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Despite beating expectations in the first quarter of 2014, American Public Education, Inc.’s (APEI - Analyst Report) share price declined 2% in response to poor second-quarter outlook.

American Public’sfirst-quarter earnings of 59 cents per share crushed the Zacks Consensus Estimate of 47 cents by 25.5%. Earnings also beat management’s expected range of 43 to 48 cents.

The company beat expectations due to lower marketing expenses, cost savings and efficiencies and the company’s efforts to reduce unnecessary spending.

Earnings, however, declined 6.3% year over year due to continued military enrollment hurdles and higher costs.

Revenues and Enrollment Details

American Public is the parent company of 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 6% year on year to $88.6 million, beating the Zacks Consensus Estimate of $86.0 million by 3.0%. The top-line growth was better than management’s expectation of a range of flat to an increase of 3%.

However, we believe the top-line beat was only due to the inclusion of $7.2 million of sales from Hondros against the absence of any such revenues last year. Revenues continued to decline at APUS, down around 3% this quarter to $81.3 million, due to weak enrollment trends.

Total enrollment at APUS declined 4% year over year to 105,800. However, the shortfall compared favorably with the company’s expectation of 5% to 7% decline. New student enrollments (student starts) at APUS declined 8% to 17,600, in line with management’s expectation of 7% to 9% decline.

Like the fourth quarter, APUS enrollments in the first quarter were adversely impacted by continued volatility and softness in military enrollments. In the quarter, total and new enrollments of students using TA decreased 10% and 21%, respectively, year over year.

Enrollments by students using Department of Defense Tuition Assistance or TA benefits 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.

However, the shortfall in total and new enrollments of students using TA was better than the declines witnessed in the previous two quarters — third and fourth quarter of 2013. Nevertheless, management is unsure of when the TA program will return to stability.

Total enrollments of students using cash or other source decreased 3% in the quarter while that of students using veterans benefits were up 14% year over year. Net enrollments of students using Title IV funds decreased 4% year over year, slowing down from the past few quarters due to lower persistence among civilian students using Title IV.

Total enrollments at the newly acquired Hondros rose 14% in the quarter to 1,290 students, driven by 43% increase in new students.

Profits Decline

Operating income for the quarter declined 8.2% year over year to $16.7 million due to higher costs related to Hondros which offset lower expenses at APUS.

Selling and promotional (S&P) expenses as a percentage of revenues improved 40 basis points (bps) to 19.7% of revenues due to lower promotional costs at Hondros and favorable timing of expenses at APUS. Instructional costs and services increased 150 bps to 35.4% of revenues due to higher costs at Hondros.

Further, bad debt ratio increased 140 bps in the quarter to 5.7% due to a change in student mix to a higher percentage of civilian students.

New Acquisition

On Apr 2, 2014, American Public acquired 25% stake in a game-based learning company that develops education software, for $1.5 million. APUS and Hondros plan to partner with this company to develop courses, as well as enhance the existing courses with interactive, personalized and adaptive learning environment – thereby improving student outcomes.

Second-Quarter 2014 Outlook Soft

Management expects second-quarter 2014 total enrollments to decline in the range of 2% to 5% while student starts are expected to go down in the range of 4% to 7%. American Public expects revenues to increase in the range of 3–5%. Management further projects second-quarter 2014 earnings between 43 to 50 cents, which fell short of the Zacks Consensus Estimate of 54 cents.

Management also stated that new student enrollments at Hondros decreased approximately 10% in second-quarter 2014.

Other Stocks to Consider

American Public carries a Zacks Rank #3 (Hold). Other better-ranked stocks in the education industry include DeVry Education Group, Inc. (DV - Analyst Report), TAL Education Group (XRS - Snapshot Report) and Lincoln Educational Services Corporation (LINC - Snapshot Report). While Lincoln Educational sports a Zacks Rank #1 (Strong Buy), TAL Education and Lincoln Educational Services have a Zacks Rank #2 (Buy).

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