Lincoln Educational Services Corporation (NASDAQ:LINC) Q2 2023 Earnings Call Transcript
Lincoln Educational Services Corporation (NASDAQ:LINC) Q2 2023 Earnings Call Transcript August 7, 2023
Lincoln Educational Services Corporation beats earnings expectations. Reported EPS is $0.57, expectations were $0.02.
Operator: Good day and welcome to the Q2 2023 Lincoln Educational Services Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael Polyviou. Please go ahead.
Michael Polyviou: Thank you, Abigail and good morning, everyone. Before the market opened today, Lincoln Educational Services issued its news release reporting financial results for the second quarter ended June 30, 2023. The release is available on the Investor Relations portion of the company's corporate website at www.lincolntech.edu. Joining us today on the call are Scott Shaw, President and CEO; and Brian Meyers, Chief Financial Officer. Today's call is being recorded and is being broadcast live on the company's website and a replay of the call will be archived on the company's website. Statements made by Lincoln's management on today's call regarding the company's business that are not historical facts may be forward-looking statements as the term is identified in Federal Securities laws.
The words may, will, expect, believe, anticipate, project, plan, intend, estimate and continue as well as similar expressions are intended to identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results. The company cautions you that these statements reflect current expectations about the company's future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond the company's control that may influence the accuracy of the statements and the projections upon which the segment and statements are based. Factors that may affect the company's results include but are not limited to the risks and uncertainties discussed in the Risk Factors section of the annual report on Form 10-K and the quarterly report on Form 10-Q filed with the Securities and Exchange Commission.
Forward-looking statements are based on the information available at the time those statements are made and management's good faith belief as of the time with respect to future events. All forward-looking statements are qualified in their entirety by this cautionary statement and Lincoln undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise after the date thereof. Now, I would like to hand the call over to Scott Shaw, President and CEO of Lincoln Educational Services. Scott, please go ahead.
Scott Shaw: Thanks, Michael and good morning, everyone. Today, we reported strong second quarter results as revenue from Campus operations grew nearly 10% over last year. Student starts increased approximately 18% and net income more than tripled. We also achieved a significant milestone as we completed the sale of our Nashville campus which generated net cash proceeds of $33 million. At quarter end, we remained debt-free and had approximately $95 million in cash and short-term securities. Despite continued historically low unemployment, our strategy to prepare an increasing number of students for productive, rewarding and essential careers while helping American corporations close their skills gap is clearly working. The combination of our hybrid teaching model, marketing programs, centralization of our financial aid process are all assisting in increased student starts, rising placement rates and enhancing returns to our shareholders.
Furthermore, we continue to make good progress with replicating high in-demand programs to existing campuses and expanding our footprint with our new Atlanta campus. Both of these initiatives will provide additional growth in 2024 and beyond. Our performance during the first half of 2023 enables us to now revise upwards several guidance metrics which Brian will review in a few minutes. This positions Lincoln for an even stronger performance in 2024 and positions us well for our 2025 goals. The rollout of our hybrid teaching model is progressing as planned and will help us become more scalable and efficient once fully in place in 2025. As we've discussed with you in the past, the model combines hands-on learning at campus facilities while delivering a greater component of classroom work through online instruction.
It enables our students to work part-time or manage other commitments while they pursue their Lincoln education and is specifically designed to help a higher percentage of students to graduate. The model also standardizes our programs across campuses with on-campus time slots of morning, afternoon and evening courses and with consistent start dates that provide greater flexibility, efficiency and overall capacity at our existing campuses. The rollout of our hybrid model at most campuses, coupled with adding existing proven programs at select campuses position us to drive higher campus and company profitability in the long term. Another key component to our growth strategy is the centralization of our financial aid process. During the second quarter, we believe improvements we have made with our centralization effort contributed to our student start growth rate and we just moved the last group of schools to the new software platform several weeks ago.
We have analyzed the data from schools that were transitioned earlier this year and clearly, we are seeing an improvement in a number of areas. For instance, the new process has reduced the number of days it takes to package an applicant's financial aid. This improved efficiency helps the student know as quickly as possible how they can pay for their education and helps us convert a lead generated to our marketing programs into a start. While the full rollout of this process will take through the end of the year, we do expect to see continued gradual contributions from this effort during the second half. Another key component of our growth strategy includes opening 10 new program replications across our existing campuses by the first quarter of 2025.
These programs are focused on preparing students for rewarding careers in electrical, HVAC, welding, automotive and medical assisting which are some of our most successful and in-demand programs. The replication model provides Lincoln with substantial organic growth opportunities through the fastest and highest return on investment as we leverage our existing infrastructure, campus management and market knowledge. We continue to anticipate that these 10 new programs will reach their full run rate after approximately 3 years of operation, at which time, each is expected to provide an average of $1 million in added profitability annually. We did plan to open 3 replication programs by the end of the current year. However, staffing issues at local government and regulatory agencies are delaying the start-up of these programs by 3 to 5 months and we now see these additions getting underway in the first quarter of 2024 which should enhance next year's start growth.
During the quarter, we actively implemented the new campus component to our growth strategy. We continue to build out the new Atlanta campus and remain on track to enroll our first student at the facility during the first quarter of next year. With the sale of our Nashville campus complete, we now are aggressively moving to secure a new site in that market and hope to have an agreement in place by the end of the year. Meanwhile, we continue to fully operate at the existing campus. In addition to the Nashville campus, our goal is to open 1 new campus a year over the next 5 years. And based on an ongoing site selection and negotiations, we are fully confident of achieving that objective. Our efforts to broaden existing corporate partnerships while adding new ones continue to make steady progress.
During the quarter, we announced a new collaboration with Hunter Engineering, a leading name in the undercar service industry. Later this summer, our Denver campus will become the latest site to house a Hunter training center where students can train directly on patented Hunter equipment. Local repair shops will also have the opportunity to send technicians to the Lincoln campus to train on the Hunter equipment. In addition, we recently opened our second Tesla training program at our Columbia, Maryland campus and Tesla has asked us to help with securing additional locations. We marked the 25th graduating class from our long-standing Hussmann partnership which provides qualified Lincoln Tech HVAC graduates with free advanced level training and a career with Hussmann all over the United States.
Discussions are ongoing with our current OEM partners to expand to other campuses as well as new corporate partners. We've had a strong first half of 2023 and our team is executing quite well. We achieved a 1.5% increase in our start rate during the second quarter which we attribute to the increased number of leads being generated by our marketing programs, the more efficient financial aid packaging that is emerging from the centralization effort and the timing of starts under the hybrid teaching model. These 3 factors combined to positively impact both high school graduate starts as well as adult student starts during the quarter. We do expect our student start growth rate to slow during the second half of the year simply because the implementation of our hybrid model means we have fewer start dates in July compared to the prior year.
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In addition, with the opening of the 3 programs at existing campuses now moving to the first quarter of next year, we won't have those starts in the second half of this year. The net impact is that we do expect to finish the full year with 6% to 10% student start growth and Brian will provide some more color on this metric during his remarks. Overall, we believe our strategies have put Lincoln in a position to consistently grow. The interest in our programs is quite strong and employers continue to have a dire need for trained employees. At the same time, prospective students are looking for alternatives to 4-year college. Our strong graduation and placement rates provide excellent reference points our balance sheet which has never been stronger, is enabling Lincoln to expand our programs and locations which will create long-lasting benefits to our students, our graduates, our instructors, our corporate partners and increasing returns to our shareholders.
Finally, our momentum has been gaining increased recognition in recent weeks. A particular note for today's call was our inclusion in the broad market Russell 3000 Index on June 26. The inclusion meant that Lincoln was also included in the Russell 2000 Index. Combined, these milestones have created additional demand for Lincoln shares from indexed investors and served to increase awareness of our company by institutional investors. I'm also proud to report that our Marietta, Georgia campus was named a School of Distinction by our accrediting body, ACCSC. Every 3 to 5 years, schools are reaccredited and only a handful of them receive this recognition. I'm very pleased with our organization's performance at every level and I continue to believe that we are poised for even greater success as we truly make a difference in helping our country address its skills gap.
Now, I'd like to ask Brian to provide his review of our second quarter financial results and our updated guidance. Brian?
Brian Meyers: Thanks, Scott. Good morning and thank you for joining our second quarter earnings call. I am pleased to report our solid financial results and highlight recent developments that continue to advance our strategic growth initiatives. Before we turn to the operating results, we completed the sale of our Nashville, Tennessee campus property for net proceeds of $33.3 million. This sale resulted in a gain of $30.9 million and a non-cash impairment charge of $4.2 million related to the goodwill and long-lived assets of the Nashville campus. To ensure campus operations remain uninterrupted for our students, we entered into a leaseback agreement for an 18-month period to provide for the relocation to a more modern and efficient facility within the Nashville market.
The initial 15 months of this lease is rent free, meaning there are no cash payments due. However, for accounting purpose, we record the fair value of the free rent as a $2.3 million prepaid asset which will be amortized monthly as non-cash rent expense. The sale proceeds, along with our cash flow from operations, boosted our ending cash balance to $95 million at quarter end, exceeding our previously disclosed estimate of $85 million. Our cash position is one highlight of our strong balance sheet and financial position as we're debt-free and net working capital of nearly $70 million. Besides working capital needs, we expect to utilize the cash to fund current and future growth initiatives, including the build-out cost of the new Nashville campus which is expected to range between $15 million to $20 million in CapEx. The build-out includes additions of 2 of Lincoln's in-demand programs, HVAC and Electrical which will be new offerings at this campus.
Our capital expenses during the second quarter were $7.6 million which included the ongoing build-out of our new Atlanta campus and the expansion and addition of new programs at existing campuses. During the quarter, we also incurred $300,000 of expenses related to the opening of the Atlantic campus. We continue to explore additional expansions and new campus growth opportunities which we anticipate funding with cash on hand. We have invested a significant amount of our total cash balances in low-risk market securities, including treasury bills. These investments yielded $0.5 million in interest income during the second quarter. Now, turning to our financial results. Unless otherwise noted, all comparisons exclude the Somerville campus that is being closed this year and included in our Transitional segment and the preopening expenses of our new Atlanta campus.
Revenue increased 9.8% or $7.9 million to $88.2 million. Higher revenues were achieved due to: one, an 8.6% increase in average revenue per student; and two, our strong 17.9% increase in student starts in the quarter. Revenue per student increased in part due to tuition increases and the transition to our hybrid teaching model which increases program efficiencies and delivers accelerated revenue recognition, particularly in our evening programs. Another contributing factor was a higher tool revenue related to increased starts in the quarter which led us to finish the quarter with a higher population than last year, driving future revenue growth. Our robust student start growth was aided by marketing investments, emissions initiatives and the progress we continue to make with our centralization of financial aid which slightly increased our enrollment to start rate.
Operating expenses were $88 million, in line with our expectations when adjusted for the Nashville sale items and the other non-recurring items detailed in our adjusted EBITDA calculation reflected in our Q2 earnings release. As we have previously communicated, while the implementation of our hybrid learning and centralized financial will drive future efficiencies, we are incurring duplicate expenses this year related to both projects. Adjusted EBITDA was $2.4 million, after excluding non-recurring items detailed in our Q2 earnings release. This was slightly higher than last year's $2.3 million and ahead of our expectations going into the year. Our financial results for the 6 months were ahead of our internal plan and provide a strong foundation as we enter the second half of the year.
We're excited to have the resources to enable us to continue to improve our processes and services for our students, while developing new growth opportunities. Turning to the cash flow; we generated over $10 million in cash flow from operations in the quarter. We invested $7.6 million in capital expenditures, largely related to growth initiatives. We also had some activity under our share repurchase plan. In the second quarter, we repurchased 61,000 shares at an average price of $5.49. In total, since May 2022, we repurchased 1.7 million shares for $10.3 million. Lastly, I'll provide some details on our revised outlook for the full year. Our strong start growth in the second quarter resulted in a 12.5% start growth for the first half of the year.
We anticipate start growth in the second half of the year will be lower with second half starts slightly above prior year. As Scott mentioned during his comments, we attribute this outlook mainly due to the timing of start dates and new program rollout. Under our new hybrid teaching model, we no longer have significant start dates in July which we had in prior years. As a result, we benefited as some students elected to accelerate their start dates to Q2 from Q3. In addition, we are experiencing delays in the rollout of certain new programs at existing campuses that will lead to a shift of approximately 150 starts, we originally expected in 2023 to 2024. Despite the shift of some starts and program delays, we still anticipate start growth for the balance of the year.
In total, our strong performance in the first half allows us to refine our outlook for full year starts. We're making an upward revision to our financial guidance which we previously updated after Q1. Our full year guidance is now the following: Revenue in the range of $360 million to $370 million, adjusted EBITDA in the range of $22 million to $26 million, adjusted net income in the range of $10 million to $13 million, student starts growth of 6% to 10%. As our investments in the Atlanta campus and other growth initiatives will accelerate in the second half of the year, our projection for capital expenditures remains unchanged at $35 million to $40 million. In terms of stock-based compensation, we now forecast it to be $5 million for the full year based on our improved performance and outlook.
Accordingly, we anticipate $1.6 million of expense recognized evenly in the second half of the year. In conclusion, our results and outlook for the balance of 2023 reflect the growing demand of our programs and continued progress on our key initiatives for the year. I'd like to thank our entire team for their efforts and contribution in delivering another strong performance this past quarter while continuing to position Lincoln for growth in the second half of the year and beyond. We look forward to communicating our progress following the third quarter. And now I'll turn the call back over to the operator so we can take your questions. Operator?
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