Good afternoon. My name is Chavez and I'll be your conference operator today. At this time, I would like to welcome everyone to the American Public Education Second Quarter 2019 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]. Thank you. I would now like to turn the call over to Chris Symanoskie, Vice President of Investor Relations.

Thank you, operator. Good evening and welcome to American Public Education's discussion of financial and operating results for the second quarter of 2019. 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 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, statements regarding expected growth, expected registration and enrollments, Navy tuition assistance funds, expected revenues, expected earnings and plans with respect to recent, current and future initiatives, including information technology replacements and upgrades and 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 Factor 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 by law. Even if new information becomes available or 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. Good evening, everyone. As we begin today, I'd like to comment on the quarter at a high level. While the quarter met our expectations, we were by no means satisfied with the results and remain focused on aggressively pursuing our improvement initiatives. Today you'll hear about the challenges we faced, but even more about how we're addressing each in a way that we believe will pave the way for improvement and sustained success. We remain focused on strengthening the core business at APUS and repairing the business at Hondros, while maximizing the inherent value on our existing assets. We will continue to be results focused both in the near and long term. I will also discuss possible future investment in our information technology infrastructure and the second quarter's operating results at a high level before our CFO, Rick Sunderland will walk you through APEI's recent financial results and our outlook for the third quarter of 2019. With that, let's proceed with our discussion of Hondros. Hondros College of Nursing, or HCN, is facing two primary operational challenges. One, achieving satisfactory enrollment in new and returning students. And two, meeting the applicable standards of our regulatory and accrediting bodies. To overcome these challenges, we have opened additional pathways to degree attainment as well as work to identify the appropriate balance of academic achievement requirements, admissions requirements and attracting appropriate students. One new pathway to degree obtainment is our new direct entry associates degree in nursing or ADN option which we will launch this fall. HCN's direct entry ADN option provides an additional way for successful college ready students to enroll, complete a degree and enter the nursing profession in as few as 15 months when attending full time. Acceptance in the program requires a prospective student to take an…

Thank you, Wally. Going on to Page 3 in the PowerPoint, American Public Education's consolidated revenue for the three months ended June 30, 2019 decreased 3.1% to $70.6 million, compared to $72.8 million in the prior year period. The revenue decrease was primarily due to a $2 million or 21.6% revenue decrease of Hondros. For the quarter, APUS revenue declined $0.2 million or 0.4%. Total cost and expenses were $64.9 million for the three months ended June 30, 2019, compared to $64.8 million in the prior year, an increase of $0.1 million or 0.2%. Consolidated instructional costs and services expenses decreased approximately $0.3 million to $28.7 million and as a percentage of revenue increased to 40.7% compared to 39.8% in the prior year period. The decrease in instructional costs and services expenses was primarily driven by a decrease in employee compensation costs and instructional materials costs in both our APEI and HCN segments. Selling and promotional expenses increased approximately $0.8 million to $14.1 million, and as a percentage of revenue increased to 20% of our revenue compared to 18.2% in the prior year period. The increase in selling and promotional expenses was primarily driven by an increase in advertising costs in our APEI segment. General and administrative expenses increased approximately $0.5 million to $18.1 million and as a percentage of revenue increased to 25.7% from 24.2% in the prior period. The increase in general and administrative expenses was primarily related to increased information technology cost in our API segment and employee separation costs in our HCN segment, partially offset by a decrease in professional fees in our API segment. Consolidated bad debt expense was $0.9 million in both quarterly periods and as a percent of revenue, 1.3% of revenue in 2019 compared to 1.2% of revenue in 2018. Depreciation and…

[Operator Instructions] And our first question comes from Corey Greendale with First Analysis.

Hey, good afternoon.

Hi Corey.

Two questions, so first. Hey, how're you doing? First question is easy and apologies, this is repetition. But I just missed the number, Wally, that you provided for the change in new student registrations from FSA, if you could just repeat that one.

Are you talking about guidance or for the second quarter?

For the second quarter.

Yeah, second quarter, Corey, new was down 5.7%.

5.7%, thank you.

I'm sorry. It's 9.7%, Corey.

9.7%, thank you.

For FSA.

Got it. So few questions, maybe first on Hondros. The -- in terms of -- there's some language in the Q and you somewhat alluded to it about market perceptions and something about perceptions on the ground, there. I was just hoping, if you could elaborate on that -- what that is and what you're doing to improve that.

Sure, we have basically been -- we flat-lined at a NCLEX pass rate for first time test takers for our ADN program, our RN program at a number that was below the level that the State of Ohio wanted us to be at, which is 95% of the national average. We -- the Board and I were not happy with that. So we wanted to look at -- we asked our academic team to look at ways in which we can improve the rate. And so a number of things that they put in place were practices followed by other schools, including administering an additional admissions test up front, a test called the ACCUPLACER , which is not uncommon. We were using the HESI and instead, we added the ACCUPLACER as well as putting in different standards for minimum passing grades on lab courses. And so when those changes went in and the last one went in and starting in the first quarter in January, it was very negative reaction across the board with prospective students. And some of that was caused by returning students who weren't happy with the changed passing requirements for the lab courses, which are very helpful toward passing the NCLEX exam. And so, that was our first quarter decline, which we obviously reported on. And we began looking at ways in which we can improvement -- and prove it. And when some of those ways, which, by the way, changes in test results and passing standards and other requirements may have to get approved by the Ohio Board. And so typically, if you're going to make a change, you've got to do, you've got to notify them a quarter in advance of when you're going to make a change. So you can't make these changes…

Very helpful, thank you. And just sort of in light of those. It sounds like there are steps in place that should lead to improvements, obviously in terms of the enrollment, it hasn't happened yet. So as you think about geographic expansion, I guess are you committed to Indianapolis and are you seeing enough in the data to suggest, it is bottoming that it makes sense to start expanding geographically before you have more confidence that the model stabilizes or just can you -- just kind of elaborate on your thinking?

No. It's a great question. In fact, we don't have a specific start date, but we did have a date. Our application had been with the state of Indiana for quite a while. I think about 18 or -- 18 months to 24 months and there was a lag because you may recall the previous administration changed out ACIC. It made all schools move over from ACICS to another accreditor and while we were in that process, we couldn't add locations, so we'd already put our application in place, we had the delay. The state understood that. Once we got a new accreditor in place, we had six months roughly to make a go, no go decision on it. We like the location, we like the state, we like all the demographics. So we signed a lease, and part of the state's process is you actually have to have your campus build up before they'll give you your license and authorization to open up a class. So our goal is to have that campus build up done by November, at the same time, our current plans don't have a starting and opening up term until the second quarter of next year. And if we're not feeling good about how we're progressing elsewhere, Corey, we can always delay that. We could push it back. But we did have to sign our lease in order to keep the authorization from expiring.

Yeah understood. I have some additional questions but I'll go back in queue and ask if no one else ask them. Thank you.

Okay.

[Operator Instructions] And we have another question from Corey Greendale with First Analysis.

All right. Well.

All right.

So I will just keep going then.

Sure.

So the next question I had was on the -- the APUS segment and understand the effect of the Navy, and I know this kind of thing has come up, this general sort of thing has come up before. If you back out the impact of the Navy, it sounds like the new course registration trend is still a little bit more negative than it was in Q2. So what else are you seeing that is softer in Q3 versus Q2?

Well, one thing we're seeing, we made a choice this year to really focus on putting our marketing dollars, given the increased competition everywhere with online. Where we could achieve a student enrollment for $2000 or less. And so that meant that we were spending more money on our military segment than our civilian segment. And so one of the things that did to us was it lowered our average number of registrations per student overall because the military students take fewer registrations per year than the civilian students. So that number in terms of net registrations through June 30th is approximately 2000. Right, Rick. And so we're seeing that. Cory, I can't quite fine tune it for what it will be in the third quarter because we don't exactly project our registrations by payer source. We look at them in the aggregate but we just don't fine tune them that much. But if you know that it was 2000 down on the net simply due to the ratio difference, TA was up for the first six months. But by virtue of TA being up, it's a lower number of net registrations per student on average. It's been that way. Historically, FSA students have to be at least half time TA Students are allowed to take one course only. And because of that differential it was 2000 down in the first. And it's going to be a similar negative number down just simply because of the mix in the third quarter.

It is very helpful, thank you. And as the decision to increase selling promotional expense for APUS. Does that mean that you're willing to accept a higher cost per student registration or does it mean you're focusing kind of on different areas?

No. It does mean we're willing to accept something slightly higher. And part of the issue is that when you have monthly starts, where you're bringing in students every month, where we have this temporary suspension of TA funding by the Navy. If we don't bring in students to replace them, then we're not going to have returning students in subsequent quarters. So it's just prudent to spend that extra money. We looked at the ROIs and the pluses and minuses and where to spend it. So we're more than likely and that incremental spend is going to be spending more than the $2000 . But it's because we want to bring in some new students to try and replace the new student lost by the Navy.

Got it, obviously, one more and then we can follow-up offline. In terms of the potential scope of the technology transformation plan, it sounds like it at least could relate to the LMS. What can the scope be, could it hit your ERP system, your CRM or what pieces of technology you're looking at?

Yeah, I would say just from a big picture perspective. We're looking at the LMS, we're looking at the SIS, which are SIS pad is homegrown and we're also looking at the CRM. So those three systems are pretty large, pretty transformative and very few people engage in a project. But we think, it's about time when you look at -- we're probably the largest user of SECIA that's our existing LMS out there. It's open source, it served us well. But there's a number of advances, particularly as it relates to accommodating some of the alternative modalities of instruction like CBE, that the newer LMSes can handle quite capably. And then CRM is really dependent on what we do with the SIS.

Okay, great. Very helpful. Thank you.

And our next question comes from Greg Pendy with Sidoti.

Hey, guys, thanks for taking my question. Can you just help us understand. I guess, just on Hondros, just with the requirement now to take that, I guess, ACCUPLACER exam. How many nursing schools, I guess in the area probably don't require that. I am assuming that, in a competitive environment, some students may just choose another nursing school. So how common is that requirement?

Actually, the ACCUPLACER requirement that we put in place in January was a pre-test requirement and not something that was normally done by the for profit schools. And so when we did that, we had students who were just test averse, because it's a three or four hour exam. They didn't want to do it and they went elsewhere where people were not administering it. We've changed that, we actually changed that requirement and we're still administering as a baseline. But we've built it into the first term courses, and so that way we can have the baseline so we can diagnose how well the students are performing and learning. But not making a pre-admission requirement. And so that's working, but it's still going to take a while to get the word out in the community that were no longer requiring that as a pre-test.

Got it. That's helpful. Thanks.

And there are no further questions at this time. I'll turn the conference back over to Chris Symanoskie.

Thank you, operator, that will conclude our call for today. We wish to thank you for listening and for your continued interest in American Public Education. Good evening.