American Public Education, Inc. (APEI) delivered better-than-expected revenues and earnings in the third quarter of 2014, Moreover, the post secondary education provider issued an encouraging outlook for the next quarter, expecting sequential improvement in enrollment trends.
American Public’s third-quarter earnings of 51 cents per share beat the Zacks Consensus Estimate of 50 cents by a penny. Earnings were also at the higher end of management’s expected range of 44 to 51 cents.
However, earnings declined 16.4% year over year as higher costs associated with Hondros and higher taxes offset slightly better enrollment trends.
Revenues and Enrollment Improve
American Public is the parent company of the online learning provider American Public University System (APUS) and campus-based Hondros College, Nursing Programs which was acquired in November last year.
Total revenue increased 4% year on year to $84.7 million, beating the Zacks Consensus Estimate of $83.0 million by 2%. The top-line growth was much better than management’s expectation of its remaining flat year over year.
However, like the previous two quarters, we believe the top line improved largely due to the inclusion of $7.5 million sales from Hondros against the absence of any such revenues last year.
Revenues continued to decline at APUS, down 5.6% this quarter to $77.2 million, due to weak enrollment trends and increased competitive pressures. However, total enrollment decline was better than management’s expectation.
Total enrollment at APUS declined 5% year over year to 102,000 better than the company’s expectation of a shortfall of 6% to 9% possibly due to improved starts of students using veterans’ benefits and cash or other sources.
New student enrollments (student starts) at APUS declined 11% to 19,700, in line with management’s expectation of 8% to 12% decline.
Like the past four quarters, APUS enrollments in the reported quarter were adversely impacted by continued volatility and softness in military enrollments. Moreover, like the previous quarter, a significant slowdown in enrollments of students using federal student aid (FSA) hurt APUS enrollments.
In the third quarter, total enrollments of students using Department of Defense (DoD) Tuition Assistance or TA benefits decreased 11% year over year. New enrollments of students using TA declined 16% in the quarter.
Enrollments by students using TA were significantly affected by the recent administrative changes by the military. Management believes that marketplace confusion over recent changes to TA eligibility also played a role in lowering TA enrollments like the previous quarter.
Total enrollments of students using FSA (also called Title IV funds) decreased 6% year over year. Increased competition, measures taken to improve the quality mix of students and the overall challenging environment for higher education hurt FSA enrollments in the quarter.
APUS is facing challenges regarding student recruitment, persistence and retention. Therefore, the company has implemented a number of initiatives — shifting advertising away from traditional mass media and increasing the focus on strategic relationships and other channels — to improve the quality of student enrollments and thereby student success and persistence.
Total enrollments of students using cash or other source increased 3% in the quarter, while that of students using veterans benefits were up 8% year over year.
Total enrollments at the newly acquired Hondros rose 8% in the quarter to 1,311 students, while starts improved 6%. Strong demand for nursing education and management’s efforts to improve student engagement and activity through expanded use of social media and by building strategic relationships improved Hondros’ enrollment trends.
Profits Decline
Operating income for the quarter declined 16.3% year over year to $14.6 million due to higher costs related to Hondros which offset lower expenses at APUS. In fact, the company’s operating margins are suffering due to the inclusion of the lower-margin Hondros segment. Hondros’ physical campus based model requires higher costs than APUS’ online courses.
Selling and promotional (S&P) expenses as a percentage of revenues increased 160 basis points (bps) to 21.2% of revenues due to poor operating leverage at APUS. Instructional costs and services increased 180 bps to 36.2% of revenues due to higher costs at Hondros.
Further, bad debt ratio increased 100 bps in the quarter to 5.1% due to a change in student mix to a higher percentage of civilian students.
Fourth-Quarter 2014 Outlook Encouraging
Management expects to see sequential improvement in enrollment trends in the next quarter due to easy comparisons from the prior year quarter which was hurt by the partial government shutdown in October last year.
Management expects fourth-quarter 2014 total enrollments to increase in the range of 6% to 8%, while student starts are expected to remain in the range of flat to up 2%.
American Public expects revenues to increase between 7% and 9% year over year. Management further projects fourth-quarter 2014 earnings between 50 cents and 54 cents, in line with the Zacks Consensus Estimate of 52 cents.
Management also stated that new student enrollments at Hondros will increase approximately 16% in fourth-quarter 2014.
Other Stocks to Consider
American Public carries a Zacks Rank #3 (Hold). Other better-ranked stocks in the education industry include Strayer Education, Inc. (DV), Capella Education Company (CPLA) and Lincoln Educational Services Corporation (LINC). All these companies sport a Zacks Rank #1 (Strong Buy).
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