Good day and welcome to today's American Public Education, Inc. Second Quarter 2022 Results Call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. And after the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the call over to Ryan Koren, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to American Public Education's conference call to discuss second 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 and 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 adjusted EBITDA, as well as other earnings guidance, expected benefits of the acquisition of Rasmussen University, plans with respect to recent current and future initiatives, including with respect to synergies and headcount and future demand or expectations for online enrollment and 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, risks related to the effects of and the company's response to the COVID-19 pandemic, changing market demands, actions taken by the Department of Defense or branches of the U.S. Armed Forces, including actions related to the disruption and suspension of tuition assistance, challenges with integrating acquisitions, regulatory matters, competitive pressures and those described in our presentation, today's press release, the company's Form 10-Q 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 a substitute for, or superior to any financial 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.

Thank you, Ryan, and thank you all for joining us today and for your interest in American Public Education. Today, I will begin my remarks about important initiatives and actions to build the next chapter in APEI's history, while continuing to provide an exceptional return on educational investment for our service minded students. Several important developments have occurred since our last earnings call. We will share more details throughout our remarks today. However, in summary, we have welcomed new leadership to APEI. Yesterday, we announced the new President of American Public University System, Nuno Fernandes, who is currently President and CEO of Latin America's largest LTM, Ilumno, which at its peak has served 300,000 students. During his tenure at Ilumno, Nuno has also served as COO, CMO and SVP of Enrollment. On Friday, we announced the appointment of Craig MacGibbon, APEI's new Chief Information Officer. Craig has deep familiarity with APEI, having been engaged as consultant for the CTO for the last 18 months. Last week, we publicly launched the search for Rasmussen University's next President, after Tom Slagle departed, and while Javier Miyares, formerly President of the University of Maryland Global Campus, continues as acting President. We are also continuing our focus on expansion. Our Hondros, Michigan campus is in its final stages of approval, with over 500 people planning to attend our open house and sufficient inbound interests without marketing, to fill our initial cohort without having launched any additional spend. Rasmussen's accreditation visit for its Doctor of Physical Therapy, or DPT program has successfully completed, and we expect the candidacy report from its programmatic accreditor later this month, with final approval meetings scheduled in late October 2022. And nursing leads since July 1 have increased over 40% over the prior year period at Rasmussen. This is the…

Thank you, Angie. Going on to Slide 8, second quarter 2022 financial results. On Slide 8, we present a summary of our financial results for the second quarter of 2022. Total revenue was approximately $150 million, up approximately $72 million or 92% from the comparable prior year period, due primarily to the addition of Rasmussen and graduate school revenue of $64 million and $4 million, respectively, in the 2022 period. At APUS, revenue was approximately $70 million, an increase of approximately $3 million or 4% as compared to the prior year period. The revenue increase was due to a 1% increase in total net course registrations in the second quarter of 2022 compared to 2021 and the timing of registrations in the quarter. Hondros revenue was $12 million, an increase of $400,000 or 3% as compared to the prior year period. This increase is in line with the year-over-year enrollment growth that Andy touched on earlier. Second quarter cost and expenses, include a noncash impairment charge of $144.9 million to reduce the carrying value of RU segment goodwill and intangible assets, and to reflect the corresponding tax impact. The impairment charge was the result of our evaluation of Rasmussen's financial performance compared to plan and overall financial performance during the period, and also included recent enrollment trends as well as industry and market conditions. To complete the fair value analysis, we engaged a third-party valuation firm to determine the fair value of Rasmussen. The independent valuation firm used two methods when determining the fair value of Rasmussen, equally weighted 50-50, the discounted cash flow method and the guideline public company method. Therefore, the final valuation was impacted by both the financial performance of the business, as well as public company pricing multiples in the higher education space. Excluding the tax…

Thank you, Rick. In summary, each of our leaders remain confident in APEI's strategic positioning as number one serving active duty military and veterans and number one educating pre-licensed nurses. While we also continue to transform and diversify API's portfolio of career learning assets and expand our mission of educating the service minded. In the near term, the factors adversely impacting Rasmussen enrollments will subside. Nursing enrollments will continue to be impacted by the smaller prior quarter cohort enrollments for the next few quarters. However, as we continue to bring marketing back in-house at Rasmussen, we are seeing early indicators of success that we believe will translate to increased starts and ultimately increase enrollment, especially as we believe demand for nursing graduates is expected to remain strong for the foreseeable future, as employers are clamoring for new nurses to supply the national shortage. We believe we continue to be well positioned to fulfill these needs. Key leadership changes at APUS, APEI and Rasmussen will help reinforce and accelerate the business on enrollment growth and momentum. And overall, APEI continues to be focused on higher education return on investments for our service-minded students, by keeping tuition rates in check, and being one of the most transfer-credit friendly institutions. We now ask the operator to open the line for questions.

Thank you. Today’s question-and-answer session will be conducted electronically. We'll take our first question from Tobey Sommer with Truist Securities.

This is Jasper Bibb on for Tobey. Just on the Rasmussen performance. I know you mentioned the ability to hire staffing enrollment, but how recently would you say the deterioration in performance has been there, and how much would you say is market factors versus, I guess, just Rasmussen's operations.

It's Angie. I will be happy to answer that question. There have been episodic incidents over the last several quarters where Rasmussen began to cap enrollments in the Bloomington campus. It's the most – I think, over was in this recent quarter, and consequently, that is the reason for what we're forecasting in terms of declines. I think that while we saw our own cap being imposed because of these faculty shortages, what we had been experiencing from the time of the close of the acquisition, was a degradation in the effectiveness of marketing from the third-party provider. And so we remain very steadfast in our belief that moving that mission-critical revenue-generating function in-house, rather than adding that outsourced to a third-party provider, was absolutely necessary for us to build momentum and regain enrollment momentum at Rasmussen.

And then I guess looking at the third quarter guidance, does that assume negative adjusted EBITDA from both Hondros and Rasmussen, or how should we think about the profitability there at the segment level?

It does, Jasper in both those BUs – both those business units. But we're laying the foundation to reverse that enrollment trend, and it's the growth engine that will drive profitability in those units. The other thing to note is, we are in the midst of the start-up of the Michigan campus, which does have a negative impact on the Hondros' EBITDA for the period.

Right. So how should we think about, I guess, the time line to get Rasmussen back to, I guess, breakeven or adjusted EBITDA profitability going forward?

Right. So as Angie indicated in her remarks, given the current plans in place, we're targeting to return to enrollment growth at Rasmussen in the second half of 2023. I think broadly speaking, the earnings of those units will track with the enrollment term, and then also, growth in enrollment there.

And just to put a finer point on that, Jasper, unlike APUS, I think we've tried to share this difference before. APUS has monthly starts and students buy courses . So blips in consumption can be rectified more quickly than in either Hondros or Rasmussen, because Rasmussen has quarterly starts, as of Hondros. And in the case of the nursing programs, in particular, because there is a defined curriculum and students move through that curriculum in a cohort, if you impose a cap on a cohort at the beginning of an academic journey, you are basically living with that reduced enrollment in that cohort through the entire educational journey of those students until they graduate and complete. So when Rick is talking about returning to enrollment growth, he's not talking about nursing starts, he's talking about nursing – are you talking about enrollment total? Because we now have imposed limits and now we will live with that reduced cohort through the entire journey for those students to graduate. So hence, the reason why we are very pleased with the early results from bringing marketing in-house, because we can't – the way for us to offset that is not – we don't – we can't insert students into those cohorts. That's not how that educational journey works. So what we need to do is offset those imposed limits by accelerating the addition of new students in the quarter where those students are still – those cohort students are still being educated. So it is essential and critical that we control our destiny on marketing and enrollment momentum, by bringing that capability from the third-party back in-house.

Okay. And as part of, I guess, the response to some of the inflationary pressures you've been seeing at Rasmussen and Hondros, are you evaluating tuition price increases for the nursing programs, or how are you thinking about that?

Yes, Jasper, it's Rick. Obviously, we look at all the levers we can pull and pricing is one of them. And that's a program by program and market-by-market analysis, but we do see that as an opportunity or maybe a necessity in a world where we're seeing wage inflation at the levels that we're seeing it.

And Rasmussen at the beginning of 2022 did, in fact, selectively increase program pricing among several of its programs. So that was put into place earlier in the year, and we need to look at the programs that had not experienced an increase and evaluate that at this time.

Last question for me and then I'll get back in the queue. Can you just update us on where you think you would stand for the new 9010 regulations that were announced a couple of weeks ago?

Yes. Jasper, we've looked at that continuously since they've been talking about it. Across the Bus, there's really no challenge at RAS, it's in the kind of 77% range. Hondros is about 80%. It would be APUS, which we've talked about when you add in the tuition assistance, which is active duty and then VA. You can look at our concentration note in our financials. It's not an exact proxy because, as you know, 9010 is on a cash basis, and that's an accrual basis based upon primary care. But I think we've said in prior calls, we're about 87%, and we still track towards that number. So we would be under the 90% under the new rule, and we do look at that as being implemented with a measurement date starting in January of 2023. So we're very cognizant and focused on maintaining that 87% and reducing it through other activities and students that are not federal funded.

Okay, got it. Thanks for taking the question.

We'll take our next question from Raj Sharma with B. Riley.

Hello, thank you for taking my questions. I wanted to touch upon Rasmussen. I think there's been a significant degradation since the acquisition wanted to understand and now, you have an impairment. I understand the impairment is a non-cash charge and it's an accounting exercise, but it is a big piece of the original purchase price of $330 million. So I just wanted to understand, does it inherently accurately inflect the true intrinsic value Rasmussen? I mean, obviously, you've made statements that employers are clamoring for nurses and they will need nurses and you are going to fix the enrollment issue. I just wanted to thematically kind of understand do you see the impairment of accounting as a reflective of the intrinsic value of Rasmussen, or it will be overpay?

So Raj, it's Rick. We broke down the impairment between, let's call it, business performance elements and then market-based elements. It's a snapshot, but we remain very enthusiastic about the long-term elements of the business, right, the nursing and the supply demand and balance for nurses, that's unchanged. Obviously, it's impacted by things like, our ability to hire faculty and the enrollment caps that we put in place in Bloomington. And obviously, we have to do those types of things. So that does impact the number. When you look at the business and you look at what's been going on since we bought it last fall, there are things that are happening. The delivery model is altered. I believe we've talked about this. There was a time during COVID, when much of the delivery was online, and then it went back on campus. We are experiencing higher costs. We talked about inflation and particularly nursing faculty wage inflation. And then the declining enrollment. That's a post-COVID phenomenon, and it's also a business-specific matter related to Bloomington, as the example. So it is a current snapshot, but I think long term, we all remain enthusiastic to – that it's going to deliver on the promise of growth. We did talk about, Raj, in the call about how we're going to optimize our cost structure and address the cost side of the equation, right? So we are focused on enrollment and enrollment growth, and we're also focused on addressing some short-term cost needs. So with that, I'll turn it to Angie, if she has any additional comments. Or Steve?

Raj, it's Steve. Just a couple more comments on that. Really to piggyback to Rick's point of view, we're playing a long game here with the Rasmussen acquisition, right? It was a unique asset with 20-plus campuses in a lot of important markets. Right now, there are some internal, but also market-driven challenges, and we'll be able to fix the internal ones. We think there's a long-term positive secular trend, even if there are some minor cyclicality, whether it's due to COVID or other unemployment-related matters, as well as unemployment rates. So we're still very positive on kind of how that positions us as a business, and we also have opportunities as we think about aligning our business and providing a great service to students. We're in what we think is an enviable position, even though there are some short-term challenges.

And last point I would add, Raj is we really look forward to bringing new leadership into Rasmussen, that will both focus on the important enrollment momentum for – predominantly our pre-licensure nursing program, but also to make sure that we continue to anticipate our staffing needs, so that we can operate with excellence. And so we're looking for a leader who can balance both of those qualifications equally well, and we're really pleased with some of the early candidates that we've seen.

Got it. So would you say that while in the short term, there might be this impairment – 40% impairment to the value that necessarily doesn't reflect the longer – the medium term or the longer term value of Rasmussen?

I certainly don't. I'll start, and Rick and Steve can weigh in. I think we ended up in a circumstance, which is what we call a perfect storm, where we've got the market comps of our sector trading at almost all-time lows. We had imposed, we thought, doing the right thing, imposing enrollment caps in order to make sure that we have the right faculty to student ratios in Bloomington to ensure that our students are getting great educational experiences. And at the same time, we had returned to an operating model of fully on campus-based operations, where we had enjoyed last year, much more of a blended online and on-ground operational experience, which changed the EBITDA profile. And so I think it's that perfect storm that all certainly happened in this period of time, basically prompted an accounting exercise, to evaluate the value of the acquisition we made. We don't, in any way, believe that this represents the long-term value of Rasmussen, and we will continue to remain enthusiastic about the supply-demand gap that exists for pre-licensure nursing in the United States, which is quoted between 200,000 and 400,000 each year on an annual basis for the next 10 years. And our ability to continue to grow and supply those pre-licensure nursing student graduates. So I think we unfortunately face this timing issue, and we are certainly seeing, as I mentioned, incredible momentum from a lead generation perspective. Now we've taken marketing and lead generation in-house and for the first time in, I believe, 10 years for Rasmussen.

Got it. So that leads me to my second question, which is that, when you're seeing these really good leads on the nursing side, when do they translate into starts and how soon will we find out that the up 40% leads are really generating good starts? Quarter out...

Yes. I think about 40% of the leads that we get in this period of time will translate into next quarter starts, and then the remainder will be in the next two quarters after that, predominantly. We still are working all leads that we have, that are even more than a year old and always are building momentum from those leads as well. So this will be something that will benefit us over the next several quarters, the upcoming quarter itself.

Raj, it's Rick. It's what Angie described earlier about the cohort-based system, which I know you understand and you've got to teach through those cohorts that were smaller. So the way to upend that, the way to reverse that is to have a large start. And so we're very focused, I think Angie's comments centered on. We're very focused on a very large October start at Rasmussen. The incremental $3.8 million investment in marketing. We're investing in what we've done, what Jeff and his team did, to in-source those execution services. It's generating good lead flow, and then the teams at Rasmussen have to – to your point, have to convert those leads into starts. And everyone is aware of the priority and the mission to get that done. So we're very focused on an October start that's going to set the path for ultimately total enrollment growth.

Got it. And then on the new upcoming switch for the Army portal. You don't foresee – I mean, you see this process as having been done a lot more – in an organized way with the existing providers still in service. So you don't foresee delays that you had experienced the last time? Do you see – do you foresee this to be more a smoother process?

We think the elements are in place, Raj, to make that happen, right? We don't know, but we are planning and working hard, to not experience the same challenges that we did last time. The points were made – a known provider with a known system, an organization we have a relationship with, we're doing UAT testing. They're not going to drop the system on a day, they're going to run it in parallel. I'm concerned about the data transfer from 1.0 to 2.0, particularly as it relates to unprocessed tuition assistance requests, which translates into transactions that we invoice. But those will be – if there is a disruption there, that will be transitory, just like it was. Think about what we experienced with 1.0, our AR increased to $30 million, working with Army, working with the bases, we've been able to work that down to 12.5%. I think we said 13% in the call. So we'll work through that – those challenges, but I think we will do so in a much better place than we were with the transition from GoArmyEd to ArmyIgnitED 1. So...

If I could just add one additional observation, Raj, which is in the 1.0 transition, we had no information. We received emails. We had no opportunity to communicate with the Army. We have worked very hard to build an open dialogue as an active partner and supporter of what the army is attempting to accomplish, and as a result, we have much more awareness, and we are grateful for the opportunity to be part of the UAT process, user acceptance test process, which is completely different than what we experienced last time. So we believe we will be able to know early on what challenges we might face, but we are very, very grateful for the Army's willingness to partner with us this time around.

And it speaks to the Army's confidence in us as a partner to have us be part of the UAT process.

Great, thank you for answering the question. I’ll take it offline. Thanks.

Thanks Raj.

We'll take our next question from Stephen Sheldon with William Blair.

Hi Angie and Rick. This is actually Matt Filek on for Stephen. Thanks for taking my questions. Seems like faculty shortages are the biggest headwind on the nursing side. And I was wondering if you are finding that it's starting to get somewhat easier to source nursing faculty to meet program demand? Or do you think that it will start to improve in the second half of the year? Any commentary there would be helpful.

Sure, I'll start. Certainly, what we see is different levels of availability, specific to certain markets. You can see our most acute challenge has been in the Twin Cities market. The – what we have instituted, as I mentioned, among the many remarks I made today, a model whereby we offer the schedule of available clinical – these are primarily part-time faculty problems that we're having now full time. We offer a schedule of available clinical position at a certain rate and people have the opportunity to get the kind of their first choice as their best choice. And then as the remaining positions remain unfilled, we start creating a more competitive price for those open positions, and we've seen really great success in getting all of our clinical positions filled. We were able to fill 100% of our clinical positions for this upcoming cohort. And so we think that, that model of variablizing the rate for these different clinicals, creates a way for us to fill the schedule completely and also kind of maintain a cost structure to the best of our ability.

Okay. That's helpful. And then just as a follow-up to that, given that the capacity for faculty is still somewhat constrained, how are you thinking about marketing spend for the nursing programs over the very near term?

Mark, that's a great question. Marketing spend really is determined – for the first time, what I would call bottoms up, right? When we had the – this is Rasmussen specifically, when we were engaged with a third-party provider, the marketing spend was identified at a macro level top-down, and then the leads fell wherever the next best dollar spent could generate a lead, which was not all aligned with faculty availability, campus capacity, et cetera, clinical placement availability, et cetera. We have turned that upside down and are doing market-specific forecasting and capacity planning at each campus for each program, so that we know that the constraints include what is the capacity at campus, what is the available clinical spots and what is the faculty we have filling those clinical spots. And so now for the first time, we are being very directive about the way in which we're investing in marketing in the markets, where we have the ability to continue to enroll students and grow, because we aren't facing those constraints. And that is what's driving our 40% increase in lead generation, because we've taken that function in-house under Jeff Tognola's leadership who joined us in January, and we have completely transformed the way we think about marketing. So we're very pleased with the complete transformation of what's going on, in terms of how we're doing our media spend and our marketing.

Yes. I would just add, Matt, we're investing, right? That's what Angie said. If you look at Rasmussen, it's not in the prior number, but if you look at marketing year-over-year, I believe through June, it's up about $2 million, and we're going to spend an incremental $3.8 million in the third quarter. We're investing for the reasons we said. Hondros is a small company, but year-over-year, their advertising year-to-date is up about $400,000. So two different businesses, two different investment amounts, but consistently, we're investing in the nursing element of the business for all the reasons we've described.

Very helpful context, thank you Angie and Rick. That’s it for me.

And that does conclude today's presentation. Thank you for your participation and you may now disconnect.