Ladies and gentlemen, thank you for standing by, and welcome to the APEI Reports Third Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Chris Symanoskie, Vice President of Investor Relations. Thank you. Please go ahead..

Thank you, Operator. Good evening, and welcome to American Public Education's third quarter conference call. Materials that accompany today's conference call are available in the Events and Presentations section of our website.

Please note that statements made in this conference call and in the accompanying presentation materials regarding American Public Education, its subsidiaries or Rasmussen University that are not historical facts, may be forward-looking statements based on current expectations, assumptions, estimates and projections about American Public Education and the industry.

These forward-looking statements are subject to risks and uncertainties that could cause actual future events or results to differ materially from such statements. Forward-looking statements can be identified by words such as anticipate, believe, seek, could, estimate, expect, intend, may, plan, should, will, and would.

These forward-looking statements include, without limitation, statements regarding the benefits of the acquisition of Rasmussen University, the closing of the transaction and it's timing, expected growth, expected registrations and enrollments, expected revenues, earnings and expenses, expected financial results for Rasmussen University, the ability to deliver a return on learners' educational investments and plans with respect to recent, current and future initiatives.

Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including risk related to the acquisition of Rasmussen University and the risk factors described in the Risk Factors section and elsewhere in our company's most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q filed with the SEC as well as the company's other SEC filings.

The company undertakes no obligation to update publicly any forward-looking statements for any reasons, unless required by law, even if new information becomes available or other events occur in the future.

This evening, it's my pleasure to introduce Angela Selden, our Chief Executive Officer; and Rick Sunderland, Executive Vice President and Chief Financial Officer. Also available for questions is Steve Somers, Senior Vice President of Strategy and Corporate Development. Now, I'll turn the call over to Angela Selden.

Angie?.

Thank you, Chris. Good evening, everyone, and thank you for joining our call today. Before I share details surrounding APEI's third quarter results, I'd like to reflect on gains and progress APEI has made over the past year. Just over a year ago when I joined APEI, we began by evaluating every aspect of each business unit.

At APUS enrollment has been flat or declining for several years, with only modest investments as the company sought to maintain margins.

Hondros had a leading position in Ohio and was in the attractive pre-licensure nursing education segment that was underperforming and had made some unfortunate decisions in late 2018, which resulted in sharp declines in enrollment in 2019.

With the support of the Board of Directors, we set out to turn around the business and to reposition the company for growth. All while continuing to ensure that we put our student's ambitions and success at the center of all we do.

We evaluated the solid set of assets the company has built, including the leadership position in both military and veteran markets, the company's strong regulatory reputation, and established pre-licensure nursing beachhead in Ohio, and a solid balance sheet from which to work.

What a year it has been! The improvements have been wide ranging and dramatic. We added key leaders and brought some additional experience to our board. Overall, it was a year of transformation and acceleration.

At APUS, we're especially pleased to welcome Wade Dyke, as President to help guide the institution into its next phase of growth and improve our educational experience for our students and faculty.

We prioritized modernizing our virtual campus, which is anchored by our Learning Management System or LMS, by implementing each well, and migrating as of this month, over 1,300 courses in nine months. All APUS courses beginning in January 2021 will occur in our new LMS.

We also began a modernization effort of our student relationship management system or CRM to ensure that we can create appropriate transparency at each student touch point. We prioritized marketing investments in 2020.

As the leading player in the military investment segments, our student centric mindset has resulted in exceptional satisfaction scores, and a 54% referral rate to prospective students. Yet we had more to do, and implemented micro segmenting to attract those students with attributes that have proven in the APUS model to persist and complete.

The net results of our efforts this year has been a pronounced improvement in new and returning students at APUS.

While, we have clearly benefited from the markets shift to online learning, particularly among active duty military students, we believe that the efforts we've undertaken will provide long-term benefits and lead to sustained future growth.

While other leading online institutions, both taxpaying and not for profit, significantly outspend APUS on brand awareness. We intend to continue our discipline around more efficient and effective uses of our marketing dollars to continuously improving segmentation and analytics.

At Hondros, under Harry Wilkins leadership, who is by the way, APEIs former CFO, he has led a turnaround that can only be described as stunning.

Enrolments, which had declined by a third in the span of three quarters from fourth quarter of '18 to third quarter of '19, have fully recovered and exceed the high watermark that had been achieved two years prior.

This has made all the more remarkable by the fact that Hondros, which was a 100% on ground operation, accomplished this turnaround during the COVID-19 lockdowns and restrictions.

Harry and his team, with assistance from APUS pivoted to a hybrid model in a period of five weeks, allowing Hondros to continue academic progression uninterrupted in the second quarter of 2020 and beyond, by offering academic coursework online, and labs and clinicals on campus, when others did not.

Hondros has continued to enrol new students and train new nurses during our national health crisis. With this turnaround, Honduras is now positioned very well for future growth. Our CFO Rick Sunderland will share the details regarding the financial turnaround that we believe resulted from the operational improvements during his remarks.

Our most recent achievement is our announced plan to acquire Rasmussen University. I have prepared more detailed comments later in our call regarding the importance of this transaction. But first, I would like to take this opportunity to give you some perspective on the election, and its implications for APEI.

While final congressional election results are still unknown, no matter the outcome, we remain confident that APEI and its subsidiary institutions are well-positioned, regardless of the political landscape to continue to deliver on our mission of helping students of all backgrounds, maximize their HEROI, Higher Education Return on Investment.

We deliver high quality education at an affordable cost, and do it by focusing on a student outcome and maintaining a strong reputation with students and regulators. We believe that our focus on educating the military and veterans as well as creating new nurses are noble endeavors that change lives and improve society, that won't change.

And we have continued to measure our performance, as if Obama era regulations had remained in place, with measures such as Gainful Employment and 90/10, all achieving passing rates. Even if 90/10 or other ratios or definitions change, we feel comfortable that we will be successful in adapting to propose changes. Moving to Page 3 of the PowerPoint.

For our third quarter 2020 highlights, enrolment momentum continued for the fourth consecutive quarter. Strong enrolment growth in APUS and record enrolment in Hondros drove a 17% increase in consolidated revenues in the third quarter of 2020, as well as 11% growth in revenue for the first three quarters of the year.

Hondros has returned to profitability, and APUS generated a year-over-year increase in operating margin, all while increasing investment in our technology transformation to improve the students and faculty experience and additional marketing to support the APUS micro segmentation and messaging about affordability.

Our results this year clearly demonstrate the APEI's value proposition of helping learners of all backgrounds maximize their Higher Education Return On Investment, or HEROI resonates with today's value-oriented students, including military professionals, veterans and nurses.

Our HEROI philosophy is shared by Rasmussen University, which we recently announced we plan to acquire. As the nation's largest educator of pre-licensure nurses in ADN and PN program, Rasmussen adds another number one position to APEIs current number one position in active duty military and veterans doing education.

With this dynamic and transformative acquisition, APEI will be better positioned as a strategic platform for adult learners, particularly those service minded individuals, pursuing professions with significant career opportunities, such as nursing.

We will be paying close attention to the integration planning of Rasmussen with a focus on unlocking new enrollments, and quad synergies, while continuing to accelerate growth initiatives across our entire enterprise.

We remain focused on maintaining our organic enrollments momentum, and delivering on our strategic priorities to enhance our offerings to all students, and to increase revenue, operating margin and adjusted EBITDA.

On Page 4, for the three months ended September 30, 2020, total course registration that APUS increased 18% year-over-year, driven by a 25% increase in new registrations.

In January of 2020, APUS created and launched the Freedom Grant for AMU students, offering a tuition reduction and free course materials for active duty military pursuing graduate degrees, to ensure these students incur no out of pocket costs to obtain a graduate degree.

This now aligns with the same no out of pocket pricing for undergraduate enlisted military students at APUS. We believe the increase in registrations among active duty military APUS, driven in part, by the launch of the AMU Freedom Grant.

Student persistence rates at both FSA and non-FSA students at APUS improved to the highest level in years, as measured by the first course path and completion rates of undergraduate students for the three months ended August 2020, the most recently available data.

In addition, I should note, that 3Q, '20 had one additional week of recruiting available to it, as compared to last year, which we estimate added about 1,000 registrations, even excluding those registrations for comparison purposes. The momentum was strong and we see growth continuing in the fourth quarter as well.

On Page 5, we couldn't be more pleased with the rapid enrollment and return to profitability at Hondros. This tremendous success highlights the importance of our strategic emphasis on pre-licensure nursing program, and emphasis that will be amplified by our acquisition of Rasmussen University.

In the third quarter of 2020, enrollment at Hondros increased 38% driven by an incredible 88% increase in new student enrollment. Hondros enrollment momentum continued into the fourth quarter of 2020, as Hondros recently reported an impressive 34% increase in new and total student enrollment, the highest in the school's history.

Not only have total enrollments reached record levels, we're seeing even faster growth in Hondras' ADN or RN program, further collaborating our interest in Rasmussen and its concentration in the ADN RN program.

Hondros has continued to improve conversion rates and student onboarding processes with the deployment and integration of sales force software. In addition, they have remained nimble in serving the nursing community after the pandemic and the resulting recession.

Their mission to provide a better way to become a nurse is both a mission and a strategy, and their direct entry ADN program, new tuition financing options and flexible scheduling seems to be attractive option for many prospective nursing students. The recent success at APUS and Hondros translates into strong financial results for APEI.

I will now turn the call over to our CFO, Rick Sunderland, to provide additional details on our third quarter results..

approximately $1.9 million in professional fees associated with the Rasmussen acquisition and $1.5 million of information technology costs related to replacement and upgrades to our information technology systems.

For the three months ended September 30, 2019, APEI's segment, general and administrative expenses include $2.8 million in employee compensation costs for post-retirement benefits related to the former APUS President's retirement.

Consolidated bad debt expense was $0.9 million or 1.1% of revenue in the third quarter of 2020, compared to $1.0 million or 1.5% of revenue in the prior year period. In addition, APUS' three-year cohort default rate and other KPI and quality measure improved to 15.2% for the fiscal year 2017, the most recent reporting period.

Depreciation and amortization expenses decreased approximately $0.6 million to $3.2 million, and as a percentage of revenue decreased to $4.1 million of revenue from 5.5% in the prior year period.

Operating income for the third quarter of 2020 increased by $6.2 million to $3.3 million compared to an operating loss of $2.9 million in the prior year period. Consolidated net income for the quarter was $2.6 million, or $0.18 per diluted share, compared to a net loss of $1.6 million or $0.10 per diluted share in the prior period.

Adjusted EBITDA for the three months ended September 30, 2020 was $10.8 million, compared to $7.3 million in the prior year period.

For the three and nine months ended September 30, 2020 and 2019, adjusted EBITDA excludes non-cash compensation expense, loss on disposals of long lived assets, goodwill impairment, employee compensation costs for post-retirement, post-employment benefits related to the former APUS President's retirement and M&A-related professional fees, a reconciliation of EBITDA and adjusted EBITDA to net income, the comparable GAAP financial measure is included in the table of our earnings release under the caption GAAP net income to adjusted EBITDA.

Total cash and cash equivalents as of September 30, 2020, were approximately $228 million compared to $202.7 million as of December 31, 2019. Net cash from operations for the nine months ended September 30, 2020, increased 40.1% to $44.7 million, compared to $31.9 million in the prior year period.

Capital expenditures were approximately $4.2 million for the nine months ended September 30, 2020, and 2019. Now back to Angie..

Thank you, Rick. As Rick just noted, our third quarter results demonstrate that APEI has moved from negative to positive growth with year-over-year increases in revenue, net income and adjusted EBITDA. Enrolment growth at both APUS and Hondros drove an 11% increase in consolidated revenue for the first three quarters of this year.

Adjusted EBITDA increased 5.8% year-to-date compared to the prior year period, even with the investments we made in technology and marketing. We believe this is a solid growth foundation that will be magnified by the acquisition of Rasmussen University.

On Page 8, I'm so pleased to announce that we've entered into a definitive agreement to acquire Rasmussen University, which is transformational for both APEI and Rasmussen. This combination dramatically increases our scale, and is expected to nearly double APEI's revenue to approximately $600 million in fiscal year 2021, on a pro forma basis.

It is also highly strategic as APEI will become the number one educator in the U.S. of pre-licensure nursing, by conferring associate's nursing degrees, and practical nursing degrees, which lead to registered nurses and licensed practical nurses respectively, after students sit for and pass the National Licensure Examination.

Collectively, Rasmussen and Hondros will be a nursing education powerhouse, serving over 10,000 nursing students. The transaction creates scale and diversifies APEI's revenue mix that will consist of approximately one-third military and veterans, one-third nursing and one-third online adult learners.

Furthermore, it provides important scale benefits, and help establish APEI as a platform for additional transactions that can create meaningful synergy opportunities over time. We feel very fortunate to have found a partner in Rasmussen, whose mission and culture aligns so well with that of APEI.

We both prioritize providing affordable, inclusive and high-quality education, and both have strong regulatory track record, which makes this an unparalleled combination in our industry. As we became familiar with Rasmussen University, we discovered that [indiscernible] is one of the best kept secrets in nursing, and higher education.

Despite its quiet persona, Rasmussen University is a leader in nursing education with a strong regulatory track record, a wonderful complement to APEI and its growth strategy. Rasmussen is regionally accredited by the HLC or Higher Learning Commission, just as APUS's.

It has a 120-year history and currently serves 18,200 learners through 24 campuses across six states and online. Rasmussen has a full ladder of nursing programs, from pre-licensure PN program to a post-licensure MSN program, with a doctoral program in nursing launching in January 2021.

In addition, Rasmussen has the fifth largest CBE program with over 2,000 students. Rasmussen Schools of Nursing was launched in 2004 and has become one of the largest in the U.S., with approximately 8,200 nursing students, representing approximately 45% of its total enrolment.

Together with the over 2,100 nursing students at Hondros, the addition of Rasmussen will make APEI the number one educator of pre-licensure ADN and PN nursing, serving over 10,000 students in a high demand market for nursing education.

With the shortage of registered nurses in the United States, growth in the demand for nursing education is expected to accelerate.

According to the Bureau of Labor Statistics, registered nursing is among the top occupations for job growth, and there will be approximately 175,000 annual job openings for RN each year through 2029, with a shortfall of over 500,000 nurses by 2030, according to a study published in the American Journal of Medical Quality.

We believe that the powerhouse combination of Rasmussen and Hondros will be at the forefront of helping our nation, solve the nursing shortage by creating new nurses.

Collectively, Hondros and Rasmussen will become the powerhouse representing approximately $165 million in nursing revenue, serving students now through the combined 30 campuses across eight states and online.

This larger nursing education footprint will be a formidable force, operating across markets to address large projected nursing shortages and high demand for education. Beyond nursing, as the U.S.

Bureau of Labor Statistics projects, above the average growth in many segments of the healthcare employment market, Rasmussen offers a full complement of degree programs in Health Sciences, its second largest school, contributing almost a quarter of total revenue.

Rasmussen demonstrates a strategic and cultural alignment with APEI's HEROI, from generous transfer policies and credit for prior learning, through its commitment to further reducing the cost of degree attainment with differentiated tuition pricing that more closely aligns with job market expectations, and time to degree completion with innovative employer centric CBE learning program.

Additionally, Rasmussen's tuition ranks among some of the most affordable in the industry, with general education undergraduate programs costing approximately $11,000 on average, and differentiated healthcare focus programs costing approximately $17,000 on average.

Rasmussen has a strong financial profile and has seen impressive gains in recent years, largely driven by the growth in its nursing school and a focus on operating efficiency. Overall enrollment has grown at a 5.5% three-year CAGR to over 18,000 students.

Revenues have grown at an 8% three-year CAGR, and adjusted EBITDA has increased to $40 million, with margins expanding for 9% in 2017 to 16% in 2020. Underpinning the strong growth story has been the mix shift towards nursing from just 25% of enrolling four years ago to approaching 50% today.

Given the nature of the programs, nursing has a higher net revenue per student, which has helped drive total revenue. Rasmussen's strong financial and operating results should further accelerate APEI's growth story.

Simply put, the acquisition of Rasmussen University represents a significant step in the repositioning APEI that began a year ago, and has included a return to growth in APUS to turn around at Hondros. It enhances our brand promise to provide our students with a higher education return on investment or HEROI.

This combination dramatically increases APEI's scale by nearly doubling our revenue to proximately $600 million, and approximately $100 million in adjusted EBITDA in fiscal year 2021 on a pro forma basis.

As mentioned, post close we expect APEI's revenue mix will consistent with third nursing, a third military, a third online adult learners, three defensible pillars for long-term growth, an increased profitability for APEI.

As we continue to transform and evolve APEI, we will continue to focus on our existing businesses, while preparing to close and welcome Rasmussen into the APEI family.

With the acquisition we expect to unlock new revenue opportunities and cost synergies, including $5 million to $10 million in cost synergies anticipated in each of the first three years, and accelerate shared initiatives that can provide meaningful benefits to students.

While Rasmussen is a large acquisition, coming with it is an exceptional management team that will be focused on its continued growth and strength as an institution.

Rasmussen's team already has existing plans for geographic and programmatic expansion, as well as initiatives to further improve operational efficiency, and strengthen its overall value proposition for students.

We will be working closely with that team to implement a shared services model that will help further facilitate delivering a quality education at attractive prices and anticipate that sharing best practices and cross-pollinating academic programs across our subsidiaries over time will lead to stronger institutions and a stronger company.

We currently anticipate the transaction to close by the middle of the third quarter of next year. At this time, I would like to turn the call over to Rick, to discuss our outlook for the fourth quarter of 2020..

at APUS, net course registrations by new students are expected to increase between 11% and 15% year-over-year, and total net course registrations are expected to increase between 6% and 10% year-over-year. At Hondros, new and total enrollment increased by 34% year-over-year, compared to the fourth quarter of 2019.

In the fourth quarter of 2020, we expect consolidated revenue to increase between 10% and 14% year-over-year, with year-over-year increases at both our APEI and HCM segments. The company expects diluted earnings per share to be between $0.41 and $0.46 in the fourth quarter of 2020.

This includes the pre-tax impact of approximately $1.3 million in M&A-related professional fees.

The consolidated outlook for the fourth quarter earnings per share includes items we generally view as important investments in our future growth, such as investments in our technology modernization project, and increase marketing to elevate our affordability message.

In closing, APEI continues to report improved financial results, including a 16.6% increase in revenue, and a $4.3 million increase in net income for the three months ended September 30, 2020, as well as a 40.1% increase in net cash from operations for the nine months ended September 30, 2020, as compared to prior year periods.

Operator, we'd like to now open the line for questions. Thank you very much..

[Operator Instructions] Our first question comes from Jeff Silber with BMO Capital Markets. Your line is open..

Thanks so much, and congratulations on the continued stellar results the company has been posting over the past few quarters. Angie, in your prepared remarks, you alluded to the political environment. And I'm sorry to start with this question. But given everything that's going on, I think it's important.

I think you used the word that the company would be adaptable to propose changes, if any.

Can you talk about what changes you might expect and how the company would adapt to those?.

Sure. I think the one that has been most commonly discussed is the change in the composition of a 90/10 calculation. And as you know and many of us know, the military tuition assistance TA benefit, and VA benefit really, truly is that. It's the benefit to our active duty in our veterans for serving our country.

And that is the reason why historically it has not been included in the 90% calculation. If, in fact, the TA and VA benefits will be included in the 90/10 calculation, APEI and APUS specifically would still be within the compliance of the 90/10 ratio.

There are also discussions about moving the 90/10 calculation to 85/15, and we have some strategies that we are developing in order to be able to make sure that we can successfully pass an 85/15 ratio in the event that comes to path..

So, I don't know if you can give us an example.

But at a high level, what kind of things can you do to make sure you stay above or below 85% if it comes down at that level?.

These are things under development right now, Jeff. So I'd rather not share all those details right now.

But there are some things related to corporate programs, employer reimbursement, a focus on kind of the micro segmenting and kind of redirecting some of our marketing spend to students, who perhaps are not the students using TA and VA benefits today.

So we have a very good handle based on our micro segmenting work that we've accomplished this year, about the students that we can see who are not leveraging TA and VA. And so certainly, we want to redirect our focus towards those students..

Okay. That's really helpful. Let me shift gears over the Hondros. Again, really phenomenal results the past few quarters. From a competitive perspective, we're just seeing and hearing lots of schools starting to offer nursing. I'm just wondering what you're seeing the competitive landscape like.

And how you can differentiate your offerings needs to be the competition? Thanks..

Sure. And thanks for asking that question. We find that there is a lack of clarity among some, not necessarily, you definitely know a lot about this. But when we get asked about nursing, we want to make sure that the understanding that folks have is that for Hondros specifically today, Hondros offers only pre-licensure nursing.

It offers PN and ADN degrees. Pre-licensure nursing is the educational program that create new nurses. And that's really a big part of what we're focused on and a big reason why we are very attracted to Rasmussen, who also has a deep focus in creating new nurses.

Certainly, Rasmussen offers the full ladder, but as soon as you do say an ADN or PN, BSN, or RN to BSN, the MSN degrees and even the doctoral program, we're not creating new nurses at that point. We're educating existing nurses and allowing them to advance in their careers, which is certainly also important.

But right now, what we know is that the market gap, the shortage, the 175,000 open positions a year, the 500,000 nurse shortage by 2030, is specifically related to registered nurses. And so it's our mission to create as many qualified registered nurses as we can to help try and address that gap.

That's what we think is really distinguishing about the programs we offer today. Certainly, as you think about competitors, who might be trying to expand into new states, there are different state regulations with the nursing boards and other regulatory bodies that make it somewhat difficult for new entrants to move swiftly into new states.

It could be up to two years before nursing programs are approved for scale. And certainly, we believe that with the foothold that we have in now nine states as Rasmussen was just approved to open campuses in Texas, that we have the opportunity to significantly accelerate the number of new nurses that we create for the United States..

Right. That's great to hear. I'll jump back in the queue. Thank you..

[Operator Instructions] We have another question from Greg Pendy with Sidoti. Your line is open..

Hey, guys, thanks for taking my question. Can you just talk and I guess at the core university, and I'm sorry, if you guys touched on this earlier? But can you just now that you are kind of making a big acquisition into nursing.

Can you kind of give a little bit of color on where you've seen the specific puts and takes in terms of demand as far as your curriculum? Are there any areas that are outpacing maybe IT or business lagging and just kind of go into a little bit of detail there in light of the enrolment numbers?.

Sure. Happy to give you some details, not necessarily at the program level. But definitely some enrolment momentum had APUS. So today, certainly the Freedom Grant which we discussed earlier on the call has created momentum for new and returning students at the graduate level for APUS.

We're also seeing significant momentum in the graduate programs for military affiliated students, who is might be spouses, and that's at the returning student level, as well as new registrations for military affiliated, both with the undergrad and the graduate level.

And our non-military students have expressed significant interest and we have enrolment growth at the graduate level and our non-military students as well. So, we do see people taking advantage of the affordability the programs that we offer and advancing in their careers and in a very affordable way during this time of pandemic..

Great, that's helpful. Thanks..

[Operator Instructions] There are no further questions at this time. I'll turn the call back over to Chris for closing remarks..

Thank you, operator. That will conclude our call for today. We thank you for listening and for your continued interest in American Public Education. Good evening..

This concludes today's conference call. You may now disconnect..