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Edited Transcript of NAUH earnings conference call or presentation 11-Oct-18 3:00pm GMT

Q1 2019 National American University Holdings Inc Earnings Call

RAPID CITY Oct 13, 2018 (Thomson StreetEvents) -- Edited Transcript of National American University Holdings Inc earnings conference call or presentation Thursday, October 11, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Prior

The Equity Group, Inc. - SVP

* Lynn Priddy

National American University Holdings, Inc. - Provost & Chief Academic Officer

* Ronald L. Shape

National American University Holdings, Inc. - President, CEO & Director

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Presentation

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Operator [1]

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Greetings, and welcome to the National American University Holdings Fiscal Year 2019 First Quarter Financial Results Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Adam Prior of The Equity Group. Thank you. You may begin.

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Adam Prior, The Equity Group, Inc. - SVP [2]

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Thank you, and good morning, everyone. Thank you for joining us. Yesterday's earnings release is available at the Investor Relations section of National American University, or NAU's, website at www.national.edu. You are also welcome to contact our office at (212) 836-9600 and we would be happy to send you a copy. In addition, a recording of this call will be made available at NAU's website for the next 30 days. National American University Holdings also has an accompanying slide presentation available in PDF format on the NAU website, which we will reference during this call.

Before we get started, I'd like to remind everyone that this forward-looking call -- excuse me, that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve certain risks and uncertainties that may affect the business prospects and results of operation of National American University Holdings. Such risks are detailed in the company's filings with the Securities and Exchange Commission. Regarding this disclaimer language, I would like to refer you to Slide 2 of the presentation for more information. Specifically, the company expects to file its audited financial results for the fiscal 2019 first quarter ended August 31, 2018, on Form 10-Q this coming Monday, October 15, 2018, and encourages all investors to read all of the company's filings with the Securities and Exchange Commission for a thorough review of NAU's business and financial results.

Let me note a brief disclaimer that the company operates in two business segments: the academic segment, which consists of the undergraduate, graduate and doctoral education programs; and ownership in and development of multiple apartments and condominium complexes from which it derives sales and rental income. The academic segment is where the company derives the largest portion of its business revenues. For the company's fiscal 2019 first quarter, the academic segment generated revenue of $15.4 million and the company's apartment and condominium segment generated $628,000 in revenues.

With that, I'd now like to turn the call over to Dr. Ronald Shape, President and CEO of National American University Holdings. Please go ahead, Dr. Shape.

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Ronald L. Shape, National American University Holdings, Inc. - President, CEO & Director [3]

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Thank you, Adam, and welcome, everyone. I would like to take a moment to recognize some of our executive leadership team, many of whom are on the call this morning. Dr. David Heflin, our Chief Financial Officer; Dr. Lynn Priddy, Provost and Chief Academic Officer; Mr. Paul Sedlacek, Chief Compliance Officer and General Counsel; Mr. John Woolsey, Vice President of Human Resources and Development; Mr. David Castle, Vice President of Marketing and Enrollment Management; Ms. Joan Meyer, President of Ground Operations; and Mr. Jerrad Tausz, President of Online Operations. We also have several other leadership individuals across our system. During this morning's call, I will discuss our operational performance and provide an update on our business strategies. Dr. Priddy will provide an update on our academic initiatives, and Dr. Heflin will give an overview of our financial performance and focus. We will then conclude with question and answer.

For those of you following along on the slide deck, Slide 3 outlines our strategic focus in online education. As we focus on our online operations, we continue to be mindful of two critical elements, demand and support. First, as noted on Slide 4, we continue to see strong demand for our online-based operations, in particular we realized enrollment growth in our online military graduate and Canada operations. However, we continue to see enrollment decline in our ground-based operations and because we are serving a smaller on-ground student population we either have or are in the process of further reducing our footprint in several of our markets, while ensuring we continue to provide the resources needed for our students to succeed.

Second, as we continue to evaluate current student enrollment trends and demand, we are responding with the increased student support and engagement efforts. One example of this shifting demand and corresponding support efforts can be found in our College of Military Studies. We continue to see strong demand in this area and have responded with new programming and support, integrated from the recent Henley-Putnam asset acquisition. As Dr. Priddy will discuss, we are also working to add new academic offerings to the Henley-Putnam School of Strategic Security and are excited to be serving students interested in these high-demand subject areas. As we concentrate on demand and student support, we are aligning our resources accordingly. In this regard, we continue to focus our resources on the parts of our operation that support enrollment demand and successful student outcomes and eliminate those aspects of our operation that distract from those efforts.

The final area of enrollment to discuss is teach-outs. As anticipated, we continue to see declining enrollments here as our remaining teach-out students make progress toward completing their programs by the end of the winter term 2019. However, these numbers are expected to change as we are working with a couple of other institutions to provide degree completion opportunities for their students. At this time, it is too early to tell how many students maybe impacted or how many students may choose to continue pursuing their educational goals through National American University. Dr. Heflin will provide greater insight in our results -- on our results for the first quarter shortly, but I wanted to highlight a few items on Slide 6.

In summary, as you review the finances and the operations of the company, the underlying theme is that the organization continues to undergo a significant transition, as marked by the shifting needs of our student population, which we aggressively addressed in the second half of fiscal 2018. As I mentioned earlier, our focus has been on aligning resources to those aspects of our operation where there is student demand and to support those operations to ensure successful student outcomes. At the same time, we have been working to reduce costs that no longer serve the evolving needs of our students, primarily lease obligations and size of workforce. This transition is most notable in our ground-based operations and marked by the significant decline in enrollments in our overall revenue drive. As we navigate through this transition and the shifting demand of our students, we are working diligently to ensure we support our students first, and build an organization that will thrive going forward. We anticipate this transition will be completed in Q4 and will better position the organization heading into fiscal year 2020.

Revenues for the quarter decreased by 19% or $3.8 million as a result of the 5,536 year-over-year decrease in credit hours enrolled by teach-out students and our continued shift in focus from ground-based operations to online operations. By the same token, we reduced operating expenditures by 12.6% or $3 million, even though we continue to carry approximately $4 million in annual lease obligations. We have successfully reduced 6 of our lease obligations and continue to work aggressively to reduce the remaining lease obligations that are not critical to our strategic growth strategies.

Moving to Slide 7 and 8. Total student headcount was down 15.9%, primarily due to the consolidation of on-ground undergraduate operations. In addition, as we mentioned in our previous call, we expect total student headcount numbers will continue to decline as building our online operation is now our primary focus.

Slide 8 provides a chart of historical student enrollment by credit hour as well as the current projected credit hour enrollments for fall 2018. For the summer term, students enrolled in 45,860 credit hours, which was below our projection of 46,700 credit hours. The decline was driven predominantly by the lower-than-expected ground-based student population. We are projecting 45,750 credit hours for the fall term, which is down approximately 22% over the fall term last year. The decrease in our ground-based student population will translate into additional year-over-year pressure on these enrollments over the next several terms as we place greater focus on our online division. We will continue to provide additional insight into the development of these initiatives as we move forward.

Next, Dr. Priddy will provide an update on our academic operations.

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Lynn Priddy, National American University Holdings, Inc. - Provost & Chief Academic Officer [4]

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Thank you, Dr. Shape. In fiscal year 2019, the highest priority strategic growth initiative for National American University is its newly acquired bachelor's, master's and doctoral degrees in strategic security and protection management, nuclear enterprise studies, intelligence management, cybersecurity and counterterrorism studies. In addition to these degrees, more than 30 strategic security-related certificates offer military, paramilitary, governmental and corporate officials expanded graduate and undergraduate expertise or a needed career update in more than a dozen niche strategic security topics and regional languages found at 2 other institutions.

The faculty at NAU's Henley-Putnam School of Strategic Security are current and former professionals and leaders in the intelligence, counterterrorism and nuclear enterprise fields. In 2019, the Henley-Putnam School of Strategic Security expects to add advanced, newly designed nuclear enterprise studies and cybersecurity offerings as well as the planned Ph. D. in strategic security. October 2018 marks the launch of the Henley-Putnam School of Strategic Security as a key operational and educational driver at National American University.

Slides 10 and 11 elaborate on academic initiatives to implement precision managed systems into our operations that will maximize efficiency, sustain and enhance quality and provide growth. The full complement of NAU online courses drive faculty-student engagement and personalized communication. Peer-to-peer projects, customized workplace case assignments and proficiency-based evaluations are aligned with industry certifications and standards in business, technology, health care, aviation management, human resources, paralegal and legal studies and, of course, now strategic security. Innovative cross-career seminar courses provide multi-term team-based interactions that combine legal studies and human resources with intelligence management and counterterrorism. These cross-career seminar courses bring diverse perspectives on health care and business ethics, technology and finance to community problems and that require extended dialogue on criminal justice and health information issues.

In addition to the reimagined curricula and revamped learning management system, NAU has now completed the real-time data systems that allow both management and strategic advancement of institutional and educational effectiveness as well as immediate intervention into and correction of student and faculty behaviors to better ensure retention, full-time enrollment, academic achievement and lower debt on completion. NAU prides itself on providing a caring and supportive environment that serves students who have not succeeded at other institutions. The data systems push the information and communication that are needed if these working adults are to achieve their career goals.

TEAMS 3 is the proprietary system that delivers this real-time data on individual students, faculty and advisers from overall persistence to actual daily engagement within the online and blended course room. Based on the original predictive indicators, TEAMS 3 is now building on data analytics and intelligence through deployment across our system. The system shows the status and risk level of every student, flagging those students who receive a C, fail to attend, fall below a certain cumulative grade point average or are unengaged in a discussion. TEAMS 3 also documents faculty and adviser engagement with students, alerting deans and others on lack of support, lack of timely assessment or lack of responsiveness to students, thus supporting an entirely new online, high-contact, high-engagement course and program experience.

Among NAU's distinctive skill sets is the ability to map and award credits for prior learnings and to transfer previously earned credits and certified training toward degree programs. Unlike many competitors, NAU is committed to evaluating and, if appropriate, accepting and applying every credit a student earns from all sources to the degree requirements up to the federal and accreditor limit of 75%.

NAU is a completion and advancement institution. Our progressive faculty and academic administration have remade educational offerings that don't just allow, but are actually designed such that students receive maximum credit for learning and complete with minimal loss of credit. Add-on and embedded certificates, along with credit for documented corporate education, allow adults seeking promotion to advance professional expertise in niche areas aligned with industry and profession-declared competencies and proficiencies. The fiscal years 2019 and 2020 academic strategies and deliverables not only build on, but demand academic policies and processes as well as a faculty and dean culture that's built for agility, intentionality and innovation.

NAU's completion of a comprehensive program audit has led to a full shift in the inventory of university programs. NAU has prioritized 40 graduate and undergraduate programs as high brand and high quality, and has positioned them for enrollment growth.

Other underperforming nonprofitable programs have been suspended and are being cut out. Slide 12 provides a breakdown of the university students by academic area and by degree offering for the summer 2018 term. Clear in the academic area background is the jump of strategic security offerings to 5% in their October debut. Business and Technology remained the strongest at 46% of all offerings collectively. Allied Health remains steady at this point at 25%. Growth in NAU's Bachelor of Science in Nursing is offset by the completion of a teach-out program in Vocational Diploma and Associate Degree in Nursing. As expected, the proportion in NAU's enrollments by degree level continued to favor bachelor's and graduate degrees, while associate degrees and diplomas decline. This shift aligns with the academic and long-term strategy of the institution and the launch of NAU's Henley-Putnam School of Strategic Security.

Slides 13 and 14 show the results being gained from increased focus on student persistence and learning success. These slides represent preliminary results, which are on track to sustain stronger course completions than in the previous 3 years. Both are anticipated to exceed their benchmarks of 85% for undergraduate and 90% for graduate, respectively. As indicated on Slide 14, successful course completion, meaning students who complete and pass the course, remains at 74% or higher, and we are targeting even greater improvement across all undergraduate and graduate offerings. Our strong course completion rates reflect the continued efforts to integrate faculty-student mentoring and other engagement strategies into all online courses. We believe the revisions to remedial entry-level courses and math offerings have impacted new and continuing students, significantly improving successful completion of gateway courses, major core entry courses and math- and writing-intensive courses.

Now I'd like to turn it over to Dr. David Heflin, who will provide an overview of our financial performance.

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Ronald L. Shape, National American University Holdings, Inc. - President, CEO & Director [5]

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Thank you, Dr. Priddy. I will begin by sharing highlights from the first quarter. I would encourage each of you to review our press release, the Form 10-Q that we expect to file this coming Monday and our investor deck for specific details and, of course, I'd be happy to take questions during Q&A.

As shown on Slide 16, revenue decreased to $16 million in the fiscal year 2019 first quarter from $19.8 million for the same period last year. Our academic segment's total revenue decreased to $15.4 million from $19.2 million in the prior year period, primarily due to decreased credit hours resulting from lower enrollments. Cost of educational services is down from $6.9 million to $6.4 million, and SG&A is down from $15.5 million to $13.1 million. Cost of educational services is down due to lower enrollment and lower teach-out instructional cost. SG&A is lower due to the cumulative effect of headcount reductions and previous consolidations of physical locations.

Overall expenses are lower despite an increase in expenses for the strategic priorities mentioned by Dr. Shape and expenses related to consolidation of locations. The expense for these strategic priorities was $3.3 million in the first quarter of this fiscal year compared to $900,000 in the first quarter of the previous fiscal year. Total expense is $3 million or 12.6% lower for the first quarter of this year compared to the prior year. This overall expense reduction is primarily the result of our previous work to consolidate locations and reduce headcount. We continue to work on improving our operating efficiencies to make sure our costs align with our current enrollment numbers. As such, we will continue to review the possibility of consolidating additional physical locations in the coming quarters.

Moving to Slide 17. Net loss attributable to the company for the fiscal year 2019 first quarter was $5 million or $0.20 per diluted share based on 24.3 million shares outstanding compared to a net loss of $3.8 million or $0.16 per diluted share based on 24.2 million shares outstanding in the prior year period. The company's losses before interest, taxes and depreciation and amortization, or LBITDA, for the first quarter of 2019 decreased to $3.6 million from LBITDA of $2.7 million in the prior year period due to lower enrollments and revenue.

Balance sheet highlights at August 31, 2018, can be found on Slide 18. Cash and cash equivalents totaled $3.2 million, and restricted cash totaled an additional $9.3 million. During the first quarter of fiscal year 2019, cash reported on the balance sheet decreased by $2.1 million from the prior sequential quarter. The primary driver behind this decrease was cash flow used in operations of $1.8 million. Current liabilities increased by $2.4 million during the first quarter of the fiscal year due primarily to a $1.6 million increase in accounts payable. In addition, current assets decreased by $2.3 million, resulting in a negative working capital of $5.4 million. Once again, the key reason behind this decrease in current assets was $1.8 million cash used in operations.

During the fourth quarter of fiscal year 2018, the company issued to Black Hills Community Bank a promissory note in the principal amount of $8 million, which is secured by a mortgage on certain real property in our Fairway Hills operation. The company purchased restricted certificates of deposit earning 1.5%, totaling $8 million at that time, which will also serve as security for the note.

As discussed in our of fiscal 2018 year-end earnings call, the loan agreements provide for an $8 million 5-year term loan. The loan carries a fixed interest rate of 4% -- the interest rate and is payable as follows: beginning June 17, 2018, 59 monthly consecutive interest-only payments based on the unpaid principal balance of the loan at the interest rate; beginning May 17, 2019, 4 consecutive annual principal payments of $800,000 each, during which interest will continue to accrue on the unpaid principal balance of the loan; and on May 17, 2023, 1 payment of the remaining principal balance and 1 month of accrued interest on the loan in the amount of $4,816,000. The proceeds of this loan may be available to provide strategic financing to the initiatives we have discussed during this call.

As we continue working to better align our expenses with our current enrollment and income levels, we are excited about the strategic initiatives we have discussed this morning, and we believe these efforts will strength -- serve to strengthen the finances and future of our university.

With that, I will turn the call back to Dr. Shape.

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Ronald L. Shape, National American University Holdings, Inc. - President, CEO & Director [6]

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Thanks, Dr. Heflin and Dr. Priddy. Operator, we would be happy to take any questions at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) There are no further questions at this time. I'd like to turn the call back over to management for any closing remarks.

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Ronald L. Shape, National American University Holdings, Inc. - President, CEO & Director [2]

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Thank you, operator. We would like to thank everyone for joining us this morning. We are available to answer any additional questions you may have. You are also welcome to contact our Investor Relations firm, The Equity Group. We look forward to speaking with you again during the fiscal year 2019 second quarter results conference call.

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Operator [3]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.