American Public Education
) recorded first quarter 2012 earnings of 50 cents per share,
beating the Zacks Consensus Estimate by 2 cents and the prior-year
quarter earnings by 7 cents. Earnings were also above the guidance
of 45 cents to 49 cents due to top-line growth in the quarter.
Total revenue of $75.7 million was up 29% from the prior-year
quarter, slightly above management's expectation of a growth of
approximately 27% for the said quarter. Revenues also edged past
the Zacks Consensus Estimate of $75.0 million. The top-line growth
was driven by brisk student enrollments in the quarter,
particularly from civilian, military, and veteran students.
Revenue and Costs in Detail
Total net course registration increased 24% to approximately
101,000, beating the company expectations of recording growth in
the region of 20-22%. Net course registrations from new students
grew 15% to approximately 20,500, slightly better than the
company's guidance of growth of approximately 14%. American Public
stated that about 119,200 students were enrolled in the American
Public University System as of March 31, 2012, reflecting an
increase of 32% year over year. Operating income for the quarter
rose 14% to $14.9 million.
The students enrolled in American Public Education courses
primarily serve the military and public service communities. They
can finance their education through tuition assistance programs of
the US Armed Forces (DoD tuition assistance programs), education
benefits administered by the Department of Veterans Affairs,
private loans, corporate reimbursement programs, and federal
student financial programs referred to as Title IV programs. In the
first quarter of 2012, net course registrations by students using
Title IV increased approximately 42% year over year. Title IV now
represents approximately 34% of total net course registrations
versus 30% in the prior-year period. Net course registrations by
students using DoD tuition assistance programs increased 7% year
over year, and net course registrations by students using veterans
benefits were up 83% year over year.
General and administrative expenses were 21.2% of revenue in the
quarter, up from 17.9% of revenue in the prior-year period. The
increase was driven by higher bad debt costs (as the company
shifted focus to civilian students), investments in Title IV
processing automation (to reduce abuse of these funds) and ePress
initiative development, and increased expenses to adapt to
regulatory changes. Instructional costs and services were 36.7% of
revenue in the first quarter of 2012, compared with 37.7% of
revenue during the first quarter of 2011.
Second-Quarter 2012 Outlook
Like always, American Public Education introduced its financial
guidance for the next quarter of 2012. The company is expecting
revenue growth in the range of approximately 14% to 22% for the
second quarter of 2012. Management now expects second quarter 2012
net course registrations to rise between12% and 18% over the
prior-year period. Net course registrations from new students are
expected to rise in the range of 2% to 4% year over year.
Management further projects second quarter 2012 earnings between 41
cents and 47 cents a share.
Though American Public Education beat expectations in the first
quarter, the overall outlook for the second quarter of 2012 is
weak. Both revenue and enrollment growth projections represent a
sharp decline from first quarter results. Management commented that
steps taken to reduce student abuse of Title IV funds could result
in lower new student enrollments in the second quarter.
Particularly, new fraud prevention software implemented in March
this year will significantly impact new enrollments in the second
quarter. The educational institutions are under the scanner due to
higher abuse of funds, mostly by civilian students who use the
balance fund (fund is usually more than American Public Education's
tuition costs) to meet living expenses. American Public Education
is taking steps to reduce student abuse of Title IV Funds and
thereby improve student outcomes. However, such efforts increase
costs and hurt margins.
In fact, the enrollment growth rates have been consistently
declining for this online higher education provider despite
numbering among the very few education companies that have booked
positive enrollment growth.
American Education derives a significant portion of its revenue
from DoD tuition assistance programs and the Title IV federal aid
programs which are administered by the Department of Education. The
DoD is expected to announce cuts to its tuition assistance
benefits, which will however be implemented only after a
comprehensive benefit review. Management believes that military
enrollment will continue to be volatile and possibly decline going
forward due to possible reductions in US army, marine and sales
force personnel due to budgetary constraints and potential changes
to the DoD tuition assistance programs.
Changing regulatory requirements are taking a beating on
enrollment growth for most education companies. Recently, a
provider of post-secondary degree programs,
ITT Educational Services Inc.
), announced a 15.4% decline in total enrollment in the first
quarter 2012 which resulted in a top-line decrease of 10.8%.
) also reported a 3.9% decline in revenues due to a 3.7% reduction
in total post-secondary enrollments across all its programs.
Apollo Group Inc.
) reported a 12.2% decline in total second-quarter enrollments at
the University of Phoenix, the company's wholly owned subsidiary,
which pulled down its total revenues by 7.5%.
We currently have a Neutral recommendation on American Public
Education. The stock carries a Zacks #3 Rank in the near term
We believe the American Public Education's affordable tuition
costs and its shifting of student focus to the civilian market bode
well for long-term growth. However, the focus on civilian growth as
well as initiatives to curb fund abuse will be a headwind for
margins. Moreover, uncertain military enrollment growth due to
possible changes to the DoD tuition assistance programs also
concerns us. We therefore prefer to remain on the sidelines and
maintain a Neutral rating.
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