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Operator: Hello, and welcome to the American Public Education, Inc. Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Brian Prenoveau, Investor Relations. You may begin.

Brian Prenoveau: Thank you, Sarah, and good afternoon, everyone. Welcome to American Public Education’s conference call to discuss second quarter 2021 results. Joining me on the call today are Angela Selden, President and Chief Executive Officer; Rick Sunderland, Executive Vice President and Chief Financial Officer; Steve Somers, Senior Vice President, Chief Strategy and Corporate Development Officer. Materials for the call today are available in the Quarterly Reports section of APEI’s website. Statements made during this conference call and in any accompanying presentation regarding APEI and its subsidiaries that are not historical facts maybe considered forward-looking statements based on current expectations, assumptions, estimates and projections.

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. Forward-looking statements may sometimes be identified by words like anticipate, believe, seek, could, estimate, expect, can, may, plan, potentially, project, should, will, would and similar or opposite work. Forward-looking statements include, without limitation, statements regarding expectations for registrations and enrollments, revenue, earnings and adjusted EBITDA and other earnings guidance, repositioning Rasmussen University for growth, change in market demands and our ability to satisfy such demand and other company initiatives, including with respect to future competition and demand and cost-saving efforts.

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 today’s presentation and in the earnings release. Management believes that the presentation of non-GAAP financial information provides useful supplemental information to investors regarding its results of operations and should be — and should only be considered in addition to and not as a substitute or superior to any measure of financial performance prepared in accordance with GAAP. Now, I’d like to turn the call over to APEI’s CEO, Angela Selden, Angie. Please go ahead.

Angela Selden: Thank you, Brian. Good afternoon, and thank you for joining American Public Education’s second quarter 2024 earnings call. For those of you new to APEI, our four co-secondary institutions are among the largest in the country in educating adult learners with an emphasis on educating those in service to others, namely new nurses, active duty military, veterans, first responders and the federal workforce. On an annual basis, APEI provides online and campus-based postsecondary education and career learning to approximately 125,000 adult learners worldwide. Our mission is to power purpose, potential and prosperity to those in service to others. On today’s call, we will cover in more detail the following good news highlight.

First, in Q2 2024, this marked the seventh consecutive quarter where APEI’s adjusted EBITDA has met or exceeded guidance. Overall, APEI revenue grew 3.9% year-over-year to $152.9 million. We saw a significant improvement in APEI’s adjusted EBITDA, which grew 24% to $10.9 million, primarily driven by year-over-year operating expense — at both Rasmussen and APEI corporate. Adjusted EBITDA margin expanded by 118 basis points to 7.2% when compared to 2Q 2023. Next, I’m pleased to report that Rasmussen has achieved its first year-over-year positive revenue and enrollment quarter since our acquisition in 2021 and as we had signaled earlier this year. And finally, we are reiterating our full year guidance of revenue between $620 million and $630 million in revenue and adjusted EBITDA between $60 million and $70 million.

Now I’d like to provide more detail about the results and trajectory of our education units, starting first with Rasmussen. I’m very pleased with the progress we have made to stabilize and put Rasmussen back on a trajectory for revenue and enrollment growth and positive EBITDA. Second quarter enrollments, which we shared in our last earnings call were 13,600, down just 2%. More importantly, third quarter enrollments, which we are sharing for the first time today, grew slightly on a year-over-year basis to 13,500 students, powered by double-digit growth in our Nursing and Health Sciences, online programs and is the positive turn in the business towards which we’ve been working. This is particularly noteworthy as Rasmussen decided to suspend new enrollment in its two Wisconsin campuses, which operate in small markets, while it continues to optimize the — campus footprint to improve profitability and to strengthen margins.

While we don’t typically report starts, I think it’s important to note that start growth was nearly 10% in the quarter and reflected positive year-over-year start growth in both Rasmussen online and Rasmussen campus portions of the business. The continued momentum in enrollment also corresponds with growth in revenue, where Rasmussen revenue was up 2%, which is also the first time since APEI’s acquisition and is indicative of the path to continued growth and profitability. EBITDA for the Rasmussen segment was negative in the quarter, with the loss narrowed to minus $4.7 million from minus $7.1 million in the prior year period. In conjunction with the expected growth in enrollments in the second half, we continue to expect Rasmussen to move into positive EBITDA territory in the fourth quarter of 2024, which sets us up for a much stronger profit picture in 2025.

In terms of student outcomes, we again produced strong NCLEX pass rates in the second quarter, where 22 of 25 programs are meeting the required thresholds year-to-date. Now I’d like to turn our attention to APEI’s online university, serving military and veterans, APUS. In 2Q 2024, overall net course registrations increased 1.7% year-over-year, reflecting the strong retention of returning students. Revenue at APUS was higher due to the overall growth in registrations as well as higher average revenue per registration from last year’s mid tuition and fee increases. As APUS has invested in 2024 to strengthen its online curriculum, implement a faculty pay increase for part-time faculty, invest in IT infrastructure optimization and better align its marketing spend, 2Q EBITDA margin was slightly lower year-over-year.

Looking ahead to the third quarter, we would expect EBITDA margins at APUS to be similar given those same factors. At Hondros, as previously reported, 2Q 2024 enrollment remains strong. We also saw growth continue in 3Q 2024, with enrollment increasing more than 10% year-over-year to 3,100 students, even against a strong 17% comp a year ago. Demand remained strong for both the PN and ADN nursing programs with the new Detroit campus performing very well. Legacy campus also contributed to growth, including Indianapolis, where we still operate with enrollment cap as a new program despite exceptional NCLEX pass rates. Starts and Hondros remain robust, and we continue to be pleased with the growth we are seeing. In 3Q ’24, Hondros has relocated one of its Ohio campuses and has experienced some unexpected infrastructure setbacks in that location, which we expect will result in some temporary but limited impact to enrollment at that one location.

Overall, with the stabilization of enrollment and continued improvement in EBITDA at Rasmussen, at APEI, we are now delivering positive growth in revenue, adjusted EBITDA and margins on a consolidated basis. Before turning the call over to Rick Sunderland, APEI’s CFO, I’d like to frame where we are as an enterprise and provide some specificity as to where we’re headed. With the stabilization of Rasmussen well underway, including line of sight to continued enrollment and revenue growth from that unit — we see margins at Rasmussen has been shifting from negative to positive in the fourth quarter, setting the stage for 2025 and beyond. Rasmussen also expects to expand its campus footprint for the first time in over five years. Once the Department of Education growth restrictions are lifted, which will allow us to expand our impact in addressing the large demand for nursing and other clinical roles in our overstretched health care system.

We fundamentally believe in our vision that education can transform lives, advance careers and improve communities. Our four education units were built for service-minded students, offering accessible and affordable higher education and training across a diverse range of subjects. At APEI, we have carved out distinctive market position. American Military University or AMU is the number one provider of higher education to the U.S. military and has been named the top choice nationwide for veterans using their GI Bill benefits. Hondros College of Nursing focuses on educating pre-licensure nursing students at a campuses and is the number one provider of pre-licensure PN education in the state of Ohio. Both Hondros and Rasmussen continue to tackle the chronic nursery shortage by graduating thousands of new nurses each year where the demand for nurses is expected to grow significantly to $3.3 million in 2031, an increase of 195,000 and an additional 203,000 job openings each year when retirements and workforce exits are factored in.

Overall, higher education remains a critical accelerator for anyone seeking employment in the US with an increasing amount of working adult students driving the higher education market, which is expected to reach approximately $173 billion by 2030. We are proud that APEI’s affordable, learn to earn focus enables students to experience a strong lifelong return on their educational investment. With that, let me turn the call over to APEI’s CFO, Rick Sunderland.

Rick Sunderland: Thank you, Angie. Total revenue in the second quarter was $152.9 million, up $5.7 million or 3.9% from the prior period. Second quarter revenue growth was driven by increased revenue at APUS, Hondros and Rasmussen, partially offset by a revenue decline at graduate school, which was approximately 1 million less than our guidance. Total cost and expenses in the second quarter decreased $61.8 million or 29.1% compared to the second quarter of 2023, which included a non-cash impairment charge of $64 million to reduce the carrying value of RE segment, goodwill and intangible assets and the corresponding tax impact. Cost and expenses for the second quarter as compared to the prior period, excluding loss on leases, severance costs and information technology transition services costs in 2024 and goodwill and intangible asset impairment charges in 2023, increased $0.7 million to primarily to increases in other technology and marketing expenses.

Second quarter diluted loss for common share improved significantly and was a loss of $0.06 compared to an adjusted net loss of $0.25 in the prior quarter, which excludes the $64 million goodwill and intangible asset impairment. For the quarter, adjusted EBITDA increased 24% to $10.9 million compared to $8.8 million in the prior period. The second quarter results were at the high end of guidance and represented an adjusted EBITDA margin of 7.2% as compared to 6% in the prior quarter. At APUS, second quarter revenue increased 4.7% as compared to the prior year to $77 million due to a 1.7% increase in net course registrations driven by an increase in registrations by military-affiliated students utilizing VA benefits and tuition and fee increases in the second and third quarters of 2023.

In total, EBITDA margin at APUS was 25% compared to 28% in the prior year. The change in margin was primarily due to increased information technology employee compensation and advertising costs. At Rasmussen, second quarter revenue was $53 million, an increase of 2% compared to the prior year due to an increase in tuition in the first quarter of 2024, partially offset by a 2.2% decrease in total student enrollment. The decline in total student enrollment was driven by an 8.8% decrease in on-ground enrollment, partially offset by a 4.2% increase in online enrollment, which has a lower revenue for students as compared to the prior year period. As Nancy mentioned, the year-over-year enrollment declines have narrowed in each of the past five quarters, and third quarter total enrollment is up slightly.

In the second quarter, Rasmussen’s EBITDA improved to a loss of $4.7 million compared to an EBITDA loss in the prior period of $7.1 million, representing an approximate 33% year-over-year improvement after adjusting for last year’s goodwill impairment this year’s thoughts on leases. At Hondros, second quarter revenue was up 15% to $16.4 million as compared to the prior year period due to continued enrollment growth and the 2023 tuition increase. For the quarter, Hondros total enrollment grew 9.4% to approximately 3,300 students, the third consecutive record-setting quarter for enrollment. For the quarter, Hondros EBITDA loss was a loss of $0.4 million compared to positive EBITDA of $0.1 million in the prior year period. Revenue in graduate school, included in Corporate and Other was $6.5 million, compared to $7.5 million in the prior year period.

For the quarter, graduate school EBITDA loss was $0.7 million, compared to positive EBITDA of $0.8 million in the prior year period. At June 30, 2024, total cash, cash equivalents and restricted cash was $156.2 million, an increase of $11.8 million from year-end 2023. For the six months ended June 30, 2024, cash flow from operations increased 16% to $33.2 million compared to the prior year. CapEx for the first six months was $11.4 million and free cash flow defined as adjusted EBITDA less CapEx was $16.6 million compared to $9.2 million a year ago. Principal on API’s term loan at June 30 was $96 million with unrestricted cash of $130 million, API continues to be net cash positive. Additionally, there are no borrowings under API’s $20 million revolving credit facility, which remains fully available.

Turning now to the third quarter 2024 outlook. APUS total net course registrations are expected to be flat to slightly down compared to the prior year [ph] between 90,500 to 92,300 registrations. We believe the softness in third quarter APUS registration is largely attributable to changes in marketing spend in late 2023, which typically has a two to three-quarter lag in registration numbers. Appropriate adjustments are being made to marketing spend to correct this decline. At Rasmussen and Hondros, third quarter student enrollments are actual because of the quarterly starts of these schools. At Rasmussen, third quarter on ground enrollment decreased minus 5% to approximately 6,030 students, while total online student enrollment increased 4.7% year-over-year to approximately 7,440 students for an aggregate enrollment of approximately 13,500 students.

This represents a slight increase when compared to the third quarter of 2023 and is the first quarter of positive year-over-year enrollment growth since the acquisition. At Hondros, third quarter total student enrollment increased 10% year-over-year to approximately 3,100 students. In the third quarter of 2024, consolidated revenue is expected to be between $152 million and $155 million. The company expects net income to common shareholders to be between a loss of $1.2 million and income of $1 million or between a loss of $0.06 and income of $0.05 per diluted share. Adjusted EBITDA is expected to be between $9 million and $12 million in the third quarter of 2024. Our full year guidance is unchanged with anticipated consolidated full year 2024 revenue in a range of $620 million to $630 million.

We expect our adjusted EBITDA to be between $60 million to $70 million in the full year. The second and third quarters tend to be seasonally low quarters with a notable increase in adjusted EBITDA in the fourth quarter especially Rasmussen continued ramping in the fourth quarter. I will now pass it back to Angie to offer some closing remarks, after which we will begin our question-and-answer session. Angie?

Angela Selden: Thank you, Rick. During the quarter, we continued to execute our strategic initiatives to grow enrollment at APUS and stabilize and increase profitability at our other units. We’re further encouraged by the performance at Rasmussen as enrollment numbers have stabilized and had the first year-over-year improvement since our acquisition. Market fundamentals continue to support our business strategy with increasing growth in higher education and online education markets and significant government education benefits for military investments. With our number one market position in active-duty military investments and focus on high-demand sectors like nursing, we are well positioned to capitalize on this growth. As we move ahead in 2024 and continue to execute on our key milestones, I believe that we have built the foundation of a business that can continue to deliver to its students’ value to its stakeholders’ value and to their community’s value for years to come.

And with that, I would now like to hand the call back to the operator, to begin our question-and-answer session, Operator?

Operator: Thank you, Angie. [Operator Instructions] Your first question comes from the line of Raj Sharma with B. Riley. Your line is open.

Q – Raj Sharma: Yeah. Thank you for taking my questions. I wanted to understand a little bit, maybe get some color on Rasmussen. I see the improvement in the enrollment is now almost flat and projected to be almost flat next quarter. Where can this business — what can this business do and is capable of specifically not as much in the year-on-year growth from here but really on the EBITDA margins, you’re getting — you have negative 9% this quarter in the EBITDA margins. What could these get to in the second half and more sorts of longer-term fiscal 2025, 2026 relative to where they were when you purchased Rasmussen or what the original capability of the operation is? Thank you.

Angela Selden: Raj, thank you very much, for that question. That’s a lengthy question with many component parts to it. So let me start by saying, as we signaled, we believe 2024 is where Rasmussen will turn to positive adjusted EBITDA. And we see line of sight to that. We’re excited about that. Several of the things that we believe will have a positive effect on 2025, include the completion of our exiting of the third-party IT agreement with creditors. And we expect to see meaningful savings on a full year run rate basis in 2025 as a result. And certainly as we turn the corner on the enrollment to positive momentum in the fourth quarter and in 2025, we believe that that will have a meaningful improvement in our adjusted EBITDA for each new dollar of revenue, we’re now more than covering the fixed cost and that has a very significant effect on our adjusted EBITDA in 2025 and beyond.

We’re not presently giving guidance on 2025, but I’ll turn it over to Steve with any other comments you’d like to share.

Steve Somers: Yes, Raj, I’ll just add some context around there, right? In the industry in general, nursing schools and school similar assets that operate in the 10%, 15%, and 15%-plus range. We’re obviously working to improve that quarter-to-quarter. Angie signaled that we’re going to be profitable in terms of EBITDA in the fourth quarter. So, I think it’s reasonable to think that over time, we can get to 5% to 10% margins over the next one to two years as you think about us inside the industry, that would be very consistent. And I think as you look forward to the third — I think you asked about the second half as well, the third quarter and then the fourth quarter, right, we’ll still be negative in the third quarter, but on a 2H basis, we would expect it to be positive overall for the second half and the fourth quarter itself.

So, whether that gives you a little bit of context around — and I think the trend that has been in place for the last 12-plus months is sort of directing in that general zone.

Q – Raj Sharma: Got it. And then could you talk a little bit about the APUS enrollment trends? And is this sort of flat to down a little expected? Is that seasonal? And where do you see overall those trends in enrollment?

Angela Selden: I’ll start, Raj, and then I’ll have Rick provide more detail. In Rick’s remarks, he did discuss the decision in the fourth quarter of 2023 to dial back investments in marketing in certain segments of APUS. And there’s a two-quarter lag that we see in terms of those investments turning into enrollment. So, as we approach Q3, we are seeing the effect of that reduction in marketing spend, which has since been course-corrected and we expect in the future quarters for that enrollment momentum to return. So, Rick, I’m going to turn it over to you for more detail.

Rick Sunderland: Yes, that’s accurate, Raj, and there is that lag. So, I would suggest that if things function as we expect and we expect it will, the course-correction we’re making now or have been making recently will play out in the numbers over to a two or three-quarter lag. That’s just the way the business functions. We remain strong in my comments, I talked about the strength of the military affiliate. We remain strong in the veterans community and quite frankly, our market share in active–

Angela Selden: Yes, I think what I’ll also say is that the margin optimization efforts that were underway last year help us now understand the sensitivity around marketing spend. And so now that we understand that we can be a lot more thoughtful and how we invest our marketing against certain channels and segments going forward. And so we’ve tested that, and we now know where those foundries are. And we also are seeing in particular, growing strength in the veterans market. It’s something that we’ve been leaning into and wanting to see momentum build. And so we’re quite pleased with the results we’re seeing with veterans.

Raj Sharma: Great. Thank you for answering my questions. That’s very helpful. I’ll take it offline. Thank you.

Angela Selden: Okay. Thanks, Raj.

Operator: [Operator Instructions] Your next question comes from the line of Stephen Sheldon with William Blair. Your line is open.

Unidentified Analyst: Great, team. You have Matt Flynn [ph] on for Steven. Thank you for taking my questions. I wanted to start with one on the full year guidance. Wondering if you could talk about some of the factors that would need to play out to push you towards the upper end of the guidance range, particularly for the revenue guide, which seems to assume a decent quarter-over-quarter step-up in the fourth quarter based on the 3Q guide. I know there’s some seasonality at play there, but any additional color would be helpful.

Angela Selden: Yes, I’ll turn it over to Rick.

Rick Sunderland: This is Rick. I’ll start and then Angie can fill in.

Angela Selden: You bet.

Rick Sunderland: Well, if you want to push up to that range, things that would have to go favorably would be a quicker, a call it, uptake on the marketing spend at APUS, right? We talked about what has been observed as a typical lag between altering a spend, be it total dollars or allocation among segments and then the resulting improvement in registration. If that accelerates, then, of course, that would push revenue up higher in the range. We’re seeing strength at RADCO [ph], right? We’ve got to turn a slight improvement year-over-year, and that momentum will continue. And I think Andy commented on the strength of the start numbers, right, which is a leading indicator as it relates to total enrollment, and that strength could accelerate or build on itself to push us up.

Then you drop down the Hondros. They’ve got a new program that they’re introducing as a new program. We don’t have any observable experience in medical assisting as to how that enrollment pattern will ultimately play out that could go up or go down, right? It’s a new program. And then graduate school, we’ve got Steve Somers, who’s in the room here, he’s back. And while it’s a smaller piece of the overall enterprises certainly had an impact on the Q2 reported results. And then, of course, the apposite could be true, an uptake of $1 million or two there in the federal workforce who obviously be very helpful against the range. And so I’ll pause there and let Angie add to the comments.

Angela Selden: So I think that’s a pretty good synopsis. The last thing I would say is that we passed on price increases certain segments across APUS, Hondros and [indiscernible] and assuming that those price increases continue to hold without degradation in our student enrollments that will also play favorably in the overall revenue that we would expect for the full year.

Unidentified Analyst: Got it. That’s helpful color. Thank you, Angie and Rick. And then I had another one on NCLEX scores. I imagine this is tougher to call, but do you have any rough estimate on when you might have all of your nursing programs with first time NCLEX pass rates that exceed state nursing board standards. I know you continue to make good progress on that with a variety of initiatives you have underway, but any sense of timing on completely resolving those first time NCLEX pass rate issues at the remaining campuses…

Angela Selden: Sure. The on campus that we are paying attention to is in Illinois, where we have done a significant amount of renewing of faculty that we’re upgrading the curriculum that campus was operating with an older version of the curriculum that was not aligned with the next-gen NCLEX testing. And so, we believe that the turn on NCLEX scores in Illinois will be slower than the two other remaining campuses. So, we — but we are incredibly happy with the NCLEX results that were that we’re posting now all of our BSN programs, all of them are above the state standards, all but one in our ADN program, which had been an area of challenge for us in the past and two of our PN programs. And so we’re just very, very pleased with the incredible turn that Rasmussen demonstrated in terms of improving NCLEX, NCLEX pass rate.

Steve Somers: Matt, this is Steve. Let me just add one more comment to that. If you went back, in terms of the number of programs that are passing today year-to-date 2012, 2025, that is now higher than it was in the prior two years before we acquired the business. So we’ve obviously made a lot of improvement in the near term, but now we are on a path to a better result on a longer-term basis as well.

Unidentified Analyst: Perfect. That’s great color, and yes, great to see the continued progress there. Thank you.

Angela Selden: Thank you.

Operator: Your next question comes from the line of Jasper Bibb with Truist Securities. Your line is open.

Jasper Bibb: Hey, everyone. Apologies if anything has been answered already. I joined a little bit late from another call. Just wanted to ask about Rasmussen, I guess, is there any update on the Florida RU campuses from last quarter? And I think there’s also potentially a bill in Illinois. I think to help you a bit with the caps you mentioned on the last answer, any change there?

Angela Selden: Sure. So Jasper, I’m not exactly sure what specifically you mean relative to the Florida campuses. So I’ll start with NCLEX results, where we have all program campus combinations, meeting the state standard for the year-to-date measurement period. So we’re very, very pleased with the incredible turnaround that we’ve had in NCLEX performance in Florida. Can you repeat the — if that doesn’t answer your question, is there something more specific here you had in mind?

Jasper Bibb: No, no, that’s helpful. I think last quarter, there was basically a technical thing where you had a really old cohort that triggered some of those campuses going on formation and it sounded like everything was…

Angela Selden: Yes. We’ve been really happy with the results of pushing through and putting every single program campus combination in the green.

Jasper Bibb: Okay. Great. And second part of the question was, I think there was a bill in Illinois that could give you some relief on — you mentioned a campus, a little bit longer turnaround plan there. I think that build might have afforded you look more patent to that at the relevant threshold. Just kind of curious if there’s any update there or that’s still kind of in the works through their legislature.

Angela Selden: Yes, that still remains in place. And so that relief affords us a 2-year measurement period. We certainly aren’t going to wait until the end. We’re working very aggressively. And as I did mention, I think before you joined the call here, we’ve done 2 major things in Illinois to accelerate our performance in those campuses, including basically a replacement revitalization of the — several of the faculty there. And importantly, we are modernizing the curriculum Illinois for a technical reason, Board nursing reason, had required us to be operating with a curriculum that was older than the version of curriculum we had been offering in our other campuses. We were able to work with the Board of Nursing to allow them or have them allow us to modernize that curriculum.

So now we are moving that curriculum to the next-gen version, which is a version for the new exam. And we have a high degree of confidence that the new faculty, the dedicated attention from our nursing leadership and the new curriculum will allow us to see significant improvements in our Illinois campuses in the future.

Jasper Bibb: That’s very helpful. Thanks for taking the questions.

Angela Selden: Thank you.

Operator: This concludes our question-and-answer session. I’d now like to turn the call back over to Angie for closing remarks.

Angela Selden: Thank you, operator. I’d like to thank each of you for joining our earnings conference call. We look forward to continuing to update you on our ongoing progress and growth, as we continue our rapid pace of operational execution. If we were unable to answer any questions, please reach out to our IR firm, MZ [ph] Group, who would be more than happy to assist.

Operator: Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation. You may now disconnect your lines, and have a wonderful day.