Good day and thank you for standing by. Welcome to the American Public Education reports Second Quarter 2021 Results Conference Call. Thank you. I would now like to hand the conference over to your speaker today, Mr. Rick Sunderland, Chief Financial Officer. Please go ahead..

Thank you, operator and good evening everyone. Materials that accompany today’s conference call are available in the Events and Presentations section of the APEI 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 maybe 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 those expressed or implied by such statements.

Forward-looking statements maybe able to be identified by words such as anticipate, believe, seek, could, estimate, expect, intend, may, plan, should, will, would and similar words or their opposites.

Forward-looking statements include without limitation, statements regarding the impact of recent disruption to the Army’s tuition assistance programs, expected growth, registrations in enrollments, revenue, net income, earnings per share and EBITDA, expected benefits of the acquisition of Rasmussen University, the closing of the acquisition and its timing, expected financial results for Rasmussen, future impacts of the COVID-19 pandemic, the ability to transform the student experience and deliver return on learner’s educational investment, the impact of organizational changes, the ability to maintain an attractive risk profile, plans with respect to recent, current and future initiatives and future demand for online and nursing education.

Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including risks related to actions taken by the Department of Defense or branches of the U.S.

Armed Forces, including actions related to the disruption and suspension of tuition assistance, the effects of an APEI’s response to the COVID-19 pandemic, including impacts on the demand environment as the pandemic abates, the acquisition of Rasmussen University, changes to and expectations regarding our enrollment, registrations and the composition of our student body and the risk factors described in the Risk Factors section and elsewhere in the company’s quarterly report on Form 10-Q filed with the SEC today, in the company’s most recent annual report on Form 10-K and in the company’s other SEC filings.

The company undertakes no obligation to update publicly any forward-looking statements for any reason unless required by law, even if new information becomes available or other events occur in the future. I will now turn the call over to our CEO, Angela Selden..

Good afternoon and thank you for joining our call to discuss American Public Education’s second quarter earnings, along with an update on our business momentum. Today I will cover four topics before turning the call over to our CFO, Rick Sunderland, who will review some key financial metrics and results.

First, I will provide an update on the Rasmussen transaction. Next, I will discuss momentum at APUS, including an Army portal update, sharing context regarding the continued impact the outage has had on both our enrollments and cash collections.

I will also share some actions we have taken to reaccelerate momentum along with efforts underway to shore up cash flows. Third will be an update on Hondros nursing momentum. And last, I will share plans to begin providing you with a longer term outlook, so you can better measure quarterly and annual performance in the context of our strategic goals.

Turning to Page 4, I’d like to discuss the Rasmussen transaction. We remain on track to close the Rasmussen transaction in the third quarter of 2021. As we have shared previously, Rasmussen University has approximately 18,000 students with a roughly 50:50 mix of nursing and non-nursing students and 40% of non-nursing students in health sciences.

When we announced the transaction in October 2020, we shared that Rasmussen’s fiscal year 2020 year end results ending September were $256 million of revenue and approximately $40 million of adjusted EBITDA.

On a trailing 12-month basis and unaudited financials through June of 2021, Rasmussen generated $273 million of revenue and $46 million of adjusted EBITDA, demonstrating continued growth and margin expansion of about 120 basis points.

For the 6 month period ending June 30, 2021, Rasmussen grew revenue over 9% to $137 million from $126 million and adjusted EBITDA grew to $22 million from $18 million. Upon closing, Rasmussen will become a wholly owned subsidiary of APEI.

We have worked together collaboratively with Rasmussen on integration planning and a smooth transition remains job one, so as not to disrupt Rasmussen’s momentum.

As we have become more familiar with the Rasmussen team, its leaders and the business, we are extremely pleased that the institution we are acquiring is not only as originally understood, but even better in many respects. We continue to explore synergy opportunities from the transaction.

Our initial expectation of $5 million of synergies in the first 12 months following close now appears to be modest and we expect we should exceed that amount. We could not be more excited to welcome Rasmussen into the APEI portfolio.

Moving to Page 5, let me turn to the status of the Army’s new tuition assistance portal IgniteED, which allows enlisted soldiers to utilize their earned tuition benefit for serving our country.

As we shared with you on our May earnings call in late January 2021, the Army notified all higher education providers that its prior tuition assistance or TA system, GoArmyEd will go offline for approximately 3 weeks, starting on February 12 and will be replaced with the new system, ArmyIgniteED on March 8.

ArmyIgniteED was indeed brought online on March 8, but experienced data transfer issues and was taken back offline thereafter. 5 months after the old TA system was taken offline, the new TA system IgniteED was brought online on July 19. Since then, only portions of the new system appear to be operating successfully.

IgniteED data requirements continue to change and the new manual processes are flooding the Army’s on-base General Services counselors. Thus, since early March, only APUS students willing to forego actual TA certainty, continue to enroll with an exception to policy, or ETP.

As a result, Army registrations were down 26% in 2Q versus a 51% increase in the second quarter of 2020. Please keep in mind however that 2020 had also experienced a COVID-related increase.

We have seen our July 2021 and August 2021 starts also affected, where Army enrollments were down 21% versus last July and August enrollments will also be adversely impacted down by approximately 4%. In addition to enrollment challenges, the portal outage has also affected our ability to collect outstanding balances from the Army through the system.

Today, this balanced approach is $17 million in unpaid tuition. As the largest educator of Army soldiers, we have been and continue to work with the Army to share files, test and validate the system and continue to collaborate.

We continue to work intensely to reach soldiers and help them register, many of whom contacted us previously and deferred enrolling due to the uncertainty around their eligibility for tuition assistance.

As we look to September, which is traditionally one of our strongest months, we are working to generate a bounce back in registrations as soldiers look towards the fall enrollment period. We can’t yet fully forecast the lingering effects into the fourth quarter.

Unfortunately, what was originally explained as a transition period of 3 weeks and an outage period has turned into the already a 5 plus month period. Despite this setback, we expect that this is a one-time event that essentially shifts many of the loss enrollments out by about a half year.

Overall, total net registrations of 82,600 in the second quarter of 2021 were down 8% versus the same period in 2020, at the low end of our guidance. However, to put that in perspective, that is still up 9% versus the second quarter of 2019 or about 4% on a 2-year CAGR basis.

Outside Army, military segments, including Navy and several others, remained strong.

We have seen a moderation in demand across non-military student segments, which we believe is caused by students taking a pause in their education due to positive economic trends and a general decision over the summer to engage in other areas of life previously put on hold by the COVID pandemic.

With respect to the third quarter, we expect that registrations will be down 8% to 13% to between 78,500 and 83,000, which would still be up versus the third quarter of 2019 by 2% to 8% despite the sharp impact from the portage outage.

As we move to Page 6, even as the Army portal issue starts to moderate and we remain optimistic that we will return to growth at APUS, we felt compelled to take swift action to improve APUS enrollment momentum for the remainder of 2021 and to improve the foundation for longer term growth. First, Dr.

Wade Dyke President of APUS has asked Harry Wilkins, Hondros’ CEO to assist APUS in further modernizing enrollment and admissions, much like he has done recently when he returned Hondros and to transfer – he returned to Hondros to transform and grow the institution over the last 2 years.

Harry has deep familiarity with APUS having served from 2001 to 2013 as advisor, trustee and CFO before beginning his first term as CEO of Hondros. Harry has deep familiarity with the APUS operating model, the systems and the value levers to pull that can improve enrollment momentum.

Harry’s focus will be on both near-term growth initiatives and building a healthy sustainable student-centric admissions and enrollment processes. APUS is also engaged in outside consulting firms to support Harry and the entire APUS team with resources to carryout this important work.

At Hondros, Harry has built a strong team and a solid operating model. So, the APEI Board of Directors and I have gotten comfortable with this near-term need to split his time between Hondros and APUS.

In parallel to the growth initiatives that Harry and team are working on, we have implemented cost reductions across APUS and APEI commensurate with the lower enrollment to bolster EBITDA and cash flow in 2021 and beyond.

In order to make up for some of the loss of cash flow from Army, these plans include a modest, but strategic reduction in headcount, along with other non-labor cost savings that are expected to result in between $5 million and $6 million in savings and improve EBITDA through the balance of 2021.

We are taking a very ROI-focused approach to ensure that we are investing in the most productive areas that preserve our academics and student service strengths. Last, APUS has just hired a veteran leader to Head of Corporate Partnerships.

This individual has in past roles secured meaningful corporate partnerships with some of the most widely known consumer brands. We look forward to the impact of his contributions. Let’s turn our attention to Hondros on Page 7, which continues to perform at a high level.

Total enrollments in second quarter increased 36% to almost 2,400 students, driven by strong growth in both the PN and ADN programs.

The ADN/RN program has continued to perform strongly, up 45% in part driven by the launch of our direct entry program in the fourth quarter of 2019 as well as continued momentum in our PN program, which acts as a feeder to the ADN program. For the third quarter of ‘21, we expect total enrollments to be up 19% to over 2,300 students versus a year ago.

Hondros continues to be profitable, both for the quarter and year-to-date. While we have seen third quarter new student enrollment softened in part we believe due to the prospective students choosing to defer enrollment to enjoy summer activities, the early metrics for the fourth quarter show resurgence in enrollments.

This term is shaping up to be the best ever, with strong new student growth, which would be on top of 34% growth in the same term of 2020.

Further supporting our enthusiasm for Hondros’ continued enrollment growth is that the Indiana Board of Nursing increased the cap on student enrollment at our Indianapolis campus by 100% to 60% from 30% and we will have the opportunity to request an additional increase in February of 2022.

The first cohort of students to graduate and sit for the NCLEX exam resulted in a 100% pass rate, further demonstrating the high quality of our PN program. Enrollment at our recently opened Akron, Ohio campus is now ramping.

And as we shared with you during our May earnings call, we are in the process of obtaining the approvals to open a campus in the Detroit, Michigan area, which could be open as soon as 3Q of 2022.

As I mentioned in my opening comments, we are enthusiastic about the continuing transformation of our company and our institutions and the closing of the Rasmussen acquisition.

To help you track our performance and our trajectory over time and hold us accountable to our goals, we intend to host an Investor Analyst Day in the late fourth quarter or early in 2022 to provide you with our longer term strategic outlook and financial and operating metric targets.

As part of this, we also anticipate harmonizing our KPIs across the institutions and business units, so that we are speaking consistently about those metrics. We are excited about our plans and look forward to sharing more with you in the coming months. Now, let me invite Rick to discuss some key financial metrics from the quarter and our guidance..

approximately between $1.5 million to $2.5 million in professional fees related to integration planning and execution of the Rasmussen acquisition; approximately $2 million in professional fees in support of enrollment and student retention momentum at APUS; and approximately between $1.3 million and $2.3 million in cost savings in our APEI segment net of severance.

Adjusted EBITDA is expected to be between $6.5 million and $8.5 million in the third quarter of 2021. Now, I will turn the call back to Angie for final remarks..

first, ensuring a high-quality execution of the integration plan for Rasmussen University, including the synergy capture, regaining both Army enrollment momentum and transforming the admissions and enrollment processes at APUS, all while staying true to our mission of HEROI, delivering a high-quality education at an affordable price to students at each of our institutions.

Operator, please now open the line for questions..

Thank you, Angie. Your first question comes from the line of Tobey Sommer from Truist Securities. Sir, your line is open..

Hey, good evening everyone. This is Jasper Bibb on for Tobey. So, I just wanted to ask two clarification questions on TA.

At this point, are most Army students are starting now able to receive TA benefits for their fall classes without an exception of policy? And what’s kind of been the general experience of getting students reimbursed for classes they might have taken during the assistance offline?.

Hi, I will start this question and then ask for Rick to provide any additional details. So, without going into lots of specificity that what I will share with you is that the issue, the data issue that exists right now is the returning students’ ability to tap into their degree plan.

The degree plan when loaded into the TA system helps the Army understand what program the student is pursuing from a higher education perspective. And also to understand which courses they have already taken. The data exchange on the degree plans isn’t working right now.

So, the vast majority of our APUS students continued to be operating in an exception to policy, very few of the students that we are serving today have successfully processed their TA request to the ArmyIgniteED system..

Okay, so that’s helpful. And then some of your peers cited a bit of upwards pressure on acquisition costs.

I was curious what your experience has been on that front and how your marketing was trended?.

Great question, one of the key focus areas that Harry Wilkins will spend time on in conjunction with APUS leadership is really a focus on converting the leads that we are receiving, because of the value proposition of APEI Higher Ed return on educational investment, the fact that we have a very affordable opportunity for students to pursue their higher education, we don’t see pressure on the acquisition costs.

What we want to do is make sure we take every lead that we receive, and convert every one of those at the highest probability of conversion.

And so a big focus for us will be optimizing the marketing investments that we have been making over the course of the last six months of 2021 to ensure that we make the most of the marketing dollars we are spending..

Okay.

And then just following up on the strategic initiatives that as APUS discussed earlier, can you give a bit of color on the opportunity you are seeing in corporate partnerships, and just talk about what types of corporates you might be targeting in that effort just given the unique student body, heavily military veterans and service?.

Great, question. I think we see that there is a keen interest in military and veterans, students, and their backgrounds and the discipline, the experiences that they have received.

And so we believe that there is a really symbiotic relationship that can be established between our student population and the corporate companies who are looking intently at finding ways to tap into active duty military students who are stepping away, and veterans.

And so it’s through that lens that we will be focusing a lot of our time and attention with our new corporate partnership leader..

Thanks for taking the question. I will get back in the queue here..

Thanks so much..

Thank you. Your next question comes from the line of Stephen Sheldon from William Blair. Your line is open..

Hey, thanks for taking my questions.

One of the asked, first kind of what still needs to be done or what approvals are still needed to get the Rasmussen deal done and what’s your level of competence that have been completed now, relative to a few months ago?.

Hi, Stephen, great question. We are really not in a position to discuss the details around the remaining closing conditions. But we have a very high degree of confidence that we will be able to close the Rasmussen transaction by the end of the third quarter..

Okay, great.

And it sounds like rather than continuing to put up really impressive growth here, anything you can share there on what growth trends and maybe look like between their nursing and non-nursing programs and the potential sustainability of the growth they have been putting up here over the last year or so?.

I mean, let’s turn that question over to Steve Somers..

Yes. Hi, Stephen. The general trend at Rasmussen without getting into the specifics is that the nursing business and the enrollment there has outpaced the non-nursing. And that’s really a trend that has been consistent for the last several years.

And so the mix shift has moved more dramatically towards the nursing side and is roughly 50-50 now, which if you look back 3 years or 4 years ago was closer to 30% on the nursing side. That has a lot to do with where they have been focusing their marketing and marketing dollars and their resources in rolling out programs as well..

Thanks..

Thank you. Your next question comes from the line of Greg Pendy from Sidoti. Your line is open..

Hi, guys, thanks for taking my questions. Just in light of the good trends you have seen at Hondros. You mentioned the NCLEX at the new campus was 100%.

Can you speak to the overall NCLEX pass rate trends that you have been seeing in light of the moment recoveries that are going on there?.

Hi, Greg, great to speak with you. What we are seeing so far in 2021, is a slight improvement. As you know, NCLEX scores are measured by program by campus. And so we pay very careful attention to those trends.

The continuous improvement initiatives that Harry has put in place, include the team focused on the academic rigor, the sequencing of the courses, the support, the academic advising and support that we have implemented at Hondros, in order to be able to make sure that students have both the content that they need, and also the confidence to be able to prepare for and sit for the NCLEX exam.

And so we believe that all of those investments are paying off in terms of what we are seeing as improvements year-over-year..

Great. And then just one more question, just trying to put together the guidance, if you – if I am not mistaken, you said July for Army registrations was down 21% and then they improved to down 4% in August. I might be incorrect in saying that.

But if I am correct, how should we be thinking about revenue per student, the impact on that, on APUS assuming that we have sort of a strong rebound at the tail end of the quarter?.

So Greg, revenue per student is on average lower than our non-military students, right. So, they get what’s called the freedom grant. So, they are at the undergrad level and $250 per credit hour, whereas non-military are $285. So, it’s about $35 difference.

As you have seen the mix shift, shift towards more military, away from the non-military, which has been the trend over the last 1 year, 1.5 year, you probably have observed a slight decline in overall revenue per student. Of course, that would have been offset by the 5% tuition increase we did for the non-military students in January of 2020.

I don-t – from my seat, I don’t think that mix shift is necessarily material in terms of overall kind of revenue trends versus registration trends.

They tend to track pretty closely to do back to the first quarter, there was some daylight between those two simply because the first quarter of ‘20, the comparable period was the first quarter of the price increase and it was making its way into the system as students could register five months in advance.

But if you look at APUS in the second quarter, the change in overall revenues is tracking fairly closely to that change in overall registrations..

That’s helpful. Thanks a lot..

Thank you. Your next question comes from the line of Raj Sharma of B. Riley. Your line is open..

Hi. Thank you, guys. Thank you for taking my questions. So, I wanted to understand the Army portal was supposed to be back in June. But then it didn’t come back until the third week of July.

But it came back on the daily exchange is not working for the students who want to get on and figure out whether they will get approval, could you please give some more color on that?.

Sure, Raj. It’s Angie, I will start and then happy to have Rick weigh in with more details. Our understanding is that when they moved from their old system, GoArmyEd to the new system, IgniteED that there was a process and procedure change. In the past, the soldiers would enroll simultaneously in the TA system and in our system.

And now they have created more dependency between data feeds back and forth. So, now the students need to enroll in our system, we send those requests and inquiries to the IgniteED system. And then they are supposed to push the information back to us with the approvals.

The dilemma, as I mentioned a few minutes ago is that they approved TA when they see that a soldier has a degree plan. And they understand which courses that soldier has already taken.

And given that the degree plan data load hasn’t been successful, our understanding is for any institution, not just ours, right, the changing the basically the layout of the data feeds.

Any soldier who had a degree plan with us prior is basically enrolling in courses through the ETP when they choose to do that, with the belief and the hope that when their degree plan gets loaded into the new system, and the courses that they have taken subsequently match up to that degree plan, that that will trigger, satisfactory set of conditions that allows TA to cover those enrollments.

So, as you – I am sure for you it is a challenge to anticipate what the next month is going to look like. So, stand in our shoes and imagine how we are also experiencing it, because we are also given the information, which is the best information that the Army has at any point in time about what they believe, will be a positive next step.

And we take those steps together. And we are seeing forward progress. But as you can see from the commentary we have provided today, it’s not fully successful at this point.

And that is measured both in terms of TA approved enrollments, but also the $17 million of students that we have served through the ETP that we haven’t been able to collect any kind of payment on so far..

So, hey, Raj, it’s Rick. Let me just add to that I agree with everything Angela said, I just want to highlight the point that the issue exists on the Army side, and not on our side as they continue to update file specifications. And I am going to give a shot out to our IT team, they probably never had that on earnings call before.

They have been very agile in responding to the incremental changes that the Army provides us at file specs, making sure that we are staying as current as we can relate to the file requirements. So, it’s an Army side issue.

They are working through some field specifications on their side, where we are staying close to that, updating the files on our end, and are ready to submit when we get the green light from the Army..

But so is it fair to say for all practical purposes, the portal is still not effective/working in the center, you are enrolling the Army students and then getting paid, last quarter – so that – is that why 3Q is guided, the impact is similar to what 2Q impact was because of this portal outage?.

Yes. Certainly for the student – returning students, we have over 22,000 students whose degree plans have not yet been successfully loaded into the IgniteEd system. And we believe that the new student process has more promise. We are seeing a trickle of students coming through what should be the new fully operational process.

But we see predominantly the same situation that we had in the last quarter to answer your question specifically. Yes..

But and so you – and you don’t know whether this extends into Q4 or not.

In Q2, about 25, right, that quarter the enrollments from Military were impacted? Is that a similar number here in the third quarter?.

We believe it’s roughly that same impact in Q3, yes..

Okay, thank you. And then my next question is also seems like the non-military surprised to the downside in second quarter, as well. I just wanted to kind of understand what could you do to fix that and get it to grow again? What’s going to….

Yes, it’s a small, it’s a small decline. Very modest relative to some of the other declines we are seeing. And certainly, we have taken swift action. Dr. Wade Dike has, as I mentioned, introduced Harry Wilkins into the APUS enrollment and admissions process. We feel that currently, our marketing investments are yielding high quality leads.

And what we want to do over the course of the next, really the next four months, is to work every single one of those leads and ensure that we are maximizing the enrollment, momentum and impact that we can from the leads that we are generating.

We have a substantial number of non-military leads that are coming into the top of the funnel, and we are turning over every stone to make the most of those leads..

Got it. Thank you. I will take it offline. Thanks..

Okay. Thank you..

Thank you, Raj..

Thank you. There are no further questions at this time. I will now turn the call back to Rick. Please go ahead..

Thank you everyone. Have a good evening. This concludes our call. Thank you..

This concludes today’s conference call. Thank you for participating. You may now disconnect..