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Operator: 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. And now at this time, I’ll turn things over to Mr. Ryan Koren, AVP of Investor Relations. Please go ahead, sir.

Ryan Koren : 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.

Angela Selden : Thank you, Ryan. Good afternoon, and thank you for joining our call to discuss 4Q ’22 and full year 2022 results for American Public Education. As you can see from today’s APEI press release, we met or exceeded 4Q ’22 guidance for enrollment, revenue and adjusted EBITDA results. Rick Sunderland, APEI’s CFO, will discuss the 4Q ’22 financial results in further detail and first quarter 2023 guidance during his remarks. I would like to start by providing some commentary on the state of APEI and our education units and what we see for 2023. There are three key themes: First, momentum continues to improve at three of APEI’s four education units. We’re fully staffed, dedicated and permanent leadership are present. For the full year 2023, we expect revenue growth, EBITDA increases and margin expansion at APUS, Hondros College of Nursing, and Graduate School USA.

Second, 2023 will be a year of rebuilding at Rasmussen University to replenish leadership, and drive enrollment momentum for long-term sustainable growth and profitability. Rasmussen’s online total enrollments were positive in Q1 ’23 for the second consecutive quarter. However, Rasmussen’s cohort-based, on-ground nursing and residential healthcare enrollment declined in part in 4Q ’22 due to tightened admissions policies and enrollment caps in some markets. We believe this is having a disproportionate and negative impact on starts in both the first quarter and first half of 2023, which in turn will impact full year 2023 revenue and EBITDA. We have put several initiatives in place to help drive enrollments and reduce cost to position the university for overall future growth and success, which I’ll describe shortly.

However, the nursing enrollment declines will weigh on APEI’s overall financial results for 2023. We believe that these enrollment challenges were in part directly related to both the unexpected departures of some key leaders at Rasmussen in late 2022, coupled with the organizational realignment during that same period, which contributed to stalling the momentum that the university had started to see with the positive starts posted in early 4Q ’22. While we have successfully filled some roles, we have active searches to fill critical open positions where we still have interim leadership in place. Third, despite the short-term nursing enrollment challenges at Rasmussen, we remain positive on the sector and on Rasmussen, which we believe is a unique asset in this sector.

The ongoing imbalance of supply and demand for clinical labor continues to result in severe financial, operational and clinical challenges for health systems. The Bureau of Labor Statistics forecast annual shortages of over 225,000 nurses each year for the next eight years, making nursing a highly desirable field for the foreseeable future. As such, we continue to see Rasmussen as a valuable long-term asset for APEI. Further, it’s highly leveraged operating model provides an attractive financial profile as we grow enrollments to continue to address this chronic national healthcare need. Next, I will offer some commentary on each of our education units. At APUS, we expect revenue growth, strong cash generation and adjusted EBITDA margin expansion in 2023.

We continue to see growth in military enrollments as the Army enrollment portal issue is behind us, and we believe other institutions may have exited or are deemphasizing Army soldier education, which has been and continues to be an important student population at APUS. Additionally, we have seen green shoots in APUS’ veterans and non-military net new registrations as President Nuno Fernandes and the APEI marketing team have introduced higher impact marketing initiatives at lower costs. While these non-military enrollments are still a small portion of the APUS business, this is encouraging progress. Having been on board for six months, Nuno and his new team are focused on increasing brand awareness, student retention and graduation margin expansion through an improved student experience, selective price increases, lower advertising spend and increased marketing efficiency.

APUS’ fundamentals are strong, and it remains a strong and steady generator of cash for APEI. At Hondros, under Harry Wilkins’ now full-time leadership, the strong finish to 2022 with 4Q ’22 all-time high student starts and total enrolment, provides a solid jumping off point for accelerating growth in 2023. Hondros opened a new Detroit, Michigan campus with an initial cohort of 30 students in 4Q ’22, and we expect enrollment there to increase quickly during the coming quarters due to strong demand in that market. In 2022, cost pressures based primarily on availability of and demand for nursing faculty impacted profitability, so Hondros has initiated a price increase in 2Q ’23 to help offset some of those costs. Student persistence is also a key focus at Hondros in 2023.

We expect stabilizing costs, continued enrollment momentum and scale to drive improvement at Hondros. At Graduate School, after acquiring the business in January 2022, we built momentum throughout the second half of ’22 and finished 4Q ’22 with high double-digit revenue growth and solid — and that solid revenue momentum is carrying into 2023. 2022 was a year of transformation and turnaround for Graduate School. With much of that work behind us, we thank Steve Somers for his strong leadership as Interim President, while stabilizing Graduate School in 2022. In January of this year, Pepe Carreras started as permanent President and Steve has returned fully to APEI as SVP of Corporate Strategy and Development. For 2023, we expect solid mid- to high-teen percentage growth at Graduate School and improving adjusted EBITDA.

Momentum is strong, and we continue to position Graduate School as APEI’s platform for career learning. Now I’d like to make some additional comments about Rasmussen. As a reminder, during 4Q ’22, Rasmussen began to implement an important organizational and operational realignment in an effort to achieve three things: 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.

Richard Sunderland : Thank you, Angie. Total revenue for the fourth quarter was approximately $152 million, down 1% from the prior year period due primarily to a $7.6 million or 11% decline in revenue at Rasmussen, offset partly by the inclusion of Graduate School revenue of $5.7 million in the 2022 period. On a full year basis, revenue was approximately $606 million in 2022 compared to $419 million in 2021. Note, we acquired Rasmussen on September 1, 2021, and Graduate School in January 2022. And therefore, the 2021 year includes only four months of Rasmussen revenue and no revenue from Graduate School. At APUS, revenue was approximately $73 million for the fourth quarter, roughly flat as compared to the prior year period due to a mix shift at higher net course registrations in the current quarter period were driven by active-duty military, offset by a decrease in veterans and non-military, the latter of which are charged higher tuition and fees.

On a full year basis, APUS revenue increased approximately 1% to $285 million driven by a 1.5% increase in 2022 net course registrations compared to the prior year period. Hondros fourth quarter revenue was approximately $12.6 million which is an increase of 2.8% as compared to the prior year period. For the full year 2022, Hondros revenue was $47.1 million, also up 2.8% compared to the full year 2021. Rasmussen’s fourth quarter revenue was down approximately 11% compared to the prior year period, driven by a decline in enrollment and a slight mix shift towards more online students, which generally pay lower tuition than Rasmussen’s on-ground nursing students. Additionally, consolidated revenue for the quarter and the full year includes $5.7 million and $21.1 million, respectively, of Graduate School USA revenue in Corporate and Other.

On a consolidated basis, APEI adjusted EBITDA was $15.4 million in the current year quarter compared to $29.3 million in the prior year period. The current quarter results represent an adjusted EBITDA margin of 10% as compared to an adjusted EBITDA margin of 19% in the prior year period. The decrease in adjusted EBITDA margin is driven by several factors. APUS experienced improved margins year-over-year driven by the year-over-year increase in total net course registrations and certain cost reduction efforts. Rasmussen’s margins continue to be negatively impacted by enrollment and revenue declines in its primarily fixed cost campus-based operating model. Hondros margins were impacted by higher faculty and non-faculty compensation costs and the ongoing start-up of the new campus in Akron, Ohio and the new campus in Detroit, Michigan, which enrolled its first cohort in the fourth quarter of 2022.

Net loss per diluted share for the current quarter was a loss of $0.35 compared to income per diluted share of $0.50 in the prior year period. Total cash and cash equivalents at December 31, 2022 was approximately $129 million, a decrease of approximately $20 million from year-end 2021. Restricted cash at December 31 was approximately $27 million and continues to be almost entirely comprised of a restricted certificate of deposit that secures a letter of credit for Rasmussen with the Department of Education. The decrease in cash was due to the prepayment of debt, partially offset by an increase in cash provided by operations and the proceeds from our Series A senior preferred stock offering in December 2022. Additionally, after Army transition to ArmyIgnitED 2.0 in August 2022, there was roughly a one-month pause that APEI and other education providers to Army soldiers experienced in being able to submit invoices to Army for courses delivered.

As such, accounts receivable from Army has grown to approximately $26 million, of which $16.5 million is older than 60 days from course start date. Since the beginning of the year, we have collected a total of $14.9 million from Army, representing both current charges and past due amounts with another $4.1 million in process pending payment. Cash provided by operating activities was approximately $29 million for the full year 2022 compared to approximately $16 million in the prior year period. The increase in cash from operating activities was primarily due to payments received from Army and other changes in working capital due to the timing of receipts and payments. In 2021, cash flow from operations was negatively impacted by the timing of the Rasmussen acquisition.

Rasmussen receives the majority of its cash receipts during the first month of each quarter while disbursements occur throughout the quarter. Finally, at the end of the fourth quarter, we completed a $40 million private preferred equity transaction with two of our existing common shareholders. Concurrently, we prepaid $65 million of debt which brings the remaining principal balance of the term loan to approximately $99 million. With this prepayment of debt, API’s net debt is zero at December 31, 2022. There were no borrowings under APEI’s $20 million revolving credit facility, which remains fully available at this time. APEI’s outlook for the first quarter of 2023 is as follows: 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.

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Operator: And we’ll take our first question this afternoon from Matthew Filek of William Blair.

Matthew Filek : 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?

Angela Selden : 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.

Matthew Filek : 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?

Angela Selden : 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.

Matthew Filek : 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?

Angela Selden : 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.

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

Raj Sharma : 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?

Angela Selden : 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 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.

Raj Sharma : 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.

Angela Selden : 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.

Raj Sharma : 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?

Angela Selden : 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.

Raj Sharma : 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?

Richard Sunderland : 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: 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.