Aspen Group, Inc. (ASPU) Q2 2018 Earnings Call Transcript
Published at 2017-12-13 16:30:00
Janet Gill - Chief Financial Officer Michael Mathews - Chairman of the Board, Chief Executive Officer
Eric Martinuzzi - Lake Street Howard Halpern - Taglich Brothers William Gibson - ROTH Capital Partners Isaac Paradise - Global Platinum Securities Marc Nuccitelli - Dillon Hill Capital David Garrity - GVA Research
Good day ladies and gentlemen and thank you for standing by. Welcome to Aspen Group Inc Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded for replay purposes. It is not my pleasure to turn the conference to Ms. Janet Gill, Chief Financial Officer. Ma'am, you may begin.
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 2018 second 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 integration of USU, student enrollment and other metrics and forecasts including USU enrollments and marketing spend, our ability to grow the monthly payment plan at USU outside of nursing, Aspen University marketing spend, 2019 growth, growth in revenue, 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 for the year-ended April 30, 2017 and the press release issued today. In addition, we and United States University remain subject to the continued effectiveness of our marketing as well as the usual integration issues. Aspen Group disclaims any obligations to update any forward-looking statement as a result of future developments. Also, I would 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 when 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 at the company's website. I will begin today by reviewing our operational and financial results for our fiscal 2018 second quarter. Then we will turn the call over to the Chairman and CEO of Aspen Group, Mr. Michael Mathews. To open, quarterly revenues were $4,851,639, a 40% increase from the comparable prior-year period. As previously announced, Aspen set a quarterly record of 1,255 new student enrollments in fiscal Q2, surpassing the first quarter's record of 1,025, representing a 22% sequential increase and 55% increase year-over-year. The company's lead-to-enrollment conversion rate this quarter rose to a record 13.6%, certainly boosted by the 518 enrollments in the month of August which was, by far, the most in a month in our history. The company increased its Internet advertising spend rate by only 19% sequentially. So consequently, our rolling six-month average cost per enrollment at the end of Q2 dropped down sequentially from $812 to $787. As a result, Aspen's marketing efficiency ratio, which is calculated by dividing revenue per enrollment over cost per enrollment, increased to 8.9 times, meaning that Aspen is projecting to earn an 8.9 times return on its marketing investments. Aspen Group's gross profit for the second quarter increased to $2,860,772 or 59% margin, which was a 300 basis point improvement sequentially. Note that instructional costs dropped back down to 17% of revenues this quarter versus 20% of revenues the previous quarter as we guided on the last earnings call. G&A in the second quarter was $3,166,391, an increase of 65% year-over-year. As projected, G&A remained relatively flat sequentially. The company hired 15 fulltime employees in the quarter in final preparation for the acquisition of United States University, which was offset by the lack of nonoperational nonrecurring expenses this quarter. In terms of our bottomline, our net loss for the second quarter was $481,551 or diluted net loss per share of $0.04. EBITDA, a non-GAAP financial measure, was a negative $179,411 or a negative 4% margin. Adjusted EBITDA, a non-GAAP financial measure, in the second quarter totaled $224,495 or 5% margin. At the end of the second quarter, the number of students utilizing a monthly payment method increased to over 3,700, which represented 66% of all course payments over the last 90 days. Now I will turn the call over to Michael Mathews to provide additional color on our second quarter results and to provide an operational update and guidance for next quarter.
Thanks Janet. Good afternoon everyone. Fiscal Q2, of course, was our final quarter before the acquisition of United States University which closed on December 1. Our new student enrollment record of 1,255 for the second quarter was a pleasant surprise based on a historic 518 enrollments in the month of August which was up 86% over August the previous year. As Janet mentioned, the 1,255 quarterly enrollments was a 22% sequential increase and this was accomplished even though we only added one more enrollment advisor to the Aspen team. We ended at 49 EAs for the quarter, meaning that this tremendous team averaged 8.5 enrollments per advisor per month for the quarter. As Janet mentioned, we added some additional fulltime staff in the quarter to support the launch of USU on December 1, including adding four more enrollment advisors to the USU enrollment team. We now have 62 enrollment advisors across the company as we enter the New Year, 13 of which are dedicated to USU. Now I would like to discuss our high-level growth and strategy plans for the upcoming calendar year for both universities. First, I will being with USU. Starting in the New Year, we plan to launch a new identity and a tagline at USU. It will mirror our corporate vision of making college affordable again and we will leverage the great name of United States University in the identity. So stay tuned. Our initial plans at USU are to market almost exclusively graduate programs and certainly our focus will be on USU's master level family nurse practitioner or FNP program, as previously discussed. But we will also begin offering working professionals in business and education, the ability to earn an MBA or an MEd with monthly payment plans. As a company, this will be our first major push outside of nursing with a monthly payment plan and we are very excited about this potential. Our plan is to spend approximately $150,000 per month at USU in the upcoming calendar year and we are projecting an average of about 150 enrollments per month to start. In these first several months, we are self-limiting or FNP enrollment as we strive to obtain the necessary clinical partnerships and placements state-by-state. In terms of our growth plans for Aspen University, we are planning our next marketing spending increase to begin at the start of next fiscal year or beginning in May 2018. We have kept the enrollment center at Aspen just under 50 people since the summer began because all the new hiring in the past six months was directed to building out the USU enrollment center. Now that USU's initial enrollment center is in place, we will hire a new group of enrollment advisors for Aspen in order to allow us to increase our spend rate for Aspen University into the $500,000 per month range, again starting this coming May. This spend will continue to be almost exclusively focused on the nursing sector. If I could repeat what I just said, prior to the USU acquisition we have been spending approximately $320,000 per month for Aspen University. As of this month, we are now spending $150,000 per month on behalf of USU and as of May we are planning to increase our Aspen spend rate from $320,000 to $500,000 per month. So that means as of May, we will be more than doubling the company's pre-acquisition spend rate from $320,000 per month to approximately $650,000 per month. Over the past several months, in meetings with investors and shareholders alike, I have been hearing a consistent theme which is, you know, you guys should hit the gas on this business model given your unit economics have remained stable as you have been scaling Aspen. Well, as of this spring, we will be ready to "hit the gas". We will need to hire a number of additional EAs for Aspen between now and May to prepare for Aspen's spend increase and we expect to be ready by our May target date. I would also like to say that just after the New Year, we will be making a significant strategic announcement on behalf of Aspen University which we believe will further position Aspen as one of the leading nursing institutions in the United States and continue to cement Aspen's reputation as bringing affordability back to higher education. Long-term, we will continue to focus almost exclusively on the nursing sector at Aspen University while USU will evolve to be our university that offers both graduate and undergraduate students with a wide variety of white-collar occupational degrees across the nursing, business, education, psychology, criminal justice and technology sectors, among others. With that as our high-level growth and strategy plans, I would like to now provide some topline guidance for the current quarter, especially given we haven't discussed any financial details to-date regarding USU. First let me begin by saying that one of the key challenges of acquiring a university and moving to a monthly payment plan business model is the fact you have to drop tuition rates by about one-half in order for a monthly payment plan to make economic sense for a working professional. USU was very attractive as an acquisition candidate because of how small the student body was which meant that switching to a monthly payment plan would not translate into a dramatic drop in their revenue run rate. USU's monthly revenue run rate this calendar year prior to our acquisition averaged about $280,000 per month based on a student body of only about 200 students back in March. Of the original 2,000 in March, 81 remain in the student body today because a majority of the USU students today are new students that started after May with the majority utilizing the monthly payment plan. So the rebuild is well underway, but it's too soon for revenues at USU to have increased materially because the majority of these new students are on monthly payment plans rather than the previous higher tuition rates USU historically charged and as I said, the majority of the higher tuition legacy students are no longer with the institution. Revenue at USU will ramp quickly during calendar year 2019 but for this fiscal quarter USU will only provide about $310,000 of revenue per month for the months of December and January. With that as a background on USU's topline, revenue guidance for Aspen Group Inc in the current quarter will be in the range of $5.7 million to $5.9 million. As I have discussed in detail, we are focused on the rapid growth in the coming quarters relative to our planned increases in our marketing spend and enrollment centers. Consequently, expect our adjusted EBITDA to go into negative territory for the next two to three quarters. This is necessary if we are going to drive growth by over 80% year-over-year in the upcoming 2019 fiscal year. That ends our prepared comments for the afternoon. Now we would like to open the call to address any questions.
[Operator Instructions]. And our first question will come from the line of Eric Martinuzzi with Lake Street. Please proceed.
Thanks. Congratulations on the October quarter. Those enrollments, I know, don't come in easy and that 1,255 number is just terrific.
Just curious, you were talking in the past about, I don't know what the right expression is, run rate or pro forma combined, I realize we are handicapping ourselves by shifting USU over to monthly payment plans. But is there a number in your mind where, for FY2019 for instance, with the two businesses operating the way you expect them to and I know we will still be investing come May 1, but what the combined topline of the enterprise looks like?
Are you talking about for nest fiscal year, Eric or what time frame?
Right. The fiscal year that starts May 1.
Yes. For the time being, I think we would just want to say that we are comfortable with an 80%, at least 80% growth rate in the upcoming fiscal year relative to how we end this year, which of course we have another quarter to go.
Sorry, two quarters to go.
Yes. You have obviously given us a pretty clear picture for Q3. I know there is seasonality to both your own business as well as the acquired, April versus January. Could we expect an uptick in the April quarter for the acquired -- you are talking about $310,00 per month for instance from USU in December and January, do we start to see traction in that in your fiscal Q4? Or do we need to hang in there and wait till FY2019?
Well, I mean one of the things that people really aren't aware of, is the fact that we are very limited in terms of what our spend rate was for USU in the six-month proceeding our acquisition. The existing owner limited the amount of money that they were willing to invest to grow the business which they are, of course, about to sell. So the enrollments were relatively limited for the last six months even though, as I have indicated previously publicly, we are extremely happy with our conversion rate and our cost of enrollment and of course the FNP program looks extremely promising. So again, as I just announced a few minutes ago, we are going to commence at spending $150,000 per month until further notice for USU. We have the enrollment center in place. We built that enrollment center over the last six months preparing for this day. And so you will see and we will obviously over each of the next couple quarters are completed, we will give specificity on what how our enrollment success occurs at USU and our student body increases.
Okay. With the acquired students, does that do anything, your title for program reporting and the monthly payment plan reporting, are we going to see anything strange happen with the quarterly reporting of those two numbers as you pickup these incremental students?
Yes. No, I don't think so. That's a great question. As I think most of you know, our Title IV revenues percentage at Aspen this past fiscal year was 21%. And for USU so far I am pleased to say that monthly payment students represent over half of the enrollments that we have done in the last several months. So we expect federal financial aid to be absolutely a minority of USU just like Aspen. Some of FNP program is quite a bit more expensive than some of our other programs. So I think you will see a little bit higher federal financial aid percentage but no, not significantly higher.
Okay. And then a housekeeping question for Janet. Janet, I see you filed your 10-Q here for the second quarter. I have got shares outstanding as of December 12 number of 14.8 million. So I understand for Q3, we are going to have a little bit funky weighted average share count. What weighted average share count should we be using for the third quarter? Or maybe if you want to just talk about Q4 or FY2018?
Eric, our numbers are little different than yours. We have 14.9 outstanding shares. But I think we have calculated what we expect the average outstanding shares to be for EPS and it's 14.5. So I think if you use that number, that would be good, 14.5 million.
Far Q3. Okay. All right. Well, thanks for taking my questions. I appreciate it.
Thank you. Our next question will come from the line of Howard Halpern with Taglich Brothers. Please proceed.
Congratulations guys. Great quarter again.
Hi. I guess I will start with Janet. After the close of the acquisition, what is your outstanding debt write now? And what might be the interest expense on a quarterly basis?
The interest expense, we expect to be about $75,000 per month, because we drew down $2.5 million the day after the acquisition. So the interest average is about $75,000 per month.
Okay. And also in terms of, I guess, going forward in the filing, are we going to see segment information for both know Aspen and USU broken out in terms of student enrollments and such?
Yes. I think what we are probably going to be doing in the first quarter, this subsequent quarter is we will absolutely provide KPI reporting for both universities, but just from a financial point of view we will roll it us, because again these aren't really two different segments. The two universities have one segment. But we will we will be very transparent about our operational result KPIs.
Okay. And in terms of some incremental expense for actually now owning a campus, what might that be going forward?
Well, we don't actually own a campus. It's a commercial lease just like all the rest of our locations. So yes, we don't have to deal with the property issue, from an accounting point of view.
Okay. And how are you going to be utilizing the current professors that are engaged at USU? Are they going to be across both platforms now? Or just stick with USU?
That's a good question. We currently have about 150 adjunct professors at Aspen and a little over 50 adjunct professors at USU. So the total is over 200. And in terms of fulltime professors, we have, I believe, around 15 fulltime professors at Aspen and I think a similar amount for USU. And we absolutely expect that some of our adjunct professors at Aspen will support some of the degree programs and courses for USU. How many of those folks are going to overlap, I don't really know at this point, but that's one of the advantages of having two universities is that we have this wonderful pool of adjunct professors that both universities can draw on as needed.
Okay. And the marketing dollars that are going to be spent at USU, are they all really going to be directed towards the nursing program? Or are you going to actually start marketing some of the occupational offerings that you plan, the occupational degrees that you are offering?
Yes. So I actually announced u what our details there are. So let me just repeat that. So we are planning to spend approximately $150,000 per month starting this month, December and we are going to be targeting graduate programs for the foreseeable future and we are targeting three graduate degree programs, our nurse practitioner programs, so nursing at the master level. We are going to also be marketing USU's MBA program as well as USU's master of education program or MEd program. So those are the three programs that we are commencing with utilizing the monthly payment plans.
Okay. And a little bit, you talk about transparency going forward too. Are you going to a separate, at least in the beginning, the return on marketing investment for each university in the beginning?
I haven't decided that yet, but my initial thinking of the boxes, I will just, because you have to realize, Howard, one of the beauties of this acquisition is that Aspen Group Inc is now basically providing shared services.
So we have this big enrollment center of now, I believe, it's 62 people that we will support both universities with as well as shared services in, for example, the academic advising category. And so I think it makes sense for us, like for example in enrollments, for us to announce our total number of enrollments as a collective unit and which we will then back into a cost of enrollment, because I think at the end of the day, I think what you care about is, how are the operating metrics of your overarching business model and is USU affecting it either positively or negatively. And so yes, I think we will probably just provide enrollments in total as well as cost of enrollment and so forth and so on because realize that the actual offer that we are making to working professionals in the country, whether it's for Aspen or for USU is essentially the same offer, right. It's just different programs.
Right. Okay. And one last one. Are you fairly a happy right now with the level, that number of employees that you have? Or might you have to add a couple more technology people or such? Or are we fairly at a fair level of employees?
In the next five months, between now and the end of the fiscal year, we have currently, we are probably going to hire another five or six people, a couple in technology, one in marketing, a couple in academic operations. But that's pretty much it. And then of course, as I announced earlier, we are going to be significantly increasing our enrollment center to prepare to move to a $0.5 million month spend rate of behalf of Aspen University. So that G&A, from an enrollment perspective, will certainly rise as well.
Okay. Well keep up the great work guys.
Thank you. And our next question will come from the line of William Gibson with ROTH Capital Partners. Please proceed.
When do expect the trend to be on the cost per enrollment with USU in there? Should we expect that to start trending higher?
Good afternoon Bill. By the way, it's Mike. So I announced earlier that initially we are expecting to spend $150,000 a month and average 150 enrollments, which of course equals $1,000 per enrollment and we are currently in the $800 range for Aspen. The reason we are being conservative is, as we are just starting marketing on behalf of USU, so we don't have any history in terms of working with the publishers with this brand and all the other things. So the short answer is, from a long-term perspective, I expect it to be very similar. But short term, it could be a little bit higher. We are being conservative.
Okay. Thank you. And do we have any stats on average tuition and new classes started?
For Aspen in the second quarter, yes.
I don't have in front of me but I can obviously provide that to you if we can report that, sure. I can get that.
That would be good. And then just lastly, on the DeVry sale, do you expect any changes in the competition from Chamberlain?
No, I don't. Because again, the transaction, from DeVry's point of view, is they essentially sold their online part of their business and Chamberlain, along with a couple of other businesses of theirs is unchanged and that's going to be their focal point on a go forward basis for those assets that remain. So I think they continue to be the largest nursing school in the United States, primarily because they have large pre-licensure campuses around the country. But if they are looking in their rearview mirror, they are going to see Aspen come in their direction.
Okay. So basically Chamberlain remains with Adtalem. Is that right?
That is clearly their healthiest business within their corporation, from a financial point of view.
Thank you. [Operator Instructions]. Our next questions will come from the line of Isaac Paradise with Global Platinum Securities. Please proceed.
Hi Michael. As you continue to grow your student body enrollments at Aspen, how are you ensuring that the teaching quality doesn't drop for the nursing programs? Are you being stretched on student to faculty ratios? Or you have the quality issues might be a program?
Yes. A great question. So one of the things that everyone should be aware of is, last year I spend some time talking about the fact that as our nursing program continues to grow, we have decided to flip a number of our best adjunct professors to fulltime status. I believe we are approximately in the 15 fulltime professor range now and they are all in the school of nursing. So I am very confident and extremely comfortable with the quality of education, with the amount of time spent between our professors and our student body and our retention rates reflect that confidence level.
Okay. Great. And how often do you update the course content of your nursing programs to ensure they remain up-to-date and competitive relative to your other universities that you are competing against?
It's approximately an annualized effort. And of course, our learning system allows for our professors to provide personalized update to the courses. So they can record video and other such things to customize their specific courses. So it's kind of an ongoing process of curriculum improvement.
Got it. Thank you very much.
Thank you. Our next questions will come from the line of Mike Ceccherelli with Dillon Hill Capital. Please proceed.
Hi Mike. It's actually Marc. How are you?
I am all right. Congratulations. Great quarter. We are certainly glad to see you starting to accelerate the growth. You mentioned now that you expect to be EBITDA negative for the next few quarters. I am assuming you are going to have to draw down on your revolver. Can you kind of illuminate when you expect what that increase interest expense, because obviously it's an expensive facility? When do you think you might start to turn cash flow positive and start generating cash again?
Yes. Okay. Well, a couple of questions in there. Number one, we drew down $2.5 million, as Janet mentioned earlier, the day after the acquisition. So we now have drawn down $7.5 million out of the $10 million facility. Our cash as we ended the quarter was about $5.4 million. And we, of course, over the next two years have a $11 million final payment each year to complete the acquisition, right. There is a $2 million note. And so what I would say to you is that we don't have any plans or expectations in the next, so I would say, three quarters to draw down any additional funds from our credit facility. We are looking in the second half of this upcoming fiscal year to turn positive again from an adjusted EBITDA point of view. So yes, again we have been adjusted EBITDA positive for quite a long time now. And I thought it was important that everybody knows that we are absolutely with our eyes wide open decided to, as you would put it, put the pedal down to the metal and really, really jack up this growth rate and this second university is what is really that the asset we needed to make that happen. And so, hopefully everyone respects the fact that we have made this decision to hit, basically put the pedal to the metal and grow at 80% this coming year. And when you do that, there is a couple of quarter lag effect when you are doing that kind of a marketing spend rate in terms of a jump. So I hope that answers the question, Marc.
Yes, absolutely and I appreciate that. And if you could just underscore, obviously ramping your advisors when you start spending $650,000 per period, how many advisors do you expect to need at that point? And you feel confident you are not going to get any degradation in your advisors at that point?
Yes. We feel pretty confident. We have gone from 15 to 30 to 62 today. And we will probably need another, I don't know, 15 to 20 approximately. And our plan is to do what we have always done, Marc, which is we like to do monthly enrollment hiring and training programs and we hire between four and six people per month. And by the time we hit May, we should be there.
Can you maybe just touch on other methods of marketing these programs? I know you have had tremendous organic growth. I suspect you are working with quite a few hospitals and institutions. How is your organic growth versus some of obviously your spend?
Yes. I mean as we are growing, it's difficult to have the same organic growth percentage. But historically, we have been a little bit over 30%. This quarter, we are right around 30%, it's not over 30%. So it's hanging in there pretty well. I mean one of the things that I am planning to announce next quarter, but because you asked the question, why not, I will give the answer. We will be announcing after the New Year that we are going to commence with building an outside sales force for the first time, which is a marketing tactic that all major universities utilize. We are going to start off in three test markets, because I am the type of executive that likes to, when I start something new, I like to test it first before I roll it out across the country. And as you might expect, we will be targeting the healthcare sector first and foremost in those initial three test markets. And we will also look to target the education sector because of the strength of USU's education program and we will also target military VA as well.
Okay. That's great. Thank you.
Thank you. Our next questions will come from the line of David Garrity with GVA Research. Please proceed.
Hi Mike. Congratulations on a good quarter and congratulations on closing the acquisition. In terms of growth plans, is there anything you might want to touch on with respect to looking at corporate accounts, especially when you are looking at healthcare, in terms of building up relationships there? How is that part of your business been progressing? And how does that fit into your growth plans for the balance of FY2018 and going into FY2019?
Yes. Your follow-up question is exactly what I was just trying to communicate to Marc that basically today we have approximately 90 corporate partnerships and those corporate partnerships are almost exclusively in the healthcare arena. And when we get a corporate partnership, that's only the first step. The next step, the next logical step is for an outside sales force to call on the locations of that corporate partner,, set up tables in their cafeteria and talk about Aspen and USU's nursing program, for example. So it's that final step that we are going to begin to make this coming calendar year that I think will help drive even further enrollment growth beyond the excellent results we have on the Internet.
Very good. Thank you very much.
Thank you. I am showing no further questions at this time. So now it's my pleasure to hand the conference back over to Mr. Michael Mathews, Chairman and Chief Executive Officer for some closing comments or remarks. Sir?
Yes. Thank you everyone for your questions. I want to thank everyone for joining us this afternoon and the team here looks forward to talking with you again soon. We will be making an announcement, hopefully sometime by mid to late January regarding Aspen University and I look forward to talking to you at that time. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.