Good afternoon. My name is Josh and I’ll be your conference operator today. At this time, I would like to welcome to everyone to APEIs Fourth Quarter and Full Year 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Chris Symanoskie, Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good evening and welcome to American Public Education's discussion of financial and operating results for the fourth quarter and full year 2018. Materials that accompany today's conference call are available in the Events and Presentation section of our website and are included as an exhibit to our current report on Form 8-K, furnished 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 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 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 to 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.

Thanks, Chris. Starting with Page 2. I'll begin our call today by discussing APEI's recent operational successes, including robust growth of net course registrations by new students at APUS in the first quarter of 2019. Our CFO, Rick Sunderland, then will discuss APEI's fourth quarter and full year financial results as well as our outlook for the first quarter of 2019. In the fourth quarter of 2018, net course registrations by new students utilizing Military Tuition Assistance or TA increased by 11.0% compared to the prior year period. Total net course registrations or net course registrations by new students at APUS each declined by approximately 1% year-over-year. The strong increase in new students utilizing TA was offset by a 4.5% decline in net course registrations by new students utilizing cash and other sources, an 8.3% decrease in course - net course registrations by new students utilizing veterans benefits or VA as well as an 11.5% decrease in net course registrations by new students utilizing Federal Student Aid or FSA. Our net course registrations by students utilizing FSA declined. The first course pass and completion rate, a measure of student persistence for APUS undergraduate students utilizing FSA, increased by 8.4% for the 3 months ended November 30, 2018 compared to the same period last year. Tuition Assistance or TA continues to be the largest pay type category at APUS, representing approximately 48% of new registrations in the fourth quarter of 2018. We believe the strong increase in net course registrations by new students utilizing TA was due in part to extended student advising and admission hours and outreach effectiveness. For the 3 months ended December 31, 2018 or the fall term of 2018, total enrollment at Hondros College of Nursing or HCN was flat year-over-year and new student enrollment decreased 4%…

Thank you, Wally. Going on to Page 3, financial results. American Public Education's fourth quarter 2018 consolidated revenue decreased by 1% to $76.9 million compared to $78.1 million in the prior year period. The revenue decrease was due to a $1.1 million or 1.6% revenue decrease in our APEI segment and a $0.1 million or 0.8% decrease in revenue in our Hondros segment. Cost of expenses were $65.5 million for each of the 3 months ended December 31, 2018 and 2017. Consolidated instructional costs and services expense as a percentage of revenue increased to 37.0% of revenue compared to 36.7% in the prior year period. The increase in instructional costs and services expense as a percent of revenue is primarily driven by increased compensation costs in our Hondros segment, partially offset by a decrease in instructional materials costs in our APEI segment. Selling and promotional expense as a percentage of revenue decreased to 18.2% of revenue compared to 18.3% in the prior year period. The decrease in selling and promotional expense was primarily the result of a decrease in employee compensation costs in our APEI segment, partially offset by an increase in advertising costs in our APEI and Hondros segments. General and administrative expense as a percentage of revenue increased to 24.3% of revenue compared to 22.3% in the prior year period. The increase in general and administrative expense is primarily related to increased compensation costs in our APEI and Hondros segments. Consolidated bad debt expense for the quarter was $1.3 million or 1.7% of revenue compared to $1.1 million or 1.4% of revenue in the prior year period. Depreciation and amortization expense as a percentage of revenue decreased to 5.6% of revenue from 5.9% in the prior year period. Our effective tax rate during the fourth quarter of 2018…

[Operator Instructions] Your first question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Thanks so much. You alluded a couple of times to the government shutdown. I just was wondering if we can get a little bit more detail on the impact you saw. And also, where there any delays in any of the federal funding streams, whether it was Title IV, Department of Defense Tuition Assistance or VA benefits? Thanks.

Sure, Jeff. Fortunately, Congress had taken care of DoD, so DoD was funded and all of our main branches of the military had Tuition Assistance funding during the period. VA was also funded, although VA did have some computer problems that weren't related to the shutdown that, we believe, that impacted particularly new VA students, less returning students, but if you were getting your paperwork processed for the first time, it was taking some time. But the Coast Guard is part of the Department of Homeland Security and so the Coast Guard was impacted. They shutdown for the month of February. We didn't get our Coast Guard registrations for that month. And there were some other - we have some relationships with other agencies like TSA and they were unfunded as well during that time period. So while it wasn't significant, there was an impact on the month of February, but we did have two strong months in both January and March.

Yeah. This is Rick. I'd like to add to that. So I don't know that we can quantify the impact, but this is where the business model is important. The shutdown occurred in February with our monthly starts. I believe we were able to recover many of those students, particularly Air Force and - I'm sorry, Coast Guard and TSA. So for the quarter, we are looking at some pretty significant year-over-year growth in Military Tuition Assistance.

Okay. That's very helpful. In your discussion on Hondros, I believe you mentioned a new campus essentially opening in 2020. I just was wondering if we can get a little bit more color on that.

Yeah. We have approval to open a new campus from a state. I'm not sure if we've given that state out yet. We'll just - we'll do it when it's the right time. But you may recall, when we had to switch from ACICS as our accrediting body, in last year in June, we got approved by ABHES and they're our new primary accrediting body. Their rules and regulations say that you have to wait one year to get permission to add a campus. We've already informed ABHES that when our year is up on June 11, we'll submit to them an application to open a new campus. We believe the build-out on that as well as the preparation for signing up students will mean that, that campus should open in the spring or roughly the 1st of April for 2020.

Okay. Great. That's very helpful as well. And you gave some color on the expected change year-over-year for Hondros' operating loss. Can you give us some similar color what you were expecting for APUS in terms of the year-over-year difference on operating income?

Well, we're certainly not expecting it to go down, Jeff, but we don't have that quantified. We thought it was helpful in the first quarter because we know what the change in new student enrollments, as well as returning students are to be able to give that for Hondros. But APUS, from a new student perspective and even overall returning student perspective, is up in the first quarter.

If you go back to your modeling historically, I think you can see variation across the quarters in terms of margin. Q1 does tend to be a lower margin quarter given the start of the tax year.

All right. Great. And one more numbers question, if you don't mind. What kind of tax rates you would be using or what's embedded in your guidance for first quarter EPS? And also, what kind of tax rate would go into the tax effect of transaction costs that you called out, what should we be using as well? Thanks.

Right. So I might say a good rate going forward is 26.5%. We're going to see a number slightly lower than that in the fourth quarter. We have a small benefit that we're going to take back through expense in that period.

But we should use that 26.5% also for the transactional costs to kind of tax effect that as well?

Yes. I would use a slightly lower number than that in the first quarter as we are going to pull in the benefit, small benefit in the first quarter, but that's just the first quarter.

Got it. I understand. Thank you for clarifying that. I appreciate it. Thanks.

Sure.

Your next question comes from Peter Appert with Piper Jaffray. Your line is open.

Thanks. Good afternoon. So Wally, I'm wondering if given the inflection you've seen at APUS here in the current quarter of the changes you have made, you've got -- your level of confidence basically in terms of the sustainability of positive new course registrations going forward?

We feel pretty good. We've made a lot of changes. We've been very patient, particularly in line with trying to make sure we were recruiting quality students in our FSA segment. And it's taken us a lot of time to put processes in place that, Peter, that would make sure that we didn't throw out the baby with the bathwater, but that we were recruiting a student whose interest in college and interest in persisting was much higher than where we were before. And I think that, along with the fact that we are continuing to emphasize our distinctive ability to meet the needs of our service members and our public service students, is serving us well. And we feel pretty good about it other than later in the year if there's another shutdown, all bets are off, but right now we're feeling pretty good.

Yeah. I'd like - so let me add to that. So we've been challenged in returning student numbers because of the declines in the new student numbers. So it's really important that we see that growth in the new student number in the first quarter because they're only a new student one time and then they become returning students. So if it's a leading indicator, I think that's a positive, just to see that 8% increase in new students.

Sure. How about though the - just the differential between TA students versus non-TA students, right? The strength is - if I seem to heard you correctly, the strength is coming primarily from the TA segment. And I'm not sure how to interpret that in terms of - does that suggest the programmatic offerings are not quite as compelling for the non-TA students? How do you...

No. I think one of the things that we talked about last quarter, Peter, was that where we have strengths, we were going to shift our marketing spend to focus on that, so not just in our military programs, but in some of our programs that focus on unique agencies like intel and public, the TSA. At the same time, we talked - I talked about early on that we've seen some success in geographic focus. So the civilian population in all areas of the country is not the same. And I think that whether it's a private college or a public college, they'll tell you that. And so somewhat naively years ago when we got into the - got approved for FSA, we - it was advertised equally for all across the board and we found out over time that, quite frankly, in certain areas, people weren't as motivated or as qualified to be college students. And so as we've put processes in, we've also said, you know what, we don't - we won't advertise in this area because it meets the profile of the student that we find to be successful and we just won't advertise in this area. We've also been very focused on adding STEM programs and technology programs and have quite a variety. And in the civilian segments that we're recruiting for as well as our military segments, those are proving to be pretty popular.

Great. Thank you. And then, Wally, the $1.5 million professional fee set, it sounds like a reasonably large number, which might imply a reasonably large transaction. Any color in terms of the kinds of things you're interested in looking at, probability that this goes forward, just anything you could help us with on that?

Well, I wish I could give you a high probability. We're certainly hopeful of that, but we've been pretty open about saying that we're looking for health care acquisitions. Nursing is our big priority and we'll look at other health care options as long as they are going to be able to meet gainful employment requirements, which are still in place, so that's our big focus.

Yes. And the other focus would be for non-Title IV and to employment skills gap type companies. So broadly speaking, it's in the area of health care and non-Title IV, call it training...

Not - but to be clear, not non-Title IV exclusively. You're looking at...

Correct, correct. I mean, the nursing and health care would Title IV.

Correct.

Got it. And presumably, would these be campus-based or are you looking for online assets?

Well, online assets would be extremely limited and also an interesting fold-in with APUS because APUS does have online nursing programs, online-only. So I guess they're out there, but there aren't that many of them, but we continue to want to expand Hondros. I mean, we've said originally when we acquired Hondros that the 4 original locations, now 5, you've got a certain level of overhead and you can run a certain number of facilities with the same number of overhead. So we continue to look for campus expansions and I think we said we'd look to do them organically as well as fold-in acquisitions.

Right. Yes. I would think that given the presence that Hondros gives you, right - would it not make more sense just to drive expansion through that brand rather than buying another asset?

Well, the issue is that with - it's a creditor. You can only add one location a year, Peter, so that's pretty very slow.

Okay. Got it. All right, great. I think I am covered. Thank you.

Thank you.

Thanks, Peter.

Your next question comes from Corey Greendale with First Analysis. Your line is open.

Hey, good afternoon. So first, on the TA side, can you just - I just kind of lost track of what is permissible and not permissible at this point in terms of marketing tactic. Do you like - do you have full access to bases at this point? Or is that changing at all?

I wish it was changing. We've been working on it since the new administration was in there, but we still have the same MOU from 2014 that only gives guaranteed access to institutions that actually teach on base. So we participate in quarterly office hours or whatever the base's commander has deemed everyone else should participate in, even though there's some bases where we -- our students comprise a substantial majority of all the students using TA. So I think we've done this, Corey, by expanding office hours of our teams, both in advising and student services and admissions, as well as finding ways to, through the process, legitimately to have off-campus events with our outreach people, and that's been effective.

Okay. And then, well, you mentioned specifically focusing or not focusing on specific geographic areas, so I had a question around that. There is some talk of changing laws at the state level to try to do some of the things that the prior admiration was going to do at the federal level. So I was just interested if - I don't know if you've ever kind of given this information - if there's specific states where you're particularly concentrated or not concentrated. I'm interested in California and New York since those are two of the higher profile ones that's being discussed. And is that something like that word to be put in place and how would you manage it?

Well, we - before SARA came out, we were licensed in every state that said we had to be licensed there, even though we were online-only. So we've -- I think we've established good relationships with states, even though many of those states we were able to roll back our licensure because of SARA. And we are approved for California, even though they're not -- they're the last state that's not a SARA state. So we look at this, Corey, and we hold our record out there that we try to operate above line; in every aspect, try to be transparent. And so far, it's held us in good stead. And when I talk about some states that we won't advertise in, it's really related to the college preparedness of the students and the income band that we think are attractive at our price point.

Hey, Corey. It's Rick. So on the military side, the business model is strong in terms of our outreach, the relevance of our programs, our tuition at the TA reimbursement rate. One of the differences is the change in, let's call it, level of service with extended hours in the admissions group and other areas. So I don't think we can equate a cause and effect. But I think the overall reengineering of the onboarding process, combined with a redirection of some of our marketing dollars, is producing good results in both the military and the non-military, but you asked about the military.

Yes. Great, that helps. And then on Hondros, it sounds like some of the decline was - or maybe all of the decline was because of some changes that you made in - for good motivation, I think, to try to make sure people were prepared. If you - I just want to make sure I understood that if you shift the timing of that exam to when people already - to a requirement of the first course, I mean, intuitively what we think will happen is your new student would go up and then your dropout rate will spike, but is that not likely?

No. So just talking about that one exam, we are trying to improve our ADN first time NCLEX pass rates. And so one of the things that we looked at in benchmarking other schools was that, in addition to having a HESI exam, that we require some schools use the ACCUPLACER and believe that's much more indicative of the NCLEX pass rate. And so we put the ACCUPLACER in place for the January term as a required preadmission test and what we found were that some of our prospective students went to other schools that don't have that requirement, they're just test-averse. And so the idea was not to use the test to weed people out because I think our benchmark that we're pretty comfortable with is HESI, but just use that test as a benchmark for predicting success and seeing where we could get remedial assistance from an instructional perspective in both math and English for students. And so with a resistance to take this test before admission, we're building it in and it's not going to be a penalty at all. It's really where are our students when they enter and we can ask them to take that test once they're admitted and then as they go through the program, we can see how they progress. And ideally, we bring up the first time NCLEX pass rates, we'll know based on those benchmarks of entering students with the ACCUPLACER as to how far we brought them along.

Okay. And last one for me and I'll turn it over. As - through this whole period, you've continued to generate good free cash flow. So the first quick one is for Rick. Just -- can you give us any sense of what CapEx do you expect in 2019? And then for either of you, in terms of uses of free cash, I know you're working on acquisitions. Do you think of that as the primary use of cash or what's your capital allocation thinking in 20 -- or free cash capital allocation thinking in 2019?

Right. So I think the dip we observed in CapEx in '18 was just that. You'll see CapEx return to something more along the lines of '17. And in terms of capital allocation, we're seeing opportunities out there. I mentioned in my portion of the talk about professional fees earlier in '18 related to a potential acquisition as well as fees we're incurring now in the first quarter of '19. So I think that gives you some sense of our focus here in terms of capital deployment.

All right. Thanks very much.

[Operator Instructions] Your next question comes from Greg Pendy with Sidoti. Your line is open.

Hi, guys. Just, I guess, along those lines as we think about the cash flow statement, can you just kind of remind us why the receivables spiked in 3Q and that continued in 4Q and when that might normalize, I guess, as we look out to 2019?

Yeah. The answer is simple, delays in payment in both TA and VA. The largest piece of that is the Air Force. At the end of '17, due to the billing cycle and their payment cycle, literally there were no months outstanding. And at the end of the third quarter of '18 and repeated at the end of the year '18, there were two months outstanding. Now, from a collectability standpoint, those are good collectable dollars. The timing of the payment has shifted. So that's the majority of the increase. The remainder, if you really put TA with VA together, you get the vast majority of the increase. There's just been a slowdown in payments at the Veterans Administration. Again, those are good collectable dollars. They're just being paid more slowly than we have historically experienced. When we talked about that in the third quarter 10-Q, we talked about the delays and I think I was purposeful to not say that it was transitory or one-time because we have no evidence that they're going to return to a prior payment schedule. Clearly, that would be our goal, but we don't control that. So it's in the - it's in both the active duty and the veterans.

So it's fair to say you will hit a payment cycle at least at some point in 2019 to normalize a bit?

Yeah. The point is it will normalize, right? I don't have any expectation that it will get worse and I don't have any expectation that it will get better. And if you have both of those expectations, then it just normalizes.

Okay. Thanks a lot.

Your next question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Thanks so much. Sorry, just a quick follow-up. I think you had mentioned that your first quarter revenue guidance assumes about 10% of that being a contribution from Hondros that would imply a pretty sizable year-over-year decline. Obviously, we've seen some pressure on enrollments as well. But from a revenue per student perspective, what should we be modeling in for Hondros?

I don't know if we've ever talked about that.

Yes. That's a great question. We don't look at it that way, Jeff, but let's see if we can.

We'll take that one offline and one of us will follow-up with you.

Okay. That will be really helpful. Thanks so much. Well, actually let me - I'm sorry, let's go on. Let me ask the question another way. The decline you're expecting year-over-year, I'm assuming that's mostly enrollment-related?

At Hondros?

Yes.

Yeah. And the first quarter number for new students is going to flow through the rest of the year in returning students, but at the same time, they're hopeful that these changes they made to not quite be as extreme as the first quarter will help them bounce back in subsequent quarters. So they've given us a projection that we're shooting for, for the rest of the year.

Okay. Thank you so much.

There are no further questions at this time. I'll turn the call back to Chris Symanoskie.

Great. Thank you. 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.