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Edited Transcript of APEI earnings conference call or presentation 6-Aug-19 9:00pm GMT

Q2 2019 American Public Education Inc Earnings Call

Charles Town Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of American Public Education Inc earnings conference call or presentation Tuesday, August 6, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher L. Symanoskie

American Public Education, Inc. - VP of IR & Corporate Communications

* Richard W. Sunderland

American Public Education, Inc. - Executive VP & CFO

* Wallace E. Boston

American Public Education, Inc. - President, CEO & Director

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Conference Call Participants

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* Corey Adam Greendale

First Analysis Securities Corporation, Research Division - MD

* Gregory R. Pendy

Sidoti & Company, LLC - Consumer Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Khaleed, and I'll be your conference operator today. At this time, I would like to welcome everyone for the American Public Education Second Quarter 2019 Earnings Call. (Operator Instructions) I would now like to turn the call over to Chris Symanoskie, Vice President of Investor Relations.

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Christopher L. Symanoskie, American Public Education, Inc. - VP of IR & Corporate Communications [2]

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Thank you, Operator. Good evening and welcome to American Public Education's Discussion of Financial and Operating Results for the Second Quarter of 2019. Materials that accompany today's conference call are available in the Events and Presentations section of our website and are included as an exhibit to our current report on Form 8-K furnished to the SEC earlier today. Please note that statements made in this conference call and in the accompanying presentation materials regarding American Public Education or its subsidiary that are not historical facts, may be forward-looking statements based on current expectations, assumptions, estimates and projections about American Public Education and the industry. These forward-looking statements are subject to risk and uncertainties that could cause actual future events or results to differ materially from such statements. Forward-looking statements can be identified by words, such as, anticipate, believe, seek, could, estimate, expect, intend, make, should, will and would. These forward-looking statements include without limitations statements regarding expected growth, expected registration and enrollment, maybe assistance tuitions fund, expected revenues, expected earnings and events with respect to recent, current and future initiatives, including information technology replacement and upgrades, and investment and partnerships. Actual results could differ materially from those expressed or implied by these forward-looking statements, as a result of various factors, including the risk factors described in the risk factor section and elsewhere in the company's most recent annual report on Form 10-k filed with the SEC, and the company's other SEC filings. The company undertakes no obligation to update publicly any forward-looking statements for any reason unless required by law. Even if new information becomes available or events occurred in the future. This evening my pleasure to introduce Dr. Wallace Boston, our President and CEO; Rick Sunderland, our Executive Vice President and Chief Financial Officer. Now, I'll turn the call over to Dr. Boston.

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Wallace E. Boston, American Public Education, Inc. - President, CEO & Director [3]

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Thanks, Chris. Good evening, everyone. As we begin today, I'd like to comment on the quarter at the high level. While the quarter match our expectations, whereby normally satisfied with the results, we remain focused on aggressively pursuing our improvement initiatives. Today we are about the challenge that we face. Even more about how we're addressing each in a way that we believe will pave the way for improvement and sustained success. We remained focused on strengthening core business and APEI and repairing the business at HCN as a mere step but a critically important step towards maximizing the inherent value on our existing assets. We will continue to be results-focused for the near and long term. I'll also discuss possible future investment and our information technology infrastructure and the second quarter's operating results at a high level before our CFO, Rick Sunderland, will walk you through APEI's recent financial results and our outlook for the third quarter of 2019.

With that, let's proceed with our discussion of Hondros. Hondros College of Nursing, or HCN, is facing 2 primary operational challenges: one, achieving satisfactory enrollment in new and returning students and, two, meeting the applicable standards of a regulatory and accrediting body. Though we overcome these challenges, we've opened additional pathways to degree obtainment as well as work to identify the appropriate balance of academic achievement requirements, some business requirements and attracting appropriate students. One new pathway to degree obtainment is our new direct entry Associate's Degree in Nursing

Good afternoon. My name is Khaleed and I'll be or ADN option, which will launch this fall. HCN's direct entry options provides an additional way for college-ready students to enroll, complete a degree and enter the nursing profession in as few as 15 months when attending full time. Acceptance in the program requires the prospective student to take an entrance exam, transfer at least 33 semester credits, with a 2.5 GPA or higher from prior college experience. We believe the program is ideal for students with no prior nursing experience, but with some college experience, or non-nursing degree, or seeking an opportunity to change careers and begin a nursing program. We think this new option will help HDN reach its enrollment goals and achieving sequential accretive in this student enrollment, striking total student enrollment and improve retention rate and first time and pass rates by attracting working adults from non-nursing professions who have already demonstrated successful academic performance. Since appointing Harry Wilkins as Interim CEO at HCN in May, I'm pleased with this team's progress in performing a thorough analysis of the college and its operations. They are already making important changes to improve the financial and operating performance of the institution. These changes include, but are not limited to, upgrading HDN's enrollment management processes, and new sales force enrollment, our RX software, tightening the staffing model by adjusting customer service staff hours to include week evening and weekends, optimizing marketing with enhanced geo-targeting and new referral-based marketing campaigns, and enhancing financial services by launching new scholarships and payment plans for improved recruitment and retention as well as lower bad debt expense. In addition, the team performed a comprehensive course-by-course analysis, made changes to optimize teaching and better-aligned curriculum within correct exam content and created a more personalized academic experience, especially for at-risk students. HDN continues to prepare for the opening of a new campus location. We signed a lease and are building out a new campus in Indianapolis, Indiana. The economics of opening a new campus are attractive given the relative low capital investment required. When properly located and managed, the new campus can reach cash flow breakeven within 18 to 24 months. Our discussion of new campus locations merit some discussion, given the work that Harry and the team are doing at HDN to improve the health of the institution. While there's great opportunity for new campus locations, beginning with Indianapolis, we will monitor our existing programs and locations before carefully considering the timing of future investments. I'm optimistic about the time and turnaround of HDN because of the quick and smart action of the current team at HDN as well as because of continuing strong demand for nursing education. In the third quarter of 2019, APEI's created plans to evaluate possible replacements or upgrades to its information technology and running management systems. The initiative is expected to lead to an information technology transformation program, intended to increase its enterprise agility, and enhance the university experience for students. In addition, if we proceed, the goal for the longer-term effort will improve, enabling our systems to better accommodate flexible learning modalities such as dual degrees,

competency-based education and customer programs for partnerships. The initial evaluation phase of this initiative will determine the final scope, duration and estimated cost in the project. Moving on to operational results for the second quarter of 2019, APUS reported a year-over-year decrease in new and total net course registrations of 2% and 1%, respectively. The decreases were driven by a year-over-year decline of 9.7% in net course registration by new students utilizing Federal student aid or FSA, a decline of 8.4% in net course registrations by new students utilizing Veterans Benefits or VA and a decline of 5.7% in net course registrations by new students utilizing cash and other sources.

These declines were partially offset by a 5.7% increase in net course registrations by new students utilizing DOD Tuition Assistance or TA. As of May of 2019, the Navy reported that its Tuition Assistance program funds had been exhausted for the balance of its fiscal year ending September 30, 2019.

The Navy is the only branch of service to have suspended its TA program funds, and we expect the funds to be reinstated at the start of their next fiscal year. Although some Navy students maybe PEL eligible, we anticipate this event will have a negative impact on our third quarter results and, to a lesser extent, our fourth quarter results. For context, Navy TA registrations at APUS represented approximately 6.5% of total registrations for the 3 months ended September 30, 2018.

I am pleased to report that according to data provided by the Department of Defense, AMU maintained its #1 position in the TA market, having provided approximately 17% of all TA courses in FY 2018, the year of the latest data is available for, a leadership position comparable to the prior year.

At HCN, for the 3 months ended June 30 of 2019, total student enrollment declined by 24% year-over-year, and new student enrollment decreased by approximately 35% year-over-year.

As mentioned earlier, I believe the team at HCN has an effective plan in place to improve the overall health and reputation of our nursing platform.

As a result of their confidence in the plan, we have decided to increase HCN's advertising spend in the third quarter in support of our goal to achieve a sequential increase in new student enrollment and the strengthening of total student enrollment in the fourth quarter of 2019.

A strong fall start would position HCN for improved operational performance in 2020.

In conclusion -- in APUS, we have built a respected higher education enterprise based on our core belief that higher education should be flexible and affordable.

Approximately 70% of our APUS alums graduate with no student loan debt incurred at APUS.

Few Title IV institutions can say this. In 2002, we celebrated the success of 107 graduates and in May of 2019, I presided over the graduation of over 11,000 students, bringing the total number of AMU and APU alums to more than 90,000. We achieved this success during a time of rapid transformation in higher ed as well as during a period of unprecedented regulatory change in economic volatility.

We recognize the strengthening in the core business at APUS and repairing the business at HCN is a mere step, but a critically important step towards maximizing the inherent value in our enterprise and building a higher education institution that serves the needs of working professionals as job skills and nature of work itself rapidly evolve. Now I will turn the call over to our CFO, Rick Sunderland. Rick?

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Richard W. Sunderland, American Public Education, Inc. - Executive VP & CFO [4]

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Thank you, Wally. Going on to Page 3 in the PowerPoint. American Public Education's consolidated revenue for the 3 months ended June 30, 2019, decreased 3.1% to $70.6 million compared to $72.8 million in the prior period.

The revenue decrease was primarily due to a $2 million or 21.6%, revenue decrease at Hondros. For the quarter, APUS revenue declined $0.2 million or 0.4%.

Total cost of expenses were $64.9 million for the 3 months ended June 30, 2019 compared to $64.8 million in the prior year, an increase of $0.1 million or 42%.

Consolidated instructional cost and services expenses decreased approximately $0.3 million to $28.7 million and as a percentage of revenue, increased to 40.7% compared to 39.8% in the prior year period.

The decrease in instructional cost and services expenses was primarily driven by a decrease in employee compensation costs and instructional materials costs in both our APEI and HCN segments.

Selling and promotional expenses increased approximately $0.8 million to $14.1 million and as a percentage of revenue, increased to 20% of revenue compared to 18.2% in the prior year period. The increase in selling and promotional expenses was primarily driven by an increase in advertising costs in our APEI segment.

General and administrative expenses increased approximately $0.5 million to $18.1 million and as a percentage of revenue, increased to 25.7% from 24.2% in the prior year period.

The increase in general and administrative expenses was primarily related to increased information technology costs in our APEI segment and employee separation costs in our HCN segment, partially offset by a decrease in professional fees in our APEI segment.

Consolidated bad debt expense was $0.9 million in both quarterly periods and as a percent of revenue, 1.3% of revenue in 2019 compared to 1.2% of revenue in 2018.

Depreciation and amortization expenses decreased approximately $0.4 million to $3.9 million and as a percentage of revenue, decreased to 5.6% of revenue from 6% in the prior year period.

The $2.4 million or 29% decline in consolidated income from operations before interest income and income taxes was driven by a decrease in income from operations before interest income and income taxes at Hondros.

For the quarter, the loss from operations before interest income and income taxes at Hondros was $0.9 million compared to income from operations before interest income and income taxes of $0.9 million in the prior year period, a year-over-year decrease of $1.8 million.

In our APEI segment, income from operations before interest income and income taxes decreased $0.6 million or 8.1% primarily due to higher advertising and information technology costs in the current year period.

APEI's segment operating income margin declined to 10.4% in the current year period compared to 11.3% in the prior year. Driven by the operating loss at Hondros, consolidated operating income margin declined to 8% in the current year period compared to 11.1% in the prior year.

Consolidated net income for the quarter was $4.9 million or $0.30 per diluted share compared to net income of $6.5 million or $0.39 per diluted share in the prior period.

Cash flow from operations increased 21.2% to $23.7 million compared to $19.6 million in the prior year. The accounts receivable decreased by $7.6 million compared to December 31, 2018, driven by improved payment processing in both TA and VA.

Total cash and cash equivalents as of June 30, 2019, were approximately $220.8 million compared to $212.1 million as of December 31, 2018. During the quarter, the company repurchased 327,467 shares of its common stock for $9.6 million under the previously authorized $35 million stock repurchase plan. At June 30, 2019, $25.7 million remains under our share repurchase authorization.

Capital expenditures for the quarter were approximately $3 million compared to $3.6 million in the prior year period.

Going on to Page 4, third quarter 2019 outlook. Our outlook for the third quarter of 2019 is as follows: in the third quarter of 2019, we expect consolidated revenue to decline between 11% and 7% year-over-year. The company expects diluted earnings per share between a loss of $0.02 and income of $0.03 per diluted share in the third quarter of 2019.

The EPS range indicated by our third quarter guidance is impacted in part by the enrollment decline at Hondros that has a significant impact on that unit's operating income.

We anticipate a year-over-year decline in HCN segment operating income of approximately $2.4 million in the third quarter of 2019 compared to the third quarter of 2018, driven in part by the higher advertising spend mentioned by Wally. In addition, the following will impact operating income and operating income margin in our APEI segment in the third quarter of 2019.

Number one, APUS estimates that the temporary suspension of Navy TA program funds will result in a loss of approximately 4,300 net course registrations in the quarter.

The revenue impact of this disruption in Navy TA funding is expected to be approximately $2.9 million. Number two, we anticipate the evaluation of technology upgrades and possible replacements will cost $1.2 million pretax. And number three, APUS plans to increase its advertising spend by approximately an additional $1.8 million pretax as compared to the prior year period.

At APUS, total net course registrations are expected to decline between 10% and 5% year-over-year. And net course registrations by new students are expected to decline between 17% and 12% year-over-year, both impacted, of course, by the reduction in Navy TA registrations.

Excluding the anticipated loss of net course registrations resulting from the disruption in Navy TA funding, new and total net course registrations would have been approximately 6 percentage points higher for new and 5 percentage points higher for total than third quarter guidance year-over-year. At Hondros, both new and total student enrollment will decrease by 29% year-over-year in the third quarter of 2019.

As Wally noted earlier, enrollment at Hondros were adversely impacted by changes in admissions processes, academic achievement policies and market perceptions. However, as noted, Hondros has launched several initiatives to improve the overall performance in the institution and importantly, has set a goal to achieve a sequential increase in new student enrollment and the strengthening of total student enrollment in the fourth quarter of 2019. Now we would like to take questions from the audience. Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Corey Greendale with First Analysis.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [2]

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A few questions. So first question is easy and apologies if it's a repetition, but I just missed the number, Wally, that you provided for the change in new student registrations from FSA. If you could just repeat that one?

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Wallace E. Boston, American Public Education, Inc. - President, CEO & Director [3]

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Are you talking about guidance or for the second quarter?

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [4]

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For the second quarter.

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Richard W. Sunderland, American Public Education, Inc. - Executive VP & CFO [5]

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Yes. Second quarter, Corey, new was down 5.7%.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [6]

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5.7%.

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Richard W. Sunderland, American Public Education, Inc. - Executive VP & CFO [7]

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Oh. I'm sorry, it's 9.7%, Corey.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [8]

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9.7%.

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Wallace E. Boston, American Public Education, Inc. - President, CEO & Director [9]

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For FSA.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [10]

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Got it. So a few questions, maybe first on Hondros. The -- in terms of -- there's some language in the Q and you somewhat alluded to in -- about market perceptions. And something about perceptions on the ground there. I was just hoping you could elaborate on that a -- like what that is, and what you're doing to improve that?

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Richard W. Sunderland, American Public Education, Inc. - Executive VP & CFO [11]

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Sure. We have basically -- we flatlined at a NCLEX pass rate for first-time test takers for our ADN program, our RN program, at a number that was below the level that the state of Ohio wanted us to be at, which is 95% of the national average.

We -- the Board and I, were not happy with that, so we wanted to look at -- we asked our academic team to look at ways in which we can improve the rate. And so a number of things that they put in place were practices followed by other schools, including administering an additional admissions test upfront, a test called the ACCUPLACER, which is not uncommon, but we were using the HESI. And instead we added the ACCUPLACER as well as putting in different standards for minimum passing grades on lab courses.

And so when those changes went in and the last one went in and starting in the first quarter in January, there was a very negative reaction across the board with prospective students.

And some of that was caused by returning students who weren't happy with the changed passing requirements for the lab courses, which are very helpful towards passing the NCLEX exam.

And so that was our first quarter decline, which we obviously reported on, and we began looking at ways in which we can improve, and improve it. And when some of those ways, which by the way, changes in test results and passing standards and other requirements may have to get approved by Ohio Board. And so typically, if you're going to make a change, you've got to do -- you've got to notify them a quarter in advance of when you're going to make a change, so you can't make these changes overnight.

And so when our team's recommended solution didn't work, starting in the second quarter in April, I decided to make -- made a leadership change, and we brought Harry Wilkins back. And so Harry's been working with the team, many of whom he knew from his previous 3 years as the CEO and put a number of changes in place, including evaluating the entire curriculum, where some of the speed bumps were in courses for students that was causing some of the negative reaction. And basically, spending a lot more time with students at the campus locations, listening to them and trying to alleviate some of those perceptions that were out in the community. So it's not cured yet, but I believe that he and his team, with this deliberate, measured pace of analyzing and then visiting all of the campuses, including making a Campus Director change of one campus, I think are progressing. And it's sad that this occurred, particularly when the impetus for the changes was to get a higher pass rate. By the way, the pass rates are improving, but at the same time, it's impacted enrollment much more negatively than we wanted. So we're working to build a balance between what the right curriculum is, right -- what the right evaluations are and how to make sure that our students succeed.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [12]

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Very helpful. And just sort of in light of those. It sounds like there are steps in place that should lead to improvement. Obviously, in terms of enrollment, it hasn't happened yet. So as you think about geographic expansion, I guess are you committed to Indianapolis? And are you seeing an up in the data that suggests it is bottoming? Did it that make sense to start expanding geographically before you have more confidence if the model stabilizes? Or just can you -- maybe just kind of elaborate?

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Wallace E. Boston, American Public Education, Inc. - President, CEO & Director [13]

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No. It's a great question. And in fact, we don't have a specific start date, but we did have a date. Our application had been with the state of Indiana for quite a while, I think about 18 -- or 18 to 24 months. And there was a lag because you may recall previous administration changed out ACIC -- it's made all schools move over from ACICS to another creditor. And while we were in that process, we couldn't add location, so we'd already put our application in place, we had to delay. The state understood that, once we got a new creditor in place, we had 6 months roughly to make a go, no go decision on it. We like the location, we like the state, we like all the demographics, so we signed a lease. And part of the state's process is you actually have to have your campus build up before they'll give you your license and authorization to open up a class. So our goal is to have that campus buildout done by November. At the same time, our current plans don't have a starting and opening up a term until the second quarter of next year.

And if we're not feeling good about how we're progressing elsewhere, Corey, we could always delay that. We could push it back, but we did have to sign our lease in order to keep the authorization from expiring.

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Operator [14]

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(Operator Instructions) And we have another question from Corey Greendale with First Analysis.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [15]

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All right. Well -- so I'll just keep going then. The next question I had was on the APUS segment and -- understand the effect of the Navy. And I know this kind of thing has come up at this general -- this sort of thing has come up if you back out the impacts of Navy, it sounds like the new course registration trend is still a little bit more negative than it was in Q2.

So what else do you think that is softer in Q3 versus Q2?

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Wallace E. Boston, American Public Education, Inc. - President, CEO & Director [16]

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Well, one thing we're seeing. We made a choice this year to really focus on putting our marketing dollars given the increased competition everywhere with online where we could achieve a student enrollment for $2,000 or less.

And so that meant that we were spending more money on our Military segments than our civilian segment. And so one of the things that did to us was it lowered our average number of registrations per student overall because the military students take fewer registrations per year than the civilian students. So that number in terms of net registrations through June 30 is approximately $2,000, right, Rick?

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Richard W. Sunderland, American Public Education, Inc. - Executive VP & CFO [17]

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Yes.

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Wallace E. Boston, American Public Education, Inc. - President, CEO & Director [18]

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So we're seeing that, Corey -- I can't quite fine-tune it for what it'll be in the third quarter because we don't exactly project our registrations by payer source.

We look at them in the aggregate, but we're -- we just don't fine-tune them that much. But if you know that it was $2,000 on the net, simply due to the ratio difference. TA was up for the first 6 months, but by virtue of TA being up, it's a lower number of net registrations per student on average. It's been that way historically. FSA students have to be at least half-time, TA students are allowed to take one course only. And because of that differential, it was $2,000 in the first, and it's going to be a similar negative number down and just simply because of the mix in the third quarter.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [19]

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And is -- very helpful. And is the decision to increase some promotional spend for APUS, does that mean that you're willing to accept a higher cost per student registration? Or does it mean you're focusing kind of on different areas?

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Wallace E. Boston, American Public Education, Inc. - President, CEO & Director [20]

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No. It does mean we're willing to accept something slightly higher. And part of the issue is that when you have monthly starts or you're bringing in students every month, where we have this temporary suspension of TA funding by the Navy. If we don't bring in students to replace them, then we're not going to have returning students in subsequent quarters.

So it's just prudent to spend that extra money. We looked at the ROIs and the pluses and minuses, and where to spend it.

So we're more than likely, in that incremental spend, going to be spending more than the $2,000, but it's because we want to bring in new students to try and replace the new students lost by the Navy.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [21]

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Got it. I'll just do one more and then we can follow up offline. In terms of the potential scope of the technology transformation plan, it sounds like it at least could good relate to the LMS, what could the scope be? Could it hit your ERP system? Your CRM? Or what piece of technology you're looking at?

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Richard W. Sunderland, American Public Education, Inc. - Executive VP & CFO [22]

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Yes. I would say just from a big-picture perspective, we're looking at the LMS. We're looking at the SIS, which -- our SIS pad is homegrown. And we're also looking at the CRM. So those 3 systems are pretty large, pretty transformative. And very few people engage in a project, but we think it's about time when you look at -- we're probably the largest user of Sakai. That's our existing LMS out there. It's open-source, it's served us well, but there's a numbers of advances, particularly as it relates to accommodating some of the alternative modalities in the instruction like CBE that the newer LMSs can handle quite capably. And then, CRM's really dependent on what we do with the SIS.

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Operator [23]

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And our next question comes from Greg Pendy with Sidoti.

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Gregory R. Pendy, Sidoti & Company, LLC - Consumer Analyst [24]

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Can you just help us understand, I guess, just on Hondros. Just with the requirement now to take that, I guess, ACCUPLACER exam. How many nursing schools, I guess, in the area probably don't require that? I'm assuming that in a competitive environment some students may just choose another nursing school, so how common is that requirement?

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Wallace E. Boston, American Public Education, Inc. - President, CEO & Director [25]

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So actually, the ACCUPLACER requirement that we put in place in January was a pre-test requirement and not something that was normally done by the for-profit schools. And so when we did that, we had students who were just half-averse because it's a 3- or 4-hour exam. They didn't want to do it, and they went elsewhere people were not administering it.

We've changed that, we actually changed that requirement. And we're still administering as a baseline, but we build it into the first term courses.

And so that way we can have the baseline, so we can diagnose how well the students are performing and learning, but not making it a preadmission requirement. And so that's working, but it's still going to take a while to get the word out in the community that we're no longer requiring that as a pretest.

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Operator [26]

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And there are no further questions at this time. I'll turn the conference back over to Chris Symanoskie.

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Christopher L. Symanoskie, American Public Education, Inc. - VP of IR & Corporate Communications [27]

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Thank you, operator. That will conclude our call for today. We wish to thank you for listening and for your continued interest in American Public Education. Good evening.