Aspen Group, Inc.

Aspen Group, Inc.

$0.14
0 (0%)
NASDAQ Global Market
USD, US
Education & Training Services

Aspen Group, Inc. (ASPU) Q3 2017 Earnings Call Transcript

Published at 2017-03-09 16:30:00
Executives
Michael Mathews - CEO Janet Gill - CFO
Analysts
Eric Martinuzzi - Lake Street Capital Howard Halpern - Taglich Brothers Jeff Kobylarz - Diamond Bridge
Operator
Good day ladies and gentlemen and welcome to the Aspen Group Inc. Fiscal 2017 Third Quarter Results Call. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference is being recorded. I'd like to introduce your host for today's conference Ms. Janet Gill, ma’am please begin.
Janet Gill
Thank you. Good afternoon. My name is Janet Gill, Aspen’s Chief Financial Officer. Thank you for joining us today for Aspen Group’s fiscal year 2017 third quarter earnings call. Please note that the company's remarks made during this call including answers to questions include forward looking statements which are subject to various risks and uncertainties. These include statements relating to expectations regarding student enrollment and other metrics and forecasts including growth in CAGR, gross margins, net income, EBITDA and adjusted EBITDA. Actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. A discussion of risks and uncertainties related to our business is contained in our press release issued this afternoon and our filings with the Securities and Exchange Commission, particularly the section titled Risk Factors in our Form 10-K filed on July 27, 2016. Additionally, to consummate the possible acquisition we announced today, we need to increase our line of credit for a range of the financing. Such risks include our ability to do so on acceptable terms. Aspen Group disclaims any obligation to update any forward-looking statement as a result of future developments. Also I'd like to remind you that during the course of this conference call we will discuss adjusted EBITDA and EBITDA which are non-GAAP financial measures in talking about the company's performance. Reconciliation to the most directly comparable GAAP financial measures are provided in the tables in the press release issued by the company today. There will be a transcript of this conference call available for one year on the Company's Web site. I will begin today by reviewing our operational and financial results for our fiscal 2017 third quarter, then we'll turn the call over to the Chairman and CEO of Aspen Group, Mr. Michael Mathews. To open, quarterly revenues were $3,735,626, a 73% increase from the comparable prior-year period. Although our third quarter followed our most favorable cold seasonal second quarter we still set another quarterly new student enrollment record in the third quarter with 825 enrollments compared to last quarter's record 811 enrollments. Key to this new student enrollment record was the fact that we increased our enrollment centers in Scottsdale from 31 to 40 people by the end of January. That increase was expected to be accomplished by the end of April, so we completed that plan 90 days earlier than forecasted. This increase of the enrollment center, a quarter earlier than expected, means that we are poised to deliver another incremental jump in our new student enrollments in the current fourth quarter. In fact, were currently tracking to deliver over 900 enrollments in this quarter. From a year-over-year perspective, the 825 enrollments in the third quarter was an increase of 50%. However, the marketing spend of $664,000 in the quarter represented a spending increase of only 35%. That translated to our rolling six-month average cost per enrollment dropping down from $828 to $768, an improvement of 8% year-over-year. Aspen Group’s gross profit for the third quarter increased 119% from the comparable prior-year period to $2,256,198 or 60% margin. This 60% gross margin results represents a 1,200 basis point improvement year-over-year. Note that our gross profit this quarter were approximately $92,000 higher than our revenues in the quarter a year-ago. This certainly speaks to our superior unit economics of our business model. Specifically, the 1,200 basis points gross margin leverage we delivered year-over-year was first a result of our cost for enrollment dropping 8% as just mentioned. Secondly, our marketing spend rose by only 35% as compared to revenues increasing 73%. Thirdly, our instructional cost only grows year-over-year by 38%, even though we had 69% more new class starts compared to the quarter a year-ago. This was our second consecutive quarter delivering positive GAAP net income. As we delivered net income applicable to shareholders of $7,377 or core earnings per share of less than $0.01 per share, that’s an improvement of $682,341 from the comparable prior-year period. Operating income totaled $85,694 or 2% margin representing a $727,919 improvement from the comparable prior year period. EBITDA improved a 145% from the comparable prior-year period to $218,420 or 6% margin. Adjusted EBITDA totaled $461,727 or 12% margin, a 361% improvement from the comparable prior year period. Contributing to the company's bottom line improvement was the fact that our G&A cost increased only 29% year over year. Specifically, G&A costs were $2,133,074 as compared to $1,659,133 for the same period of prior year. From a sequential perspective, G&A cost only rose by $213,421 primarily as a result of the previously discussed headcount increased in our enrollment center. Finally, for the nine months ended January 31, 2017, cash used from operations was $99,042, an improvement of $1,260,759 or 93% from the comparable prior year period. Now I'll turn the call over to Michael Mathews to provide additional color on our third quarter results and to make an important strategic announcement.
Michael Mathews
Thanks Janet. Good afternoon everyone. As you've now heard, we actually delivered more gross profits this quarter than our revenues were in the quarter a year-ago. Allow me to walk you through some of our operating metrics that led to this result. To start last quarter, we announced that our lead-to-enrollment conversion rate was an impressive 12%. This quarter our conversion rate actually rose to 13.6%. There is no question that increase in our enrollment center from 31 to 40 people attributed to these special results. But also note that our organic or referral leads accounted for 35% of our total leads this past quarter. So word of mouth and our corporate partnerships continued to both grow rapidly. Students paying through a monthly payment method grew sequentially from 59% to 61% of our total new class starts. That means we now have 2,575 students paying through a monthly payment method from 2,208 a quarter-ago. Consequently, the total number of monthly payment method students increased by 367 students sequentially or over a 120 per month net. Bottom line, it's pretty clear that offering students the ability to pay for their education months-to-months has been the critical factor responsible for our outstanding conversion rate and the subsequent transformation of our financial year-over-year. In terms of our new class start activity students began 4,652 new class starts in the third quarter as compared to 2,753 new class starts in the quarter a year-ago, that's an increase of 69% year-over-year. To support this increased in new class starts, we have thoughtfully grown academic support systems to ensure the success of our students. Based on institutional data, we've increased the size of our advising team, increased our quality faculty, we now have 116 faculty members and 66 of them are doctorly prepared. We also strengthened our curriculum with various virtual classroom experience and contracted with a library service to provide 24/7 research report for our students. As a result of our outstanding institute and enrollment growth and the rapid increase of class starts over the past two quarters, we're now comfortable raising our CAGR organic guidance for fiscal years 2017 and 2018 from over 50% organic growth to over 60% organic growth. Before I make an important announcement, I'd like to mention that our Department of Education or DOE program review that was conducted back in 2013 is finally nearing completion. By way of background the company returned a total of $102,810 back in 2013 to the DOE following their determination that we had not fully complied with all requirements for calculated and making timely returns of Title IV funds. On February 8, 2017, just last month the DOE issued Aspen a final program review determination letter related to the 2013 program review. The letter included the calculations of amounts due to the DOE for the 126 students that they reviewed. We have 45 days to appeal the amount calculated and we're currently preparing that appeal. We recognized that we'll owe some amount in the range between $80,000 and $360,000. We expect it to be a one-time expense given that Aspen's two most recent years of compliance audits fiscal year 2015 and fiscal year 2016 reflected no material findings relative to the calculation and timely returns to the Title IV funds, which is what caused the liability in the 2013 program review. Accordingly, we've recorded a minimum liability of $80,000 at January 31, 2017 and of that amount 55,000 was recorded against the accounts receivable reserve and $25,000 was expensed. Okay, onto our important announcement. As you know one of the key reasons we've been focused solely on marketing on monthly payment plan to registered nurses, is because Aspen is a nationally accredited university and not regionally accredited. In the nursing sector, given that our nursing programs are accredited by the CCNE, the fact that Aspen University holds national rather than regional accreditation does not materially affect our results. That speaks to the vast majority of healthcare employers recognized as CCNE accredited degree without regard to whether degree from that university is nationally or regionally accredited. Aspen Group's long term mission however is to offer any college worthy adult the ability to earn a college degree by paying months-to-month. In order to accomplish this mission Aspen Group has been looking to acquire a second university, one that is regionally accredited. The long-term plan for Aspen Group, the public company is to own two universities; first Aspen University which will over time evolve to focus solely on nursing; while the second university, the regionally accredited university we would plan in the future to offer monthly payment plans across a wide array of online undergraduate and graduate degree programs include business, information technology, education, criminal justice, psychology in addition to nursing. Earlier this week Aspen Group signed a letter of intent to acquire a regionally accredited university based in California. Today this university offers business, education, and health sciences degrees and it also offers CCNE accredited nursing program, which we are very excited about because we believe there is easily enough demand in the nursing sector to have two huge online nursing schools in the marketplace both offering monthly payment plans. We're not disclosing the name and the university for competitive reasons and non-disclosure reasons and also because the deal includes the confidential financial contingency that the target university must achieve by no later than December 31, 2017 or year-end. Aspen Group is committed to providing market consulting to that university to support their efforts to meet this financial contingency later this calendar year. Should this contingency or any other contingency or customary closing conditions not be met, Aspen Group can exercise its right to terminate the definitive agreement. The total purchase price is set at $9 million. Payable with 4.5 million of Aspen common-stock, 2.5 million in cash at closing, and the remaining 2 million in the form of a convertible note that matures over a 2-year period after the closing. At the auctions as a holder the note will convert at the market prices one year and two years from closing or be paid in cash. It was structured this way to ensure that this will be short-term a cash friendly transaction for Aspen, while simultaneously limiting the dilution effect to Aspen shareholders. Additionally, Aspen has agreed to lend $900,000 to a newly formed entity controlled by the loan guarantor, who owns 100% of the voting power at the regionally accredited university. The loan bears an interest rate of 8% per annum. If we enter into a definitive merger agreement within 60-days of the letter of intent, and if the merger is consummated by January 15, 2018, the principle amount of loan and accrued interest will be credited against the 2.5 million in cash payable at closing. If the parties do not enter into a definitive merger agreement within 60-days or if a definitive agreement if entered into, but the merger does not close by January 15, 2018 and/or either party exercises it's right to terminate to definitive agreement then the loan and accrued interest will become immediately due and payable. To fund the $900,000 Aspen is drawing that amount on its existing line of credit. In addition, to close the transaction, which we are estimating to complete late this calendar year we will need to pay another 1.6 million of cash at the closing. To make that payment and to provide ample working capital for our growth plans of both universities, we have begun discussions with a number of debt providers to replace our existing $3 million line of credit with a larger credit facility that will support our longer-term objectives. We're confident that we will be able to secure a new facility sometime this calendar year based on the fact that we've already began to receive term sheets from debt providers. That ends our prepared comments to this afternoon. And now we would like to open the call to address any questions.
Operator
[Operator Instructions] Our first question is from Eric Martinuzzi of Lake Street Capital. Your line is open.
Eric Martinuzzi
Thanks. Congratulations on two fronts, so I guess the quarter just printed [ph] as well as the letter of intent here that you've got with this regionally credited university. So let me start there and pause to line-up my more detail questions. The regionally credited university, what impact does this have? I understand obviously now you are broadening it out, this won't be just focused on the nursing side, it's going to be basically any talent for the adult. But let's say we move forward to that time in late calendar 2017, when the transaction has closed and also if Aspen goes from being a company that's doing maybe 13.5 million of revs and slightly EBITDA positive, what -- not slightly, but double-digit digit EBITDA positive, what happens to the financials when we layer on this regionally accredited universities?
Michael Mathews
First of all, just to be clear as you essentially just pointed out, the acquisition is likely to close sometime late in the calendar year, so you're not really going to see much of a material effect on our financial for this fiscal year that's starting May 1, our fiscal year 2018. However, for fiscal year 2019, the first full year after we acquire the university, we're expecting that the size of this university from a top line perspective will be approximately, if you look at the full 2019 fiscal year, it'll be approximately the same size as Aspen is today. Does that makes sense?
Eric Martinuzzi
Yes. So, as Aspen is today as in FY'17?
Michael Mathews
Yes, in other words, yes exactly. Right, the size of Aspen today will likely be the size of this other university in the first year that we start working with them. They are currently smaller then us, appreciably smaller then us, but Eric, as you know once we get our hands on this university the growth is going to be quite rapid.
Eric Martinuzzi
As far as the -- I know you have to be a little bit -- it’s a delicate topic given the transaction hasn't closed, but any margin profile or any profit insight which you can provide us?
Michael Mathews
No, I prefer not to do that today. I think it's -- well first of all, we signed very strict NDA that relates to this LOI, so we really can't say much between now and when the acquisition is announced. So, but I'll be more than happy at the right moment to provide you guys with the understanding of how it's going to affect Aspen groupings financials in fiscal year 2018 and coming quarters.
Eric Martinuzzi
Obviously, it's a substantial transaction, you guys are putting $9 million of investor money to work, whether it's -- whatever shape it takes, whether it's the common debt, it is obviously a transformative acquisition and that's why I asked. Let's shift back over to the legacy business just a terrific Q3 on the enrollment side, you blew my number out of the water with the 825 new student enrollments. You did increase the number of enrollment advisors, are we seeing any shift here, are enrollment advisors getting more productive or is it still pretty tightly correlated with the number of enrollment advisors, any certain number of new students per enrollment advisor?
Michael Mathews
I think, first of all, I do want to make the point that there are for competitive reasons, there has been a number of universities in the Phoenix area that have either closed or conducted layoffs over the last year or so. And we've been very, very fortunate to be able to attract very high level highly experienced, high quality enrollment advisors without a lot of effort. As we mentioned in the earnings earlier in the script, we're really -- we thought we would have 40 advisors by the end of April and it was very, very easy for us to get to 40 before we hit the end of January quarter. So, the answer to your question is a little bit of both. The quality of the people is just outstanding and the performance of the entire center is improving across the board. I know we just guided this quarter that we're currently in we're looking to exceed 900 enrollments, I want people to be aware that we're likely to beat that number by a lot. We're going to be well beyond 900 this quarter, we're absolutely exploding in terms of our enrollments.
Eric Martinuzzi
Last question from me and then I'll hand the microphone off, you talked about and it was obviously, it's an enrollment focused question, but the referrals that was just frightening [ph] to me the percent coming from referrals, you talked about this in the past whether it's partnerships or hospital groups or just word or mouth on the floor. Is there any structured element to this increase that took place in Q3 that you can specifically point to?
Michael Mathews
Well this goes back to the enrollment center, probably if you had asked me the question, how many corporate partnerships do we currently hold and are leveraging a year-ago, I would say we probably would have said maybe we had 30, somewhere in that range. We've recently surpassed 65 corporate partnerships across this great country and so there is no question that we're seeing a lot of referrals from our corporate partnerships and as I've mentioned before, if you give a student that's in a large healthcare organization or a large hospitals, if you give them a great experience, he or she are going to tell all of their co-workers about the experience and this is what happens when you build a great business and you give great customer service, in our case, student experience. It becomes an organic referral avalanche.
Eric Martinuzzi
To shareholder benefits. Okay, well good luck broadening up this LOI and thanks for taking my questions.
Operator
Thank you. Our next question is from Howard Halpern of Taglich Brothers. Your line is open.
Howard Halpern
Congratulations. You used the right word, you exploded in the third quarter and I guess you are going to continue to explode going forward now.
Michael Mathews
Yes, we have a lot of momentum, Howard. Thank you for that.
Howard Halpern
I guess first question is, so you have the 41, are you going to now add just incrementally as talent becomes available to your enrollment center?
Michael Mathews
That's a good question. We will -- just so you know, we targeted to be in the low 40s by the end of this fiscal year, which is the end of April and we targeted to increase slightly marginally during the calendar year. So we now have enough advisors to be able to increase our budgets for year-over-year by at least 30% to 40%. So the good news here is that we are we sort of -- we basically spent the money early in this is the most recent fiscal quarter in order to prepare for a very, very significant growth in the coming fiscal year, and we're there. So as we continue to drive higher and higher enrollments we're not going to have to add as many call center people as we've done in the last six months.
Howard Halpern
Okay, and they have enough capacity because I would assume that they are going to be part of the consulting that you are going to do with your intended acquisition?
Michael Mathews
No. So I can't talk about the terms of our marketing consultant agreement, but please I want to make sure every shareholder of Aspen Group Inc. is aware that this will not affect Aspen's operational performance at all.
Howard Halpern
Okay.
Michael Mathews
We will continue to be in the low-40s enrollment advisors for Aspen and that will never change.
Howard Halpern
Okay, and I guess an additional question about the acquisition what type of -- what do you estimate the professional fees, it might increase in the coming quarters as you work on the acquisition?
Michael Mathews
Yes, that's a good question. So we're -- in the next 60-days of course we will have legal fees and completed the definitive agreements. We will also be required to do a GAAP audit of the university over the next 60-days. And we'll also have to get a fairness opinion done with the investment bank. So those are the three -- and also we're going to have regulatory attorney's that are going to end-up filing a pre-approval document to the Department of Education and to the regional creditor which is called LOSK [ph]. So there is definitely going to be -- probably when all is said and done, maybe somewhere in the vicinity of $250,000 to $300,000 of professional fees that will be obviously onetime kind of expenses.
Howard Halpern
Okay, and just from the timing standpoint it seems like you have a long -- if everything goes according to plan, a nice long lead time, which gives you I guess a lot of runway to be able to replicate what you are doing in nursing and -- so you're going to be able to hit the ground running I guess, I want to say once the acquisition is completed?
Michael Mathews
Yes, yes, there's no climbing. If you want to talk about what is the five-year strategic plan for Aspen Groupings at a very high level? There's no reason that four or five years from now that the target university, the regionally accredit university someday will be probably double the size of Aspen University to give you an idea. That's why this is absolutely a transformative acquisition for us because it allows us to take the monthly payment plan to every adult in the United States of America who is interested in getting either their first degree or their next degree. And today of course we're doing gang busters [ph] in the nursing niche and imagine a scenario where we have this gigantic nursing school at Aspen and it keeps growing and we have a couple of announcements to make in the coming two quarters by the way, about it's going to get bigger. Along with the regionally accredit university where we have the same nursing program with second schools plus all these other categories of occupational degrees as I described earlier. We're incredibly excited about this.
Howard Halpern
And one last one, just for your current operations, now you talked about adding support staff, I guess library system, are there more things to come, and is that going to add a little bit to the expense, but in the long term benefit the company?
Michael Mathews
We're always going to need to be adding some G&A on the academic side, whether it's additional academic advisors, whether it's additional support services for our students. And as you guys know, about a year ago we started to implement a hybrid faculty model where once a particular professor has a certain course load, we flip them to full time status because once they have a certain load, over a period of the next 12 months we actually gain $50,000 of efficiency on an annualized basis when we do that. We've flipped close to 10 professors now over the last year and so you guys I'm sure have seen excellent leverage on the instructional cost of services line that Janet described earlier and you're going to keep seeing that kind of leverage. One of the reasons why this acquisition is so perfectly timed for us to be late this year is everyone should expect some really, really significant leverage in fiscal year 2018, and so we'll be in a position to be able to successfully start growing both universities and we'll still have really, really nice margins on the bottom line.
Operator
Thank you. Our next question is from Jay [indiscernible], an Investor. Your line is open sir.
Unidentified Analyst
Mike is there any -- great quarter. Is there any color of upgrading the stock to a higher uplift, so you get more of [indiscernible] and what kind of transpiring?
Michael Mathews
So, let me just say that the company is currently focused in the near term on increasing its credit facility. We're not looking at an uplift in the -- right in the near term. So, we absolutely are planning to do an uplift and it's probably going to happen sometime before the calendar year, but in terms of the capital markets our first big move is going to be increasing our credit facility. We'll make that announcement once it's done and then we'll look to a potential uplift subsequent to that.
Operator
Thank you. Our next question is from Jeff Kobylarz of Diamond Bridge. Your line is open.
Jeff Kobylarz
I just want to make sure I understood a few things that you already noted. You said that about this California educational company, you said that the size of Aspen, I think you said the size of Aspen today will be the size of this California entity after you put your model in place. Is that what you said Mike?
Michael Mathews
Yes, exactly and I was very specific about stating that the size of the university in fiscal year 2019 which is our first full fiscal year with this new university assuming we close. That first fiscal year, at the end of that fiscal year we will be at the size approximately of what we will producing for the full-year in Aspen this year.
Jeff Kobylarz
Okay, got it. And then you do say that the number of enrollment counselors that you have that and they have a capacity to handle 30% more new enrollees, is that -- did I get that right?
Michael Mathews
Yes, you did. In other words, we can spend 30% to 40% in our internet advertising spending rate at this point higher than we currently spend and we would not need to add additional advisors.
Jeff Kobylarz
Alright, great. And then just curious, in my model, I was assuming that the monthly advertising spend was going to be up versus the October quarter, but it was down, but it was down just a little bit, I have it around 221,000 a month versus 229,000 in the October quarter and can you explain why it was down.
Michael Mathews
Good observation. Couple of good reasons; number one, last quarter was our seasonal high point, the second quarter which is our fall month. So we "over spends" in the month of September and October more so then we normally would. In the third quarter that just ended, the second half of November and the entire month of December tends to be seasonally weak. So -- and then of course January is our best month to the year. So this spend rate was relatively similar quarter-over-quarter, but were very good about understanding, I've been doing this for five years I have a crystal-clear understanding of which months are the best months and we move our spending around to accounts for that. We also as we added enrollment advisors throughout the quarter this past quarter we implemented a strategy and I hope this doesn’t come off the wrong way, but we starved them a little bit in terms of new leads. Because we wanted to see how successful we could be with our existing data base which has millions and millions of leads now, total over five years. And I think you guys saw that it was the strategy that worked, looking at the numbers.
Jeff Kobylarz
Okay, interesting. And any general reason why the referrals keep going up? Congratulations on that. I heard you say 25% organic enrollments back in the April 2016 quarter then last couple of quarters it was 30% and now you are at the 35%, any things that were -- any general thoughts about where that can go and what's driving that?
Michael Mathews
Yes, I mean to be honest with you, if you had said to me a year-ago, Mike what's the limit of work that'd end up, I would have said to you, we would probably arrive at maybe a third would be the highest we would ever get. But now there we're at 35%, I don’t know. I mean, I've never seen any ecommerce company in any sector that is in the 40% to 50% range. So I would say we're probably tap out maybe in the 40% range, but this business model is a first of its kind business model and honestly as this is happening were making history and we're seeing what happens.
Jeff Kobylarz
Alright. And so you up'd your guidance for this year's revenues, from up 50%, up 60% and can you make any comment about EBITDA, will EBITDA be seeing a little bit more leverage? Than you just said before that EBITDA will be over 12% level.
Michael Mathews
No, our guidance for adjusted EBITDA for the fiscal year 2017 that's just ending in a month and a half. We have said for a long time that our CAGR guidance is 50% plus and 12% adjusted EBITDA margin. Because of the incremental spending in the call centers in this quarter increased our spend rates to the plain where we basically had a couple of percent margin decline as a result. We're still at -- the 50% CAGR along with the 12% margin, that backs into a full fiscal year of about $1.5 million of adjusted EBITDA. We still believe we're going to hit that 1.5 million of adjusted EBITDA for the fiscal year, it's just going to be on a higher growth rate, over 60%. Does that answer your question?
Jeff Kobylarz
Yes, yes, that's fine.
Michael Mathews
And you will see material improvements very material improvements on our adjusted EBITDA margin in this current -- in the fiscal year that's going to start in May 2018.
Jeff Kobylarz
And the driver of that is what?
Michael Mathews
Leverage growth. We're getting to the point where we're big enough that we don't have to add as much G&A as we have in the past and as you can see our direct costs every quarter are getting better and better in terms of our efficiency. I talked about the instructional cost earlier about how that's declining as a percentage of revenue.
Operator
Thank you. This time there's no other questions in queue. I'd like to turn it back to Mr. Mathews for any closing comments.
Michael Mathews
Thanks, everyone for your time this afternoon. I appreciate all the questions and I'm looking forward to speaking with you in our fiscal year end fourth quarter a few months from now. Have a good day. Thank you
Operator
Ladies and gentlemen, thank you for participation in today's conference. This concludes your program. You may now disconnect. Everyone have a great day.