Good afternoon, ladies and gentlemen. Welcome to the APEI Fourth Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode and please be advised that this call is being recorded. [Operator Instructions] And now at this time, I'll turn things over to Mr. Ryan Koren, AVP of Investor Relations. Please go ahead, sir..

Thank you, and good afternoon, everyone. Welcome to American Public Education's conference call to discuss fourth quarter 2022 financial and operating results.

Joining me on the call today are Angela Selden, President and Chief Executive Officer; Rick Sunderland, Executive Vice President and Chief Financial Officer; and Steve Somers, Senior Vice President and Chief Strategy and Corporate Development Officer.

Materials for the conference call today are available under the Events & Presentations section of the APEI website.

Please note that statements made during this conference call and any accompanying presentation materials regarding APEI and its subsidiaries that are not historical facts may be forward-looking statements based on current expectations, assumptions, estimates and projections about APEI and the industry.

In some cases, forward-looking statements may be identified by words such as anticipate, believe, seek, could, estimate, expect, can, may, plan, should, will, would and similar words or their opposites.

Forward-looking statements include, without limitation, statements regarding expected growth, registrations and enrollments, revenue, net income, earnings per share and EBITDA as well as other earnings guidance, expectations regarding initiatives to improve NCLEX pass rates and reposition Rasmussen University for growth, plans and expectations with respect to other recent, current and future initiatives, including with respect to leadership and future competition, demand or expectations for non-military enrollment at APUS and for nursing education.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

These risks and uncertainties include, among others, risks related to changes in management, our ability to meet regulatory and accreditor requirements such as NCLEX pass rates and retention rates, regulatory matters such as the impact of amended 90/10 rules or dependence on effectiveness of our ability to attract students who persist and are likely to succeed in our institutions programs changing market demands, impacts of increases in labor costs and enrollment trends, the reduction elimination suspension of tuition assistance, challenges with integrating acquisitions, competitive pressures and those described in our presentation, today's press release, the company's Form 10-K filed with the SEC today and 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. This presentation contains references to non-GAAP financial information.

A reconciliation between the non-GAAP financial measures we use and the most directly comparable GAAP measures is located in the appendix to our presentation and in our earnings release.

Management believes that our presentation of non-GAAP financial information provides useful supplemental information to investors regarding our results of operations and should only be considered in addition to and not as a substitute for or superior to any measure of financial performance prepared in accordance with GAAP.

I will now turn the call over to our CEO, Angela Selden. Angie, please go ahead..

to drive sustainable growth for both its on-ground nursing and allied health programs as well as its fully online program, dedicate resources more directly to improve NCLEX first-time pass rates and reduce operating costs.

Just prior to the organizational realignment, Rasmussen delivered in 4Q '22 its first quarter of year-over-year new student start growth in six quarters.

In addition to the several unexpected leadership departures, which we believe are having a negative impact on 1H '23 starts, John Lock, who we announced as President but hadn't yet started, notified us last week that for personal reasons, he would be unable to join Rasmussen as expected.

Rasmussen is now continuing its national search for a permanent leader. In the interim, Javier Miyares, retired President of University of Maryland Global Campus will continue as Acting President.

Importantly, Rasmussen was able to successfully rehire a 16-year Rasmussen veteran of admissions and enrollment as its Chief Operations Officer after a four-month hiatus. He was a key contributor to driving the 4Q '22 start at Rasmussen before his departure, and we can already see his positive impact again at the university.

Overall, we have come to believe that many of Rasmussen's challenge over the past year can be attributed to unexpected openings in key leadership during a period of significant change.

As we turn our attention to improving nursing enrollments and NCLEX pass rates from April of 2020 until July of '22 under the direction of Rasmussen Nursing leadership, campuses delivered the majority of coursework and labs online due to their COVID-19 protocols.

This drove a total enrollment growth to record highs due both to online accessibility for students to enroll and progress and ease for faculty to teach and support clinicals.

In July 2022, as we previously shared in prior earnings calls, when pre-licensure nursing education returned on ground, Rasmussen introduced enrollment caps in select markets including to ensure students would have the proper clinical experience and also experienced higher costs for in-person faculty to oversee those clinicals.

Initiatives were implemented in 4Q '22 to improve student outcomes. First, Rasmussen launched a new Center for Educational Readiness to better align faculty and clinical to student requirements, for progression and completion.

Second, Rasmussen established a Center for Nursing Excellence, focused on supporting student preparedness for NCLEX first-time pass rates. In its work, the center has gathered new insights as to the lower scores at certain campuses and has put in place several initiatives to improve scores and drive student success.

The center has also introduced greater rigor to entrance exam requirements and has re-implemented on-ground proctored testing environments to ensure assessment integrity. This tightening of admissions and progression standards have, however, contributed to the near-term declines in new enrollment starts and pre-licensure nursing retention.

Due to the cohort-based enrollment model, these initiatives are contributing to near-term negative impacts on enrollment but we believe we have a long-term, but gradual positive impact on NCLEX first-time pass rates.

These unexpected circumstances in 1Q '23 contributed to a total enrollment drop from 2022 ending enrollment of about 15,600 to approximately 14,300. The impact of this decline on APEI's 2023 revenue and adjusted EBITDA is expected to be significant, and we will not see the improvement in 2023 that we had signaled in the September 2022 supplement.

As we think about the financial results of Rasmussen, it's important to understand that its considerable campus-based operations and high fixed cost structure create a highly leveraged operating model that scales both up and down. At current enrollment levels, these fixed costs are weighing on near-term profitability.

As such, we are pursuing actions to improve Rasmussen financial results, including implementing selective price increases in Q1 '23, focused on -- focusing on enrolling students at locations and in programs, including online that don't have enrollment caps or restrictions and continuing brand building for our online enrollment momentum.

Finally, it's important to note that since APEI's acquisition of Rasmussen, due to the Department of Ed's imposed growth restrictions, Rasmussen has not yet been permitted to open new locations. Once these restrictions expire, we intend to pursue additional growth opportunities.

Clearly, 2023 is now a rebuilding year at Rasmussen in terms of on-ground Nursing and Allied Health enrollment and collects first-time pass rates and profitability.

I want to take a moment to thank the incredibly dedicated faculty and employees at Rasmussen, who are working tirelessly on behalf of students, and their success to move the university forward despite these short-term setbacks. In summary, in 2023, three of APEI's four education units are poised for growth and margin improvement.

And we are tackling near-term challenges to set basis on a path to sustainable growth and profitability with a bright future that we ultimately expect. We believe APEI remains solidly positioned to execute on this strategy and to experience future momentum.

I would now like to turn the call over to Rick Sunderland to review our fourth quarter results and first quarter outlook in further detail..

In all cases, these net course registration and enrollments are actual given the timing of the monthly starts at APUS and the quarterly starts at Rasmussen and Hondros. In the first quarter of 2023, APUS total net course registrations will increase 2.4% year-over-year.

At Rasmussen, first quarter total nursing student enrollment decreased 19% year-over-year to approximately 6,800 students. Non-nursing total enrollment declined 4% for an aggregate Rasmussen enrollment decline of approximately 12% year-over-year to approximately 14,300 students.

At Hondros, first quarter total student enrollment increased by 10% year-over-year to approximately 2,700 students, its largest total enrollment figure ever. In the first quarter of 2023, consolidated revenue is expected to be between $155.1 million and $157.1 million.

The company expects the net loss available to common shareholders to be between a loss of $9.7 million and a loss of $8.4 million and loss per diluted share minus $0.51 to minus $0.44 per diluted share. Adjusted EBITDA is expected to be between $2.4 million and $4.1 million for the first quarter of 2023.

With that, operator, we would like to open the line for questions..

[Operator Instructions] And we'll take our first question this afternoon from Matthew Filek of William Blair..

This is Matt Filek on for Stephen Sheldon. To start, what Rasmussen nursing campuses are currently not meeting state nursing board standards for first time NCLEX pass rates and have those campuses received sanctions from the nursing boards in the form of enrollment caps.

Just looking for some more clarity on the impact of the NCLEX score issue on enrollments?.

It's Angie Selden. I'm happy to begin answering your question. I'll start by saying that the the caps that we have in two states in Minnesota and in Illinois are primarily sanctioned by us. In Minnesota, in particular, we have voluntarily identified caps in our nursing program.

As we stated on previous earnings calls, largely because we wanted to ensure that we had sufficient clinical slots and faculties to oversee those clinicals to ensure that the students that we had already enrolled in the program could persist and complete. So in Minnesota, those enrollment caps are self-imposed.

In Illinois, we have been asked by the Board of Nursing to achieve an enrollment level that they've asked us to achieve. And we continue to work very positively with the Illinois Board of Nursing on those enrollment levels..

Yes.

And then I guess, just to clarify, so in your campuses outside of Illinois and Minnesota, how are NCLEX scores looking there? And is there any risk that nursing boards in those states impose enrollment sanctions looking ahead?.

Good question. So we are seeing a national trend in 2022 as a result of COVID, where essentially, institutions across the board are seeing NCLEX scores below prior year performance. Each board of nursing in each state has a different way of measuring the standard of achievement in NCLEX.

And we are continuing to work collaboratively with our remaining states about our NCLEX performance and have not received any notification from them about any concerns that they have about our NCLEX performance so far..

And then another question.

I know you guys talked about some pricing increases across your educational units, just looking for some more context on how that might affect revenue per enrolment?.

Great question, and thank you for that. Yes. We -- in the case of our campuses, we're seeing anywhere -- our campus-based programs we're seeing anywhere between 5% and 10% price increase. And we believe for those programs that, that is going to have a meaningful impact on offsetting the faculty cost.

We're also really looking carefully now, in particular at those campus based programs both at Hondros and Rasmussen, to ensure that we have full productivity of our campus-based faculty and that the courses and the classrooms that they're teaching are being fully utilized by students.

So there's a cost structure component, but there's also a utilization component that we really think will help us improve the overall revenue and cost ratio inside the campus-based businesses..

We go next now to Raj Sharma at B. Riley..

I would like to understand better just a few months ago, you had announced these changes in pro forma EBITDA for the year, changes in cost structure and the different initiatives that you're playing.

Can you please give us more color on have those initiatives been enacted? Would they still deliver results, of course, offset by declining revenues or those initiatives are not playing out either.

Can you please break that down?.

Sure. Raj, this is Angie. We have fully implemented and seen the benefits of those initiatives. And when we look at -- where we are from an enrollment perspective now versus what the enrollment level was that went into the September supplement. There's meaningful departure in the enrollment levels.

And that's really the only difference that we're seeing right now in that point in time versus the point in time that we're in right now. So as you can imagine, we are laser-focused on healthy enrollment momentum at Rasmussen, so ensuring that the students that we enroll are able to successfully persisting and pass the NCLEX exam the first time.

It's a really important measure of our contribution to the student success. And so in doing so, some of the policies that we implemented recently have narrowed the pipeline of students that we are contemplating for the program.

And I would say one of the bigger things that has changed that enrollment trajectory really was the reorganization and operational improvement that we made in the fourth quarter of '22. We have assigned people their new responsibilities that had a disproportionate effect on 1Q '23 enrollment results.

And that, coupled with the fact that we had some unexpected leadership departures at the enrollments and senior leadership levels has made 1Q '23, not the quarter we had hoped or expected.

We do believe we have line of sight to the initiatives and the activities that are necessary to get Rasmussen back to enrollment levels that you saw in the supplement last year.

And we have confidence that we have many of the team members in place, including the great news of having [Duane Bortoto] rejoin us as Chief Operations Officer, one of our key enrollment leaders who departed in the fourth quarter and then returned in February.

So we are on a path to implementing the initiatives that we've outlined to return to the enrollment levels that we had seen in 2022, and we believe that we have the necessary actions in place to return to those levels and more..

I mean, would you characterize the decline -- would you characterize this new pro forma EBITDA number to be -- to have been completely offset by these enrollment declines, the gains that you were expecting this year from your initiatives, have they been offset or only partially offset and that you have a line of sight into second half that helps you perhaps to regain some of it..

Well, a good question, Raj. I mentioned to you that we're really pleased with the both the enrollment momentum and the margin expansion at APUS at Hondros and at Graduate School. So in each of those cases, those cost initiatives that we undertook at the end of last year have taken hold and are really bearing fruit.

As you can imagine, with a campus-based high fixed cost model that Rasmussen has for more than half of its revenue, there's an enrollment level that we need to achieve after which you can see margin expansion occur. And so we need to return to those enrollment levels.

It's not a -- it's not out of reach for us to be able to get to those enrollment levels and more, and it's a modest decline in enrollment for a significant negative impact in the EBITDA performance.

But like I said, we have the people in place and the initiatives in place, we're going to fill a couple of additional leadership, open leadership slots, but I have confidence that the team will be actively implementing the initiatives to return to those enrollment levels within reach..

And then could you talk a little bit about -- give more color on the integration of Rasmussen. Would you characterize the integration of Rasmussen has been significantly worse than expected? The reason behind the departures, I mean how many departures is there.

Could you give some more color on that, please?.

Sure. I don't see this as a post-merger integration issue. I see it as a very seasoned leadership team with the folks leaving, having dozens of years of experience at Rasmussen.

And I think you couple that loss of legacy knowledge and history with the fact that those departures occurred at a time when we simplified the organizational structure to a campus-based operating model and an online-based operating model.

And that change for the folks inside of Rasmussen had to be managed without the senior leadership in place, in some cases, to be able to help them get to the new organizational structure and the new operating model. So those two things happened simultaneously, but in an unexpected manner.

I believe that refreshment will make the university stronger and that we are allowing very seasoned next-level folks elevate into operating roles. I'm pleased to say that all five of our enrollment and operations folks have at least 10 years each experience with the university and have been able to step up and step into new roles.

And so we're allowing people who have deep expertise at Rasmussen to rise up into the next level and really perform. We have seasoned academic leadership as well. Our Provost is probably one of the least experienced inside of Rasmussen, at the university, having been here just about a year now.

But I have very -- I have a lot of confidence in this team. And our open search for the President is something that is a high priority and we will continue to do that very actively and aggressively.

In the meantime, I spend a really important amount of my time really focused on the performance improvement at Rasmussen and also making sure I'm hearing from the team, the ideas that they have for growth as well as many of the obstacles that they may suggest that we need to remove in order to help them get there faster..

And then just lastly, can you please talk about maybe Rick can. Can you talk about the preferred, the thinking behind the preferred.

What was the need for the rationale for and the terms around it?.

Yes. Thank you, Raj. Really to replace debt with some equity for purposes of our once-a-year calculation on the composite score, we wanted to combine the proceeds from the preferred, again, replacing equity with debt -- with equity with incremental debt pay down to really, I guess, shore up the composite score at the 1.5 or above level..

[Operator Instructions] Okay. Ladies and gentlemen, it appears that we have no further questions today. So that will bring us to the close of APEI's fourth quarter 2022 results conference call. Again, I would like to thank you all so much for joining us today and wish you all a great afternoon. Goodbye..