Adtalem Global Education Inc
NYSE:ATGE
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Adtalem Global Education Inc
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Greetings, and welcome to the Adtalem Fourth Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. John Kristoff, Vice President, Investor Relations. Thank you, sir. You may begin.
Thank you, and good afternoon. With me today from Adtalem's leadership team are Lisa Wardell, Chairman, President and CEO and Patrick Unzicker, CFO 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 for the year ending June 30, 2018, previously filed with the SEC on August 24, 2018. And it's most recently quarterly report on Form 10-Q for the quarter ending March 31, 2019 filed with the SEC on May 2, 2019. 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, whether 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, they're not substitute for our most directly comparable GAAP results. Our press release, which contains financial and other quantitative information to be discussed today, as well as a reconciliation of non-GAAP to GAAP measures is also available on our Web site. 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 us today. During our call, I will discuss the highlights from our fourth quarter and full fiscal year before turning to performance in our business segments and strategic focus and outlook for fiscal 2020. I will then turn the call over to Patrick to discuss our financial results before we open up the line up to your questions.
In the fourth quarter we delivered revenue and EPS growth within our expectations and prior guidance, driven by continued growth at two of our three segments. In our Business and Law segment we experienced a double-digit revenue decline in the quarter as the result of the previously reported headwinds in Brazil. However, our leadership team in Brazil has done a tremendous job stabilizing the business and controlling administrative and other non-academic related costs, which resulted in a slight increase in operating income for the segment during the quarter.
During the quarter we continued to achieve superior student outcome with NCLEX pass rates at Chamberlain of 90%, and first time residency obtainment rates at AUC and Roth University School of Medicine of 91% and 92% respectively. These academic outcomes increased our competitive differentiation, and position us well for future growth in enrollment and revenue. We also continued our strong revenue growth in financial services, which was driven not only by sustained double-digit growth in ACAM, but also strong performance from Becker, continuing the momentum from the third quarter. Finally, we are pleased with the 4.2% increase in total student enrollment in the quarter.
Looking back at the recently completed fiscal year, we made significant progress on our strategy to transform Adtalem into a leading workforce solutions provider. We achieved a number of critical milestones, including completing the divestitures of DeVry University and Carrington College, which allowed us to refocus our three verticals to better support our enterprise growth strategy. We also expanded our portfolio through the strategic acquisition of OnCourse Learning, providing us increased exposure to banking, credit union, mortgage and insurance markets and cross selling expansion opportunities with ACAM.
The repositioning of our portfolio through both M&A and divestitures has allowed us to leverage our strength, streamline our business and pivot ahead of the market. During our Investor Day in May, we unveiled our workforce solutions provider strategy, which permits us to serve our markets in a more competitive, responsive and comprehensive way. We are already seeing the positive impact of this strategy with our employer partners, and I'm excited to further execute on this journey in fiscal 2020.
Turning to our operating segments. Medical and healthcare, we posted another solid quarter overall, driven by growth in Chamberlain overall student enrollment, as well as through year-over-year increases in certain tuition, housing and fee revenue across the segment. Operating income margin decreased in the quarter, driven by increased marketing expenses to drive future enrollment growth into higher level of corporate allocation expenses. Overall, enrollments in the segment during the quarter were mixed with modest growth at Chamberlain and a slight decrease in med vet.
At Chamberlain, we saw growth in overall enrollment and revenue during the fourth quarter. In the most recent July enrollment session, which consists almost entirely of online program, the majority of which is RN to BSN, we saw a 5% decrease in new student enrollment. This continues an ongoing trend that we faced challenges to keep the pace of new enrollments aligned with the record number of graduates in this program during the year. As the pool of RNs wishing to pursue a BSN plateau, the market is becoming more competitive.
To strengthen Chamberlain's level of competitiveness in RN to BSN, we continued to focus on our superior student outcomes. In addition, we have begun testing and refinements to our pricing model in certain market to better align our advertised credit hour price with what students are actually paying to attend Chamberlain's RN to BSN program today. Through these efforts, we believe we can attract more new students and bolster top line growth over time.
During the fourth quarter, Chamberlain also launched several new initiatives with students starting in September, including an evening and weekend BSN program at our Chicago land Adtalem campus, as well as the accelerated Master of Science in Nursing program. Our San Antonio campus is now operational, and recruiting for its first class to start November 2019, while our enrollment caps at our campuses in Saint Louis and New Orleans were increased by 27 and 20 students respectively. I'm incredibly proud of the fact that besides running the largest nursing program in the country, Chamberlain is currently the largest grantor of BSN degrees to underrepresented minorities in the United States.
Our RUSM delivered strong student outcomes in the spring term as well, achieving a first time residency attainment rate of 92%. As part of our strategy to address physician diversity in the U.S., we announced the partnership between RUSM and Tuskegee University to increase the number of African American students who enter medical school. This partnership offers qualified Tuskegee students who are in full acceptance into the medical school, a scholarship covering full tuition for their first semester.
This agreement is in addition to the four agreements we developed previously with Historically Black Colleges and Universities to further our commitment to improve diversity among doctors across our country. These partnerships are off to a great start. And I'm proud to share that we already have more than 15 students, representing all of these HBCU starting at Ross University School of Medicine, or in our Medical Education Readiness Program, MERP, in Miramar, Florida.
Ross University School of Veterinary Medicine experienced healthy revenue growth in the quarter, primarily driven by the year-over-year tuition increases. And we have already seen a record number of applications for the upcoming September term, which positions us well to maximize our seat capacity going into the fall. At the American University of the Caribbean School of Medicine, operating income during the fourth quarter was negatively impacted by lower clinical with the smaller size of classes for the semesters impacted by the 27 hurricane, now reaching their clinical semesters. Despite this, AUC has been working hard to manage operating expenses and continue to improve the student experience.
We continued our momentum in the financial services segment, driven by strong performance across both ACAMS and Becker. I'm encouraged by the rapid growth we have generated in ACAMS, which have now surpassed 75,000 active members in more than 175 countries. We remain focused on expanding internationally by identifying strategic partnerships that will entrench ACAMS within large organizations across the world. This is especially true in Europe and Asia, where we see a large opportunity to capture value and financial crime prevention.
We are also working towards the launch of the Certified Global Sanctions Specialist certification, which is the first new ACAMS certification in 16 years, and is anticipated to becoming available for students in early calendar 2020. We've accelerated growth in Becker, continuing to grow CPA test prep and driving revenue growth of 8.4% in this business. I'm confident that we have reinvigorated the Becker brand and product offerings, repositioning the business for long term growth. We have strengthened our core CPA value proposition, better aligning it with student expectations and expanded our CPE product offers. Business-to-business contract awards have continued to gain traction with large corporate partners, allowing Becker to further broaden our presence as the workforce solutions provider.
As I mentioned earlier, our acquisition of OnCourse Learning also represents a long term growth opportunity for the vertical, complementing our current portfolio and giving us broader exposure to banking and compliance credentials. Having closed the acquisition at the beginning of June, we're now intently focused on integrating the business and investing in growth.
Finally, as I previously mentioned, we continued to face revenue headwinds in Business and Law during the quarter, stemming from foreign currency exchange and the current political landscape in Brazil. Total enrollment grew 5.6% in Brazil in the fourth quarter with cost and pricing pressures remaining unchanged versus the prior year. We remain diligent in our efforts to maintain profitability in this challenging but stabilized operating environment. And the new leadership team in Brazil has been doing a great job managing the factors within our control. During the fourth quarter, we implemented significant cost savings, and we're able to do so while maintaining the quality of student outcomes and positive momentum of the team.
As we turn our attention to fiscal year 2020, we remain focused on leveraging our strong financial position to accelerate growth by expanding our customer base, product offerings and markets. We are committed to unlocking value creation opportunities as a workforce solutions provider, and aligning our business with our mission and student commitments to drive long term growth and enhanced profitability.
Shortly, Patrick will walk you through our financial expectations for fiscal 2020 as part of his comments. We have maintained our outlook from Investor Day in May, adjusting only for the acquisition of OCL. While the overall economic outlook for 2020 has become increasing volatile of late, I would emphasize that our business model and end markets tend to be resistant to economic cyclicality, positioning us well to execute our transformation growth strategy going into fiscal 2020.
With that, let me turn the call over Patrick for a deeper look at our financials for the quarter, and outlook for fiscal 2020.
Thank you, Lisa and good afternoon everyone. We finished fiscal 2019 with modest growth across the business, and fourth quarter in line with expectations. We are well positioned as we enter fiscal 2020 and remain focused on maintaining our financial strength and flexibility as we look ahead.
I will now turn to our financial results. During the fourth quarter, Adtalem revenue of $330.3 million increased 3.3% from the prior year. This increase was primarily driven by growth in our financial services and a medical and healthcare segment, which was partially offset by lower revenue in our Business Law segment. Operating costs, excluding special items, were $260.2 in the fourth quarter compared to $252.7 million in the prior year. The 2.9% increase was primarily due to investments to support future growth.
Operating income from continuing operations, excluding special items, grew 4.6% to $70.1 million. Net income from continuing operations, excluding special items, was $55.4 million compared with $53 million in the prior year. Diluted earnings per share from continuing operations, excluding special items, grew 12.3% in the quarter compared with the prior year. Please note that our fourth quarter results contain special items, including total pretax restructuring charges of $8.8 million, primarily related to real estate consolidations at Adtalem's home office and a pretax gain of $10.6 million related to settlement of certain derivative law suits.
We will now turn to our fourth quarter segment results, starting with Medical and Healthcare. Revenue increased 5.2% to $211.6 million compared with the prior year. Chamberlain revenue grew 6.9% compared with the prior year. Fourth quarter average new student enrollment increased 2.6%, while total student enrollment grew 2.4% compared with the prior year with growth in the campus-based BSN program, as well as the graduate program.
Revenue in the fourth quarter for the medical and veterinary schools increased 3% from the prior year. In the May 2019 session, new student enrollment declined 0.6% while total student enrollment declined 6% compared with prior year. Excluding special items, segment operating income in the fourth quarter, declined 17% to $40.1 million compared with $48.3 million in the prior year. This decrease in operating income was a result of increased marketing expenses to drive future enrollment growth and a higher level of corporate allocation expense.
Now turning to our Financial Services segment. Fourth quarter segment revenue increased 18.1% to $53.5 million compared with the prior year. Becker accounting revenue grew 8.4% and ACAMS revenue increased 26.8%. Excluding special items, segment operating income in the fourth quarter grew 23.3% to $16 million. Fourth quarter business and law revenue was $66.1 million, a decrease of 11.1% or 3.7% on a constant currency basis compared with the prior year.
Despite the decrease in revenue, fourth quarter segment, excluding special items, grew 2.4% to $15.3 million. The increase in operating income is a result of reductions in back-office and administrative costs. Our effective income tax rate from continuing operations, excluding special items, was 15.1% the fourth quarter and 16.2% for the full year.
Now turning to our balance sheet and financial position. Cash flow from continuing operations for fiscal 2019 totaled $226.4 million compared with $221.3 million in the prior year. Our capital expenditures for fiscal 2019 totaled $64.8 million compared to $66.5 million in the prior year. We closed the fourth quarter with cash and cash equivalents of $299.4 million and outstanding base borrowing of $407 million. We remain committed to maintaining a healthy balance sheet and ensuring we have ample resources to support our growth strategy.
Share repurchases remain an integral part of our capital allocation strategy, and our strong balance sheet continues to allow us to pursue this. During the quarter, we repurchased 1.7 million shares at an average price of $45.35. For full fiscal year 2019, we repurchased 5.3 million shares for $252.9 million at an average price of approximately $47.65 per share.
I'll move to our full year 2020 outlook. We expect 2020 revenue to increase 5% to 7%, including the impact of the OnCourse Learning acquisition. We expect our effective income tax rate for the year to between 17% and 18%. Earnings per share from continuing operations, excluding special items, are expected to grow in the 7% to 9% range compared to the prior year, also, including the impact of OCL. Lastly, full year capital spending is expected to be in the $45 million to $50 million range.
Going forward, we will only be providing specific guidance figures for the full year, as we believe this approach is better aligned with the long-term view we take in managing the business to create shareholder value. That being said, I would like to note that we are expecting more difficult earnings comparables in the first half of 2020 due to higher levels of marketing spend in the latter half of 2019 that will carry forward into 2020. As we enter into fiscal 2020, we are continuing to prioritize our capital deployment around investing in our core institutions and companies, returning capital to shareholders and evaluating disciplined strategic acquisition opportunities, all while maintaining our financial strength and flexibility.
With that, I will now turn the call over to the operator for Q&A.
Thank you [Operator Instructions]. Our first question today is coming from Jeff Meuler from Baird. Your line is now live.
So I guess, first, I just want to ask about the enrollment trends in the Med and Health business. I guess, first focusing on the quarter. The trend year-over-year this intake was worse in Med Vet than it was on an adjusted basis. I think there was 6.5% or so growth in January of the last intake. And then similarly for Chamberlain, I guess similar decline for the online only, but the mixed online on ground growth was weaker than it's been in a while. But then I'm hearing a lot of positives as it goes forward in terms of good academic results, record ops for September in Med, new campuses and cap bumps for Chamberlain, more marketing spend. So just trying to understand, is there an explanation for why things were weaker this quarter, should this quarter mark the bottom given those other factors? Just any help there would be appreciated. Thanks.
So let me start with Med Vet. Couple of things to keep in mind, so if we look at our May semester, both new and total. On the total side, really that has to do with the lower student clinical weeks as those students are taking a longer time between basic science and clinical. Some of them obviously were part of both AUC and Ross Med during the hurricane, et cetera. But we are actively engaged with those students who, frankly, the data shows that it is much more beneficial for them to go as quickly as possible and shorten that time between basic science and clinical. We have a program in place with our deans and faculty, and we are seeing some positive trends and positive changes there, which gives us the confidence into the front half of 2020 and the fiscal year.
In terms of new students, keep in mind, this time last year Ross Med did not have a permanent campus. We moved there in January. But as a result, some of that marketing was certainly slowed as its kind of difficult to have focus -- market to folks where they don't know where they are going to school. Obviously, that has now changed.
And so if you then look at our accelerated marketing, which Patrick alluded to in terms of the marketing expense in the front -- well, actually the back half of '19 and the front half of '20 being front loaded, that's some of the reason for that. As you know, there's a pretty long cycle into those students as they explore medical school and vet school. So when we look at that, we obviously have visibility into the September class for Med Vet. We're confident in our revenue growth projection for full Med Vet going into FY'20. But certainly, understand the questions as it relates to that May class.
Moving to Chamberlain, a couple of things, again, obviously, the July enrolment numbers are online only, primarily RN to BSN. Talked about it before, but I think there's a couple of pieces that we are actively now engaging and seeing the positive trend, so they're worth a mention here. One is obviously we talk a lot about on the pricing. What we think about our advertised credit outlook price, we just need and are doing a center job of communicating and better reflecting what students are actually paying. And so while we don't want to be in the race to the bottom for the lowest list price, because we view ourselves and know that we have quality.
You look at the NCLEX scores in the 90s and that's the case. We also want to make sure that the students understand that when we look at our grants and discounts, et cetera, we really are competitive in that value for RN to BSN. So we look at how we communicate our pricing and our advertised credit outlook. We have there also front loaded marketing in terms of inquiries and applications specifically for online, primarily RN to BSN, but across our online programs. And we're seeing good trends and growth as we launch new programs, such as the accelerated MSN. We've improved messaging and then we're also improving persistence as we start looking at that total student across the online programs, particularly in RN to BSN.
Again, using that differentiator that we have, that we have a lot of those students coming to, are HDS or I should say our employer hospital provider program. And so being able to provide them the message around value and the improved one-on-one advising experience for the students, which is what Chamberlain is known for and puts out in the market place we're confident in moving that as we go into the fall.
And then after my long preamble of a question for the first one, this one will be shorter. What is the guidance assumed, if anything, for additional share repurchases given that you bought quite aggressively this last quarter and that remains an important part of capital allocation?
So our guidance -- first on our share repurchases. We do feel that our shares are undervalued. We have had a good plan view on our intrinsic value. And we will continue to be opportunistic with that as we have. To answer your specific question, we do revert more to a longer term guidance that we shared with you at Investor Day, about a $100 million a year. But again, look at that more as a floor and we'll continue to be opportunistic as appropriate.
But I guess what I'm wondering is the 7% to 9% EPS growth in the guidance. Does that assume $100 million of incremental share repurchase in fiscal '20?
Yes.
Thank you. Our next question today is coming from Jeff Silber from BMO Capital Markets. Your line is now live.
Just wanted to focus on the entire portfolio, I believe earlier this week, Kaplan announced that they purchased a small business from you guys. Wonder if we can get a little bit more color on that. And I know there was some media speculation about potentially looking to divest Brazil. If you can comment on that as well, I'd appreciate it.
Sure, I will start with Brazil. We obviously don't comment on rumors in the market. But what I can do is tell you little bit about how we're feeling about that business, obviously, given all of the macro headwinds there. So first of all, we had a quarter now of our management transition, our leadership change being complete. It's going very well. And I think that that is quite clear as we look at how that team was able to manage the cost associated with the revenue pressure that we were seeing there that we don't control the macro, et cetera. Primarily that cost control was around centralized back office. Obviously, we have some experience with that in terms of the cost reduction processes we went through in DVU, and we were able to transfer that into Brazil in a way that did not take away from student service.
We're seeing really good trends as it relates to distance learning, since our stock launch a little over a year ago. And then as well in IBMEC as we look at enrollment trends there, they are very positive between that and the distance learning. So we feel that the situation at DeVry's has stabilized. Obviously, there is currency, et cetera. We also have FIES that were waiting to be realized. But again, some of our programs there, the majority of the high growth one are not dependent on FIES. So where we did feel it on the top line is no question. Last quarter and this quarter, we are managing to that as we move forward. So that is Brazil.
Other question, oh yes. So we had a medical test prep business, and quite small for us that we did divest to Kaplan. That primarily for us it was important, because of course Ross students and AUC students would use that to prepare for their licensing exam, and being able to do that in a way that we got the ability to have those students still serviced through the Kaplan deal, which really was good for us. And allows our financial -- our test prep team, I should say, to now focus purely on the financial services, which as you all know, is growing at quite at good clip. So while medical is core for us, the test prep business, not so much on that side.
This one's for Pat, more on the guidance side. I know you had previously used to give top line guidance and then changes in operating expense. I'm just wondering on the operating expense side or the margin side. What's embedded to get to your 7% to 9% growth in EPS?
A - Patrick Unzicker
We gave some qualitative perspectives around some increased marketing spend. But beyond that, we're going to just provide what we did.
And then just one more question on the quarter, just looking at some of the details, if I look at the home office expense, even taking out the settlement gain. It looks like it was a very small number I think its $1.2 million versus last year a little over $9 million in the quarter. Is there something else going on there that we're missing? I'm just wondering why we're still low this quarter.
It's reflective of our continued efforts to reduce our stranded cost, and be true to our commitment of reducing it by 40% to 50%. And we said over the 18 months and we have got about six months left on that. So we're tracking right where we need to be.
So in terms of, again, I know you're not giving specific guidance. But is that the kind of number we should expect on a quarterly basis? I'm just trying to frame it.
It's a little bit lower, maybe than what we expect on a go forward basis. But very representative of our ongoing focus on the stranded costs.
Your next question today is coming from Chris Howe from Barrington Research. Your line is now live.
Good afternoon everyone, thanks for taking my questions. First question, just starting off ACAMS, you mentioned the great growth, the robust growth that you're seeing here 26.8% year-over-year. Can you break it down by region? You mentioned the strong opportunity that you're seeing within Europe and Asia, the different runway for growth that you're seeing within each region. And then as we look at ACAMS and then your recent acquisition. What other opportunities are out there to round out the professional education portfolio? And how should we think about inorganic growth, the balance of the year and into next year?
Well, let's start with organic for ACAMS. As we have mentioned, we are seeing quite a bit of growth as it relates to Asia and Europe, not that U.S. is not growing. But certainly, across those markets tends to kind of move with the regulatory environment. So if you think about Europe, all of the changes there, the Baltic nations, anywhere where there have been significant issues, we're seeing more growth. And then in general, as we start thinking about virtual assets and those types of cryptocurrency, et cetera, and some of our subject matter experts that hope align that with that AMO and just in general financial crime concerns, we're able to be see good growth.
I think some of it also comes from -- I know some of it also comes from how we are seeing our conferences grow. Those had record growth as we talked about last quarter and also this quarter as we are going into FY20. So we expect some continued robust growth there. And I think that as again looking at organic, now that we own OnCourse Financial, some of that is going to be moving ACAMS products across other customer segments, such as in insurance mortgage, et cetera, that those customer bases that come to us through OnCourse.
To answer your inorganic, as you know, we've had OnCourse for just a little over a month. And so we will be spending some time as we go into FY20, really making use of those synergies and cross selling, et cetera, between ACAMS and OnCourse Financial that we're seeing great opportunities and synergies there.
And my last question, you had mentioned previously in the past, the supply demand balance within medical and healthcare. But more specifically, as it relates to Chamberlain, you mentioned some new campuses that you plan on opening to support the high demand. Moving from Chamberlain to the overall portfolio, beyond what you've already said. Where should we think of where you are as far as optimizing your campus footprint, and maximizing the efficiency gains that you see within that portfolio?
So starting with Chamberlain. Our latest campus to open in San Antonio, and we are recruiting for that November classes, we have been talking about that for a while. But that is now open and under recruitment. So between that and the new programs that we are offering in Chamberlain, we see a good path to grow for FY2020 and beyond, primarily in the online Masters, the accelerated MSN and then some of the doctorate programs that are growing. What we always talk about and are seeing more and more of that, we get greater online growth as it relates to places where we have geographic expansion. And so we expect to see that in San Antonio in the broader region there and Texas as that campus opens. We've certainly seen that in New Orleans Oschner Campus, et cetera.
Thank you. [Operator Instructions] Our next question today is coming from Corey Greendale from First Analysis. Your line is now live.
This is Logan Bender on for Corey. Congrats on the quarter guys. Just had a quick one about Brazil. What should we assume is factored into the guidance from an enrollment perspective? And do you expect that you'll need to continue doing more scholarships or possibly some price adjustments in order to keep enrollment stable? And then finally, what are we assuming on currency?
Hi Logan, I'll take enrollments and then take it over to Patrick for currency. So we -- clearly the different segments require different kind of discounting them and pricing. So as we said before in terms of Wyden and Wyden online, our distance learning, we do need to continue to discount to be competitive in the market. But we understand where that is. We've seen it this quarter and managed to that quite well, and as a result got the enrollment numbers that we need. So we feel that that has stabilized across those segments. And then of course, in IBMEC, we were able to demand different pricing, because obviously that's top of the market. And there, we're seeing really good growth in that, particularly in the Sao Paolo campuses, because we have more ability to grow there as it's the newer campus with less enrollment. So very excited about that and some of the partnerships with InfoMoney University of Sorbonne, et cetera, we see some good run rate there.
With respect to foreign currency, we do think right now that the AI is a little abnormally weak rather to the U.S. dollar, or it has been. But on a go forward basis, we haven't forecasted much improvement off of where it is today.
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.
Well, thank you again everyone for joining our call. And as always, if you have additional questions, please feel free to reach out to me directly. Have a good evening.
Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.