American Public Education (APEI - Analyst Report) delivered solid top and bottom-line results in the second quarter that surpassed both management as well as the Zacks Consensus Estimates.
American Public reported second quarter 2012 earnings of 51 cents per share, beating the Zacks Consensus Estimate of 45 cents by 13% and the prior-year quarter earnings by 4.1%. Earnings were also significantly above the guidance range of 41 cents to 47 cents driven by better-than-expected top-line and enrollment growth in the quarter.
Total revenue increased 23% year on year to $74.6 million and was slightly above management’s expectation of a growth in the range of 14% to 22%. Revenues also edged past the Zacks Consensus Estimate of $72.0 million. The top-line growth was driven by brisk student enrollments in the quarter, particularly from civilian, military, and veteran students.
Operating income for the quarter was almost flat at $15 million.
Total enrollments increased 18% to approximately 92,900; at the higher end of the company’s guidance of recording growth in the region of 12% to 18%. New student enrollments grew 4% to approximately 19,600, also at the higher end of company expectations of growth in the range of 2% to 4%.
Changing regulatory requirements are taking a toll on most education companies’ enrollment growth. Recently, a provider of post-secondary degree programs, ITT Educational Services Inc. (ESI - Snapshot Report) , announced a 15.7% decline in total enrollment in the second quarter 2012, which resulted in a top-line decrease of 15.0%.
In June, Apollo Group Inc. (APOL - Analyst Report) reported a 13.1% decline in total third-quarter enrollments at the University of Phoenix, the company’s wholly owned subsidiary, which pulled down its total revenue by 8.5%. In fact, American Public features among the very few education companies that have booked positive enrollment growth.
Costs in Detail
General and administrative expenses were 21.6% of revenue in the quarter, up from 17.9% in the prior-year period. The increase was driven by higher bad debt costs (as the company shifted focus to civilian students), investments in information technology upgrades and Title IV processing automation (to reduce abuse of student aid) and increased expenses to adapt to regulatory changes. Instructional costs and services were 32.5% of revenue in the second quarter of 2012, lower than 37.8% of revenue during the second quarter of 2011.
Third-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 16% to 19% for the third quarter of 2012. Management now expects third quarter 2012 enrollments to rise between 16% and 18% over the prior-year period. New student enrolments are expected to remain flat from 2011 levels. Management further projects third quarter 2012 earnings between 46 cents and 51 cents a share.
The company is taking steps to reduce student abuse of the Title IV Funds (federal student financial programs) and thereby improve student outcomes. The educational institution is under the scanner due to the rise in abuse of funds, mostly by civilian students who use the balance fund (fund is usually more than American Public’s tuition costs) to meet living expenses. Management analyzed that 25% to 35% of enrollments in both the third and fourth quarters of 2011 came from such students. The company’s fraud prevention initiatives are reducing enrollment of students who abuse funds, which explains the muted year-over-year enrollment growth expectations for the third quarter. Management justified that in the absence of such enrollments in the past quarter, the third-quarter 2012 new enrollment growth would have been in the mid-teens.
We currently have a Neutral recommendation on American Public. The stock carries a Zacks #3 Rank in the near term (‘Hold’ rating).
Overall, we believe that the company’s affordable tuition costs and the shifting of student focus to the civilian market bode well for long-term growth. In addition, the company’s initiatives to improve student quality augur well for long-term growth. American Public is developing its technology infrastructure to support a larger and more diverse student population. Further, it is making investments to automate Title IV processes and has launched an ePress initiative, which will help reduce costs and thereby increase affordability.
However, the focus on civilian growth as well as initiatives to curb fund abuse will be a headwind for margins. Moreover, uncertainty of growth in military enrollment due to possible changes to the Department of Defense tuition assistance programs is also a concern. We prefer to remain on the sidelines due to a tough regulatory environment.