching year-to-date.
At Chamberlain, in addition to the increased enrollment and NCLEX pass rates I mentioned earlier, we are set to launch two new programs, the first is Master in Social Work and the second is an accelerated Master of Science and Medicine program. Our current MSN program requires students to take core MSN courses and then take additional specialization courses in a particular track or area of concentration. Our new accelerated program will allow students to get an MSN generalist degree and will take less time to complete. Both of these new programs have received all regulatory approvals and we will begin recruiting shortly.
With our continued investments in new programs, student services and additional campus locations, coupled with improved student outcomes that provide increases in student enrollment cap and drive greater interest from prospective students, I remain bullish on Chamberlain's long-term growth prospects.
Professional Education also continued its momentum from last quarter, growing revenue double digits largely due to the continued success of ACAMS. This vertical remains a pillar of strength for us, providing us opportunities to unlock value as we extend our reach in the attractive governance, risk and compliance space and giving us a clear right to win with our market-leading position and growth profile.
ACAMS continue to see solid growth with membership exceeding 72,000 driven by growth in the Americas, Asia and Europe. During the third quarter, ACAMS announced the upcoming Certified Global Sanctions Specialist Certification, credentialing employees in sanction compliance functions at multinational institutions to navigate in a world of increasingly complex laws and regulations. We have already received a positive reaction to this new core program, which will be released in early 2020.
Our ACAMS campuses also continue to post record attendance, with the third quarter showing a highest-ever attendance to-date and we welcomed Rohit Sharma as our new President to lead ACAMS. Rohit brings deep experience managing a global business and a strong operational background. I'm thrilled to work with Rohit as we continue to capitalize on opportunities in governance, risk and compliance professional certification.
Becker also reported a strong third quarter, growing CPA test prep and Continuing Education revenue by approximately 3%, reversing the historical trend of declines we experienced previously. The growth in our Continuing Education business was reinforced by our growing corporate partnerships. Expanding our corporate partnerships remains a top priority for us as we broaden our presence as a global workforce solutions provider. We recently launched an unlimited access bundle for Becker, continuing to strengthen our value proposition in response to student demand.
We also entered into an exciting new partnership within our Professional Education vertical with Northeastern University to jointly develop and distribute new products to our marketplaces. The first of these offerings will be an online course in artificial intelligence for financial services that will launch late summer this year and will be targeted to leaders and professionals in the industry to understand AI, its impact and assess AI readiness within their own organizations.
Finally, as I mentioned earlier, we recently announced our acquisition of OnCourse Learning's financial services business, which deeply runs our Professional Education offerings to banking, credit union, mortgage and insurance markets and unlock expansion opportunities across global financial services.
As I previously mentioned, we will face a series of macro factors that had an unfavorable impact on our results for the third quarter. However, the growth trends and business learning since our soft launch in March 2018 are positive and we're optimistic that this trend will continue based on our ability to deliver high-quality academic programs and experiences to our students.
Among the top 10 private higher education institutions in Brazil, Adtalem Brazil institutions are ranked as the number one institution in eight of the 13 cities we serve based on the Brazilian Ministry of Education's IGC metric, a composite score focused on the national end-of-program exam, faculty credentials and student satisfaction.
So as we look ahead to fiscal year 2020 and beyond, we are committed to unlocking value creation opportunities by streamlining and focusing the business to build upon our existing strength and leveraging the opportunity we have to attract new customers, innovate new product offerings and reaching new markets. We have been working hard during this transitional year to build the foundation for more comprehensive solution for our B2B partners, including partnerships with not-for-profit academic institutions.
We recognize that near-term results and consistent execution matters and we are taking the necessary steps to grow revenue across the portfolio. I'm proud of the focused portfolio that we have created and I remain confident we have a solid runway for long-term revenue growth and enhanced profitability.
With that, let me turn the call over to Patrick for a deeper look at our financials for the quarter.
Thank you, Lisa. Good afternoon, everyone. In the third quarter, Adtalem revenue of $308.6 million decreased 0.5% from the prior year but grew 2.1% on a constant currency basis. The decrease was primarily driven by revenue softness in the Technology and Business segment, which was impacted by negative foreign currency exchange in Brazil. This segment's performance was mostly offset by growth in Medical and Healthcare as well as strength in the Professional Education segment, driven by robust growth in ACAMS and Becker.
Operating costs, excluding special items, were $258.4 million in the third quarter compared to $256.9 million in the prior year. The 0.6% increase was primarily due to cost to support growth in the Medical and Healthcare and Professional Education segments, partially offset by the favorable effect of foreign exchange cost in Brazil.
Operating income from continuing operations excluding special items was $50.2 million compared to $53.1 million in the prior year. Net income from continuing operations excluding special items was $40 million compared to $43.4 million in the prior year. Diluted earnings per share from continuing operations excluding special items was $0.68 compared to $0.70 in the prior year.
The Medical and Healthcare segment revenue of $223.6 million increased 1.6% compared to the prior year. Chamberlain revenue was essentially flat at $128 million for the year. Higher discounting and a decline in new and total enrollment for the RN to BSN program offset growth in our other programs. Revenue in the quarter for the medical and veterinary schools increased 4% to $95.4 million compared to the prior year.
The third quarter of the 2019 year-over-year revenue comparison is negatively affected by a difficult comparison to the third quarter 2018 when $3.7 million of revenue was shifted into January 2018 from the postponement of basic science academic instruction at the medical schools due to the hurricanes.
Segment operating income, excluding special items in the third quarter 2019 was $53 million compared to $60.8 million in the prior year. The decrease was due to cost increases to support future growth and the return to a normal level of expense at the medical schools.
Now turning to our Professional Education segment. Third quarter revenue increased 14% to $35.9 million compared to the prior year. The significant improvement was due to double-digit growth in ACAMS as well as the return to solid growth in Becker. Segment operating income more than doubled to $5.1 million compared with $2.4 million in the prior year, again driven by the performance of both ACAMS and Becker.
Third quarter Technology and Business segment revenue totaled $49.9 million, a decrease of 16% or down 2% on a constant currency basis. As Lisa mentioned, this decrease was driven by the Brazilian government's delay in FIES funding, increasing pricing pressure and continued currency headwinds. However, we remain well positioned in this segment with strong brands and market leadership, superior student outcomes and enhanced distance learning capabilities.
Segment operating loss in the third quarter excluding special items was $845,000 compared to a loss of $103,000 in the prior year driven by lower revenues. Our effective tax rate from continuing operations excluding special items was 16% for the third quarter.
Now turning to our balance sheet and financial position. Cash flow from operations for the first nine months of fiscal 2019 totaled $129 million compared to $183 million in the prior year. Fiscal year-to-date capital expenditures totaled $50.9 million compared to $50.4 million in the prior year.
Our net accounts receivable at March 31, 2019 was $155 million, flat with the prior year. For the first nine months of the fiscal year, bad debt as a percentage of revenue was 1.2% as compared to 1.5% in the prior year, reflecting the quality of our programs and solid student outcomes.
We closed the third quarter with cash and cash equivalents of $321.2 million and outstanding bank borrowings of $297.8 million. We continue to benefit from the strength of our financial position and balance sheet. One of the ways we deployed cash during the quarter was through returning capital to our shareholders, which is among our top capital allocation priorities. We completed our 10th share repurchase program and commenced our 11th program by repurchasing approximately 1.3 million shares of common stock at an average cost of $48.15 per share during the third quarter of fiscal 2019.
Now turning to our outlook. For the fourth quarter of fiscal 2019, we expect revenue to increase 3% to 4% compared to the prior year. We expect fourth quarter 2019 operating costs before special items to increase 3% to 4% compared to the prior year. The fourth quarter outlook assumes an exchange rate of BRL 3.81 to the U.S. dollar.
On a full year basis, we expect 2019 revenue to be essentially flat compared to the prior year, which includes a negative currency impact of approximately 3%. We expect earnings per share from continuing operations before special items to grow in the 2% to 3% range compared to the prior year. We expect our full year tax rate to be in the 16% to 17% range. The full year outlook assumes an exchange rate of BRL 3.83 to the U.S. dollar. Full year capital spending is expected to be approximately $65 million.
With that, I will now turn the call over to the operator for Q&A.
Thank you. Ladies and gentlemen, at this time, we’ll be conducting our question-and-answer session. [Operator Instructions] Our first question comes from Peter Appert with Piper Jaffray. Please state your question.
Thanks. Good afternoon. So on the Chamberlain business, you cited – I think, Pat, it was you who was citing the pricing pressure and then weak enrollments in the RN to BSN program. And it seems like these have been issues for a while and probably going to continue to be issues so I'm wondering how you get back to sustained growth at Chamberlain?
Yes. So hey Peter, I would say a couple of things. Certainly, we had some been decline in RN to BSN but that gap is narrowing for a couple of reasons. One, we're really bolstering our hospital system, B2B teams there make them more efficient in driving students to that pipeline. As you know and as we talked about a bit, that should be a competitive differentiator for us, is, and we just need to drive that pipeline more efficiently, which we're seeing as we see that gap narrowing. And at the same time, we've also talked about a bit – in our shift in terms of our mix, our BSN on-site enrollments were particularly robust as we saw really good movement in our graduate programs. So really, really bullish on Chamberlain.
The Master of Public Health, while it's obviously very small base because we just started that program, great growth there and two new programs rolling out. And as you know, from SMP, Master in Public Health and others, Chamberlain is very well-positioned to get new programs into the market of quality and be able to market those because of the strong brand in academics. So I do understand what you're saying about RN to BSN, but we feel like we've got a really good handle on immediate and long-term growth there.
And Lisa, as the mix presumably continues to shift with the undergraduate BSN and the MSN programs growing, does that have negative implications in terms of profitability or margins for the segment?
Yes. I mean from my perspective, there's two positives here. One is obviously optimization of the campus. We've got those buildings, and as you know, the ROI on those campuses over the medium to long term are quite good. I do understand what you mean in terms of RN to BSN being online, but as you know, all of our graduate programs that we have in place and the ones that we are continuing to develop and put in place, like the two that I mentioned on the call, are online and, therefore, have that nice margin profile. So we are happy with that.
And then on Brazil. Lisa, you mentioned online competition and pricing pressures. And again, it seems like those could be continuing issues in that market. So what improves the operating results there for you?
Yes. Sure. And of course, there's some macros that we don't control, but we've got three controllables there that we believe give us a right to win and to return to top line growth there in Brazil. The first really is getting the discount cadence right. I would say that we overcorrected a bit on price. So while we saw some good growth in new student numbers and new student enrollment, we did not get the revenue per student there that we perhaps should have, and that's one that the team is used to being able to deal with and correct. So we're on that.
The second is, as you know, one of those macros is FIES. We continue to make sure that FIES is a smaller part of our revenue base. I've mentioned we're below 20%, continuing to go down into the teens, and we'll continue to do that. Because frankly, the third controllable there, we think about top line growth, is that we've got brands that are less price-sensitive, IBMEC being one of those brands and we need to be able to push those more.
So as an example, IBMEC with a core, we've got less price sensitivity and good revenue per student and certainly over the lifetime of the student. And then we've also started to add programs to IBMEC that have shorter-length cycle programs and less revenue per student, but they are incremental to the IBMEC base, which is something that we think will help us push the top line.
And then maybe lastly, Lisa. ACAMS continues to do well. But not surprisingly, I guess, the top line growth rate decelerates just in the context of it being a bigger business. So just your thoughts in terms of the sustainable growth rate we should think about for that business going forward.
Yes. So I think that in terms of rate, we are really online – or on track with what we sort of said. I think it's a bit lower because of cyclicality and some timing on renewals. So as we've said before, and we'll probably get into a bit as we talk about full year guidance, Q4 is really the strongest for both ACAMS and Becker. So we have no concerns there that we're going to continue to see that robust growth. And in fact, we're also seeing it across all three geographic regions, so Asia, Europe and the U.S. So really excited about where ACAMS is going.
And then I just wanted...
Yes. Peter, just for the timing in the second quarter for that conference shift from the sequential basis actually, ACAMS' growth accelerated.
Okay. And maybe just lastly, with the OnCourse acquisition pending, obviously you're building the professional services part of the business. And presumably, I assume you're looking to do more there, Lisa. So can you maybe just talk a little bit about your big picture view of how you see the mix evolving in the business over the next year, next couple of years?
Yes. Sure. Obviously, with OnCourse, we see a broader right to win across governance, risk and compliance. We've always said that the ACAMS model is one of beauty but very specific to anti-money laundering, know your customer. And now of course with this new certification and sanctions, we are extremely bullish on what that's going to look like.
As OnCourse comes into the portfolio, pending its successful close here which we anticipate shortly, we're able to then extend both the customer base, so I talked about mortgage lenders and different tier of banks that we just don't – we don't reach today, insurance providers, et cetera, but then also across those programs and program offerings, there is some cross-selling and synergy opportunities. Obviously, as we get to closing and move through the next couple of quarters, we'll get visibility to what that looks like. But we continue to see opportunities there.
Okay. Great, thanks Lisa.
Thanks Peter.
[Operator Instructions] Our next question comes from Jeff Meuler with Baird. Please state your question.
Thank you. Just I guess first, maybe if you could give us some additional detail on the incremental cost savings, what you're doing to offset the revenue shortfall to maintain the EPS guidance?
So the incremental cost savings is largely driven by our continued focus on reducing our standard costs. So we've been able to continue to reduce our real estate footprints here at the home office as well as now that both of the institutions are in a good hands with their new owners, we've been able to then start to see some of the benefit in terms of supporting a lower student count, employee count, et cetera.
Okay. And then there was a comment in there I didn't fully touch it. There was something about lower clinical weeks at medical schools. Is this just a timing issue or was there something with being able to fill clinicals or just what's going on there?
Yes. It's absolutely timing. And so the time between the students ending their basic sciences and then going into their clinical rotations extended, and therefore, deferring that revenue out. But we are – we have a plan to basically make sure that those students aren't taking as much time because frankly, from an academic perspective, it's not good for them. I think if they spend more time out studying before they go, they'll do better. And in fact, it's the opposite. And we've got the data to be able to show them that. So we're not worried about that long term at all.
Okay. And then the comment about partnership with not-for-profit academic institutions, what are you doing or what are you envisioning doing?
Yes. So actually, we have one that I mentioned in the script that we're kicking off right now, where – with Northeastern University, which is a really innovative university not-for-profit in Massachusetts. And we're putting together a program with our content and really also our ability modality, right, in terms of online delivery for that as it relates to artificial intelligence for financial services, for business – their business undergrad and grad majors.
So those types of things where the not-for-profits are also trying to make sure that they're remaining relevant in the market. And just the industry in general changes, and being able to partner with them, I think, is a way for us to drive incremental revenue. This one in particular is through ACAMS, but we're seeing it kind of across the entire portfolio.
Okay. And then just last – the comment about streamlining and focusing the portfolio. But then I think, generally, you're saying you like the portfolio. Are there additional parts of the business that could be candidates for divestiture, I don't know, Brazil or something else? Or just what do you mean by streamlining the portfolio?
Yes. So – and we're certainly going to talk about our long-term plans just a couple of weeks here at Investor Day. But in terms of the actual platform and portfolio, we feel that we've got the right pieces in place. So if you just go through the three areas, as we talked about financial services, Professional Ed, we have streamlined that to, again, financial services but then within governance, risk compliance. And we've talked about any sort of inorganic growth there being very core to what we're doing now. I think OnCourse financial services is a perfect example of that, and we've got a lot of organic runway.
If you look at Medical and Healthcare, we have the platform that we need there. And we talk about we certainly, organically, have room there from a program and product – new programs and products. And that if we did anything inorganically, it would be to accelerate the time frame – I always use Chamberlain as an example because it takes three to four years to get through programs. But you see that we – and get them to market. You see that we're doing that in parallel because we've got two new ones coming out. Those were in the works three years ago. So that's might be there.
And then in Brazil, we certainly have the platform that we need to win in Brazil. I've talked a little bit about what the controllables are, what we need to do. And there, of course, it's a macro question. But certainly not in a way that we want to be reactionary, we feel like we've got the platform.
Thanks Lisa W.
You’re welcome.
Thank you. Ladies and gentlemen, there are no further questions at this time. I'll now turn the call back to John Kristoff for closing remarks.
Thank you. So just real quick before we close. Lisa just mentioned Investor Day, which we will be holding on May 13 in New York. We'll be issuing a press release in the morning with details. So we'd encourage you to look for that and register to attend. And if you have any further follow-up questions as a result of the call, please feel free to reach out to me directly. Thank you very much.
Thank you. This concludes today's conference. All parties may disconnect.