Good day, ladies and gentlemen, and welcome to the American Public Education, Inc. Third Quarter 2018 Earnings Call. At this time, all participants are in the listen-only mode. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Vice President of Investor Relations, Chris Symanoskie. Please go ahead, sir.

Thank you, operator. Good evening, and welcome to American Public Education's discussion of financial and operating results for the third quarter of 2018. Presentation materials for today's call are available in the webcast section of our website and are included as an exhibit to our current report on Form 8-K filed with the SEC earlier today. Please note that statements made in this conference call and in the accompanying presentation materials regarding American Public Education or its subsidiaries that are not historical facts may be forward-looking statements based on current expectations, assumptions, estimates and projections about American Public Education and the industry. These forward-looking statements are subject to risks and uncertainties that could cause actual future events or results to differ materially from such statements. Forward-looking statements can be identified by words such as, anticipate, believe, seek, could, estimate, expect, intend, may, should, will and would. These forward-looking statements include, without limitation, statements regarding expected growth, expected registrations and enrollments, expected revenues, expected earnings, and plans with respect to recent, current and future initiatives, investments and partnerships. Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described in the Risk Factors section and elsewhere in the company's most recent Annual Report on Form 10-K and subsequent quarterly report on Form 10-Q, filed with the SEC and 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. This evening, it's my pleasure to introduce Dr. Wallace Boston, our President and CEO; and Rick Sunderland, our Executive Vice President and Chief Financial Officer. Now, I'll turn the call over to Dr. Boston. Dr. Boston.

Thanks, Chris. Good evening, everyone. I will start our call today by discussing our recent operating performance and our third quarter financial results and also our outlook for the fourth quarter of 2018. Our CFO, Rick Sunderland is here, but he has laryngitis but we'll make sure he is available for questions at the end of my presentation. In the third quarter of 2018, net course registrations by new students excluding those utilizing FSA increased 1.4% compared to the prior year period. This increase was driven by a 3.2% year-over-year increase in net course registrations by new students utilizing military tuition assistance or TA, which was partially offset by a 2.7% decrease in net course registrations by new students utilizing cash and other sources. Net course registrations by new students utilizing veterans' benefits or VA were approximately flat compared to the prior year period. Net course registrations by new students utilizing federal student aid or FSA at APUS declined 10.8% compared to the prior year period. This represents the smallest year-over-year decline in net course registrations by new students utilizing FSA, since the first quarter of 2014. Overall, total net course registrations and net course registrations by returning students were both approximately flat year-over-year, while net course registrations by new students in APUS declined by approximately 3% year-over-year. In short, net course registrations by new and total students exceeded our third quarter outlook because of better than anticipated net course registrations by students utilizing TA. For the three months ended September 30, 2018 or the summer term of 2018, total enrollment at Hondros College of Nursing or HCN increased approximately 11% year-over-year and new student enrollment decreased 3% compared to the prior year. The prior year period included a second ADN cohort at our new Toledo Campus, which was possible…

Thank you. Our first question comes from the line of Jeff Silber with BMO Capital. Your line is now open.

Thank you so much. Like to first focus on APUS, if I remember correctly, last quarter you talked about some potential processing delay, I think it was in the Air Force, if I remember correctly. Can you just remind us what happened there? And it looks like you did there as expected on TA, so may not have been as bad as you'd thought?

Yes. So, we had approximately a three week period when the Air Force registration system was down and we couldn't take any registrations from Air Force students and then when they finally fixed the system, it was so close to the September period, and we were in August when we announced our earnings, that we really couldn't predict whether or not those registrations that we lost during the three-week period would come back. Well, as it turns out, they pretty much came back since we exceeded our forecast, particularly in TA for the third quarter.

So that's what really drove the difference that wasn't in any of the service branches, it was mostly in the Air Force?

Mostly in the Air Force. Yes.

Okay, great. Wally, in your prepared remarks, you talked about some of the expected volatility in Hondros, you went through that pretty quickly. Can you just kind of step back; give us a little bit more color on exactly what's going on?

Sure. Hondros primarily has two programs; they provide a certificate program and practical nursing, which is a licensure program. That program can step into an ADN program, which is a degree program for registered nurses and so the PN program has very good NCLEX pass rates and the ADN program is below the Ohio standard in NCLEX pass rates and so what happened when a number of the nursing schools owned by other companies went out of business, and they had very low performing rates, the NCLEX pass rates both nationally and in Ohio went up and we found ourselves at a gap between where we were closer to the NCLEX pass rates and where we needed to be once those schools no longer operated. We looked at what we had to do to get the pass rates up and it was really a lot of factors. We had already put in a new curriculum for the ADN programs. So it really wasn't tweaking the curriculum as much as it was looking at some of the policies we had for course retakes, for minimum scores IN some of the lab courses, which are heavily tested on the NCLEX, pass for the clinical component. And as well as entry test results for our HC exam, which predicts how well people are going to succeed in the program. So looking at a number of factors, we increased our requirements and by increasing those requirements, we certainly expect some volatility as we take students through the cycle for the next 18 months or so.

And that was already done prior to this most recent semester?

No, we had done -- we had put in the curriculum changes, we had put in the course retake policy, but we had not put in the new higher standards for admissions.

Right. So that course retake went into dry and the admission change goes in January of 2019.

Okay, great, that's helpful. Just a few numbers questions, I'm sorry, for the model, what do you -- within your guidance, what are you forecasting for revenue per net course registration at APUS and revenue per student at Hondros?

Right. So we don't typically give out those numbers, we've seen declines in revenue per net course registrations at APUS for the reasons Wally said in the script. As it relates to that two credit course, I think that's probably normalized into the system at this point. So you're not going to necessarily see large continued declines and in terms of Hondros, I think that trend has been fairly stable. I guess the company with which you model, this is out putting but from my seat, that number has been pretty static.

Okay, that's fine. And then on the adjusted, excuse me, on the EPS line, what tax rate and share count are you looking for?

I think we just reported 16.0 -- tax rate is 26.25 in that share of $16.7 million, I believe.

Yes, I'm looking for, I'm sorry, for fourth quarter guidance, what's incorporated in your guidance?

We issued incentive shares early in the year, so it doesn't move materially when you get into the fourth quarter.

The tax rate you said was 26.5%, that's what you're expecting in the fourth quarter?

26.25%.

26.25%. Thank you so much for the color.

Thank you and our next question comes from the line of Peter Appert with Piper Jaffray. Your line is now open.

Thanks. So Wally, you talked a bit about evolution in the marketing focus, I'm hoping you might just give some more color in terms of what you're thinking about there? You had experimented with some step up in spending. I guess a year ago. Is that still in the cards, perhaps, to revisit that?

Yes, Peter. We have experimented in a number of pilot scenarios, tweaking added expenses in certain geographical markets. I think we referred to that during my script as markets where we think we can make a difference with the student as well as experimenting in spend for specific degree programs, where we have higher completion rates, greater enrollment success and as well as certain keywords, you may recall that we don't use lead aggregators at all. So we're going around search engine optimization internally as well as building landing pages and looking for certain combinations there, including even building our own social media content generation blogs that we use to spread the organic hits for APUS and I think those combinations are still in a pilot mode. But I think one of the things that we can point to is that our retention has improved and part of that retention improvement isn't just paying better attention to the students when they are in the class but it's actually bringing in better students to the class.

Got it. Any commentary, Wally, on potential new program offerings as a potential driver of enrollments?

Yes, we look at that all the time. I think the one that's currently experiencing some success is the fact that we've had a cybersecurity program for a while, but in June we received the NSA certification for that and that's a pretty big deal that differentiates your program from a lot of the other ones out there. But we continue to look at STEM, because we think we've differentiated our offerings as a university and between healthcare and STEM subjects in general, we've been able to build labs and get good academic outcomes from the students. For example, when we set up our Bachelor of Science and electrical engineering, which we believe was the first fully online BSEE program; we were able to build a math degree because we had to have six calculus courses for the BSEE. So we were well on our way to having enough courses for the math without having to add a lot of development time. We also have a very unique program in space studies. So we're keeping an eye on what the Department of Defense is doing for this new space course program and hope to be ready for that should they make a firm announcement on it.

And then, Wally, can you remind me how big the corporate market is for you, maybe it's -- I don't know, percent of revenues, percent of enrollments and do you offer special pricing in the corporate market or any special programmatic offerings ?

Well, typically in the corporate market, we offer a low discount compared to a lot of the non-profit schools. I would say that 5% is a typical discount because our tuition is already as low as it is. We do have a couple of outliers that have a discount higher than that, but it's usually because we've got a fairly exclusive relationship that brings the marketing cost for that program down. I think for the quarter, we had roughly 13% of our students paid cash and we estimate that in that market the number of people who are getting reimbursed by their companies for the cash payments can be anywhere between half of that number to as much as two-thirds of that number.

Sure and then last thing, Wally, anything to report new on the M&A front, obviously, you moved away from the transaction you were looking at last quarter, should we be anticipating something in 2019 ?

Well, you can never predict. Unfortunately, we had to write that one off. That was when we thought we were close to reaching agreement on, but we have not been shy about saying that we are looking for the right opportunity should we find one. So we were pleased with our Hondros acquisition and so we continue to look in the healthcare arena, and we've also said that we are looking in the workforce development area.

I think just one more, sorry. Have you thought about expanding Hondros into the BSN market or would that have to be through an acquisition?

Actually, so Hondros was approved for BSN, they had an online RN to BSN. But APUS also had an online RN to BSN and the APUS online RN to BSN was offered with more frequent starts and a slightly lower price because Hondros was on the quota system and APUS is on the semester hour system. So I would say that if Hondros offers the BSN again, we'll probably do it on ground and leave the online to APUS who operates at a much more efficient cost structure.

Thank you. And our next question comes from the line of Corey Greendale with First Analysis. Your line is now open.

Good afternoon. So you talked about -- you updated the air force issue on the VA side, I think there were some publicized IT problems they had that were leading to delays in payments, I know you mentioned the impact on cash flow, was there any impact of the VA's IT issues on enrollment ?

We believe the complaints that we got from our students related mainly about payment and not about enrollment.

Yeah, Corey, there is a significant backlog delay in processing payments at the VA, which we experienced at the end of September, but to my knowledge, that's not affecting student's abilities to enroll.

And is that -- I hate to make you talk, Rick, but is that -- so what we understand is, is that still ongoing or have you started to see those payments?

So at the VA, it's ongoing, we've gotten the payments in from DoD on tuition assistance but we were careful to where we were at the Q, I don't know that there's not going to be a similar delay at the end of December. So I'd like to think that that was a temporary delay, but I don't know that it's not going to repeat itself, on the VA side it's ongoing.

Okay. And on the FSA side so, Wally, I think you pointed out that the decline in new enrollments is the best it's been in a while. In so far as, so I guess two questions, insofar is it still negative. I think we know overall the issues, but can you just sort of update us and why do you think it is still in slightly double digit territory negative. And then as you look forward, I know you've been very cautious looking at forward-looking statements but any thoughts on whether there's a potential to see that turn positive the FSA new students in 2019?

Well, we're certainly hoping for that inflection point. Predicting it exactly will be tough but I think that the reason it was still at about a 10% negative number for the third quarter has to do primarily with the last big thing that we put in for requirement was we actually wanted to see drivers licenses, and actual proof of high school graduation in the form of either a transcript or real diploma. And that was last August that we put that in place for FSA students. So that was in the middle of the third quarter and putting that in place has clearly gotten rid of students, who weren't serious. I think it's impossible necessarily, it's impossible to tag them, as potential pelt chasers or fraud chasers, but the bottom line is there were students who are taking advantage of the system and by putting in these requirements that have authentic identification, we ratcheted it down again. But on the good news side, we have a much more serious pool of good students as reflected by my comment in the script that our pass rate -- first-time course pass rate for FSA students was up again in the third quarter.

Right. So you can see that, Corey, the relationship between the new and the total, right, and what that means is the success persistence is much better, and we've been reporting that for numerous quarters now. But what that really means is the lifetime value of a student is a lot higher and that's important.

And actually on that point, can you -- I saw in the key you gave and this is probably public before, but you gave the update or the new CDR number, can you help us then perspective why the CDR isn't lower in light of -- and I know there is a lag but it isn't lower in light of things you've been doing on quality and persistence?

Well, it's a four-year lag unfortunately, Corey, so it's a CDR rate that takes into -- goes back to 2014/2015.

It's 2015, it's students entering repayment in 2015, which was, Corey, the tail end of that. So without making any predictions, we do have some visibility going forward and you know the reason why that's high, right. We've talked about the calculation, the numerator and the denominator now, a significant portion of the students in that numerator, which is driving that 23% were our stipend chasers. So my view on that is we're likely going to start seeing the downside, but Corey my prediction with the number is going to be next year.

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

Hi, guys, thanks for taking my question. Just one real quick one, I think on the last call you gave us a percentage of the impact for the Air Force, can you remind us what that was?

Greg, we're all shaking our head, none of us recall that. You can get that on the transcript on that one.

I think we might have given you the percentage of -- so registration in the Air Force is 43% of our total TA registrations -- memory. So it's clearly our largest branch, and so that roughly three week disruption in enrollment had a fairly sizable impact. As it turned out on our guidance and as Wally said earlier, the good news is we have monthly starts, so we were able to recover some portion of that and end up leaving our registration guidance.

Thank you. And they show no further questions at this time. I would like to turn the call back over to Chris Symanoskie for closing remarks.

Great. Thank you, operator. That will conclude our call for today. We wish to thank you for listening and for your interest in American Public Education. Have a great evening.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a great day.