Q3 2023 Lincoln Educational Services Corp Earnings Call
Participants
Brian K. Meyers; Executive VP, CFO & Treasurer; Lincoln Educational Services Corporation
Scott M. Shaw; President, CEO & Director; Lincoln Educational Services Corporation
Eric Martinuzzi; Senior Research Analyst; Lake Street Capital Markets, LLC, Research Division
Rajiv Sharma; Senior Analyst; B. Riley Securities, Inc., Research Division
Robert T. Puopolo; Partner; Epic Partners
Steven Bruce Frankel; Director of Research & Senior Research Analyst; Rosenblatt Securities Inc., Research Division
Michael Polyviou; Managing Member; EVC Group Inc.
Presentation
Operator
Good day, and thank you for standing by. Welcome to the Lincoln Educational Services Third Quarter 2023 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, Mr. Michael Polyviou. Please go ahead.
Michael Polyviou
Thank you, Crystal. Good morning, everyone. Before the market opened today, Lincoln Educational Services issued its news release reporting financial results for the third quarter ended September 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 also 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 M. Shaw
Thanks, Michael, and good morning, everyone. Our transformative growth strategy continued to generate exceptional results during the third quarter as revenue increased 10.5%. After realizing 18% student start growth during our second quarter, student start growth during the third quarter surpassed 7%. These top line results exceeded our expectations, and as Brian will review during his prepared remarks, we are increasing our guidance for the full year. Our top line growth was achieved through student growth, a 3 percentage point increase in average student population and a 6.8% increase in average revenue per student. The continued rollout of our hybrid instructional platform, which we call Lincoln 10.0 also contributed to increasing our average revenue per student growth. As we've discussed with you in the past, the hybrid 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 hybrid 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 positions us to drive higher campus and company profitability in the long term, once we complete our transition to the model in 2025. During the third quarter, our exceptional student start growth was driven by the increased number of leads generated by our marketing programs. This lead generation is occurring across the board, both geographically as well as from a curriculum perspective and is accompanied by a healthy conversion rate of those leads. What we find particularly encouraging is that this lead generation student start growth is nearly all organic. There's a little of any contribution from recently started programs since their launch states were delayed due to later-than-expected regulatory approval. Once our recent initiatives start to contribute to student starts, we are very well positioned to continue to start growth. During the third quarter, we saw a shift in the marketplace beginning to take hold from both a geographic and curtail perspective, we are experiencing increased demand for Lincoln's programs, and this increased demand is occurring despite a continued very low unemployment rate and exceptional GDP growth.
It appears that more and more people are interested in acquiring real hands-on skills that lead to solid careers. There are a number of factors driving this increased interest. First, many people are questioning the value of a 4-year degree in the accompanying debt. Many students that eventually do graduate with a 4-year degree, don't have the marketable or applicable skills that today's employers demand. At Lincoln, we strive to provide strong ROI programs that lead to solid in-demand careers and we deliver these programs in a supportive environment that focuses on graduating and placing students. Also, the careers we offer will most likely not be replaced by artificial intelligence or be offshore, adding security to a student's career decision. With our country's growing need for middle skilled trades people, we feel good about our positioning and long-term growth opportunities. We also believe that being aligned with the industry also drives interest in our programs. For example, in the past year, we have launched 2 Tesla programs, 1 in Denver and the second in Columbia, Maryland. And in Nashville, we launched our first specialized training program for truck OEM Peterbilt. Both companies approach Lincoln since we are known for quality graduates and our ability to be a strong partner focused on helping our students while supporting each company's specific needs.
During the second quarter of 2024, we will start to layer on starts at our new Atlanta campus as well as the first programs developed under our replication strategy. Further out, our new lease in Nashville gives us twice the space that we have at the new Atlanta facility. And when we opened the new Nashville facility in the first half of 2025, it will include 2 new programs in addition to the current Nashville market offerings. During this quarter, we purchased a new facility in Levittown, Pennsylvania, which when opened during the first half of 2025 will house our program serving the Philadelphia market. This new facility gives us the space to expand our offerings in Philadelphia beyond automotive to include HVAC, welding and electrical. And the facility has space to add additional programs or partnerships. Brian will review our strategy regarding the purchase of this facility and our near-term plans during his comments. We remain on track to achieve our objective to develop 10 new programs under the replication strategy. Many of these programs are already in some stage of development and will begin enrolling during 2024. The remainder are planned to be opened during the first half of 2025. They all deployed the Lincoln 10.0 platform, and we remain on target to realize our 3-year profitability goals for each of these 10 programs. At the same time, we continue to pursue our strategy of opening 1 new campus per year. Aandelen will welcome our first classes during the second quarter of next year. And last Friday, we announced our plans to expand into the Houston, Texas market.
Our first campus in Houston will be located in the heart of one of Houston's busiest commercial corridors and strategically located for both student convenience and maximum graduate exposure to area hiring managers. The new Houston campus will represent our second campus in Texas and will allow us to take advantage of the country's fourth largest employment market. The new campus will feature an approximately 100,000 square foot training center offering career opportunities in the auto, diesel, welding, HVAC and electrical fields. Of the 2.4 million jobs that are expected to become available nationwide in these industries by 2032, over 290,000 of those jobs are projected to be in Texas. Over the next 2 years, as we layer on new campus openings and the program replication strategy, we consistently expand our opportunities to increase overall student starts, while we remain focused on continuing the impressive organic start growth at existing programs. Our strategy and its successful execution fuels our long-term optimism for Lincoln to prepare increasing number of students for good paying, rewarding and essential careers while helping American corporations close their skills gap. Our new campuses program replication strategy, the Lincoln 10.0 platform and improving the efficiencies and effectiveness of our financial age programs are requiring, as we have said in the past, increased investments during 2023. Some of these initiatives require us temporarily to double up on processes so that we maintain our high level of service. During the third quarter, these investments were priorly recognized in SG&A expenses and supported our strong student start growth and higher lead generation. Brian will provide more details as well as the progress we have made on bringing these increases down during his remarks.
Recently, the Department of Ed issued its long-awaited updated role on gainful employment. The rule establishes specific debt-to-income percentages that educational programs must achieve. The data used to establish the percentages won't be available until July 1 of next year. We have some small programs that might be impacted by the rule implementation, which wouldn't come until 2 years after the July 1, 2024 data setting date. We expect that others with a larger presence in the curriculum is most likely to be impacted by the rule setting will challenge the rule, which has been successfully done in the past. The bottom line is that if we are required to take some action, we don't expect the action to have much impact on our EBITDA growth and the programs potentially impacted aren't part of our replication strategy or new campus development plans. 2023 is shaping up to be a very strong year for Lincoln, and we are positioned to continue our growth in 2024 and beyond. We should start to see improvement in our operating efficiency by the second half of next year, but we expect to continue to make investments in replicating programs and opening up new campuses for the foreseeable future.
The interest in our programs in the new hybrid teaching model is quite strong and employers continue to face increasing challenges when it comes to finding trained employees. At the same time, I noted earlier in my remarks, how we are seeing an increased number of prospective students looking for alternatives to 4-year college. Our strong graduation and placement rates provide excellent reference points in 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. I also want to announce that we will be hosting a virtual Investor Day from our new Atlantic campus sometime in the first half of next year. More information on this event will be made available at the beginning of the new year. Now I'd like to turn the call over to Brian so he can review some of our financial highlights during the quarter as well as our increased guidance. Brian?
Brian K. Meyers
Thanks, Scott. Good morning, and thank you for joining our third quarter earnings call. Before I begin my prepared remarks with Veterans Day being celebrated in a few days, I'd like to take a moment to thank our veterans, our students, Loveman instructors who have sacrificed and serve to protect our great nation. As Scott highlighted, we are very pleased with our significant progress made towards our long-term strategic growth plan. With the addition of the Usan and Atlantic campuses, we'll be expanding our footprint to 23 campuses in 2025. Moreover, the relocation of our existing Philadelphia and National campuses will enable us to expand our program offerings, growing our student population and adding to our earnings. In terms of the Philadelphia campus relocation, as previously mentioned, we purchased the facility in Leverton, Pennsylvania to serve as the future campus location. We are now pursuing a sale leaseback agreement, which should enable us to recover our initial investment of $10 million and reinvest the proceeds in the facility build-out. Accordingly, as of quarter end, the purchase price of this facility is presented on the balance sheet as assets held for sale.
Turning to the P&L results, which excludes the Transitional segment, the preopening costs of our new Atlanta, Georgia campus and nonrecurring items. As a reminder, the Transitional segment includes assemblable Massachusetts campus, for which we have completed the successful teach-out of the final students as of the end of October. We will continue to incur some limited expenses through the end of the year. Revenue during the quarter increased 10.5% or $9.4 million to $99.5 million. The increase in revenue was mainly driven by student stock growth of 7.1% and average revenue per student growth of 7.3%. To expand on those drivers, the student stock growth was mainly derived from organic programs and the increase in average revenue per student was mainly attributed to tuition increases, combined with the acceleration of revenue recognition, particularly for student unit enrolled in our even programs under our new hybrid teaching model. Operating expenses were $96 million, in line with our expectations after adjustments for nonrecurring items detailed in our adjusted EBITDA calculation reflected in our Q3 earnings release. Domain expense increases over the prior year were instructional expenses, largely due to our population growth and merit increases, planned increases in marketing investments, which are generating greater returns as evidenced by our flat cost per stock during the quarter and our higher bad debt expense due to higher student accounts receivable. We ended the quarter with higher levels of receivables due in part to our initiative to transition our financial aid process, which continues. Adjusted EBITDA was $6.1 million compared to $7.4 million after excluding nonrecurring items detailed in our Q3 earnings release. Although 2023 is slightly behind last year, we are pleased with this result as our growth has delivered performance that was slightly above our internal plan given our high level of investments this year. Diluted EPS was $0.07 based on 30.7 million weighted average shares outstanding.
Now turning to the balance sheet and cash flow. We ended the quarter with a strong balance sheet with approximately $70 million of total cash and no debt outstanding. During the quarter, we earned approximately $900,000 of interest income and $1.9 million for the 9 months. Cash used in operating activities was approximately $6.7 million. This quarter, we experienced some delays in our cash collections, leading to a higher accounts receivable balance and the previously mentioned increase in bad debt expense. In addition, our income tax payments materially increased in the third quarter compared to prior year. We paid nearly $4 million more of income taxes this year since we have fully utilized our federal NOLs to offset our taxable income. In terms of state NOLs, we have approximately $30 million of gross NOLs to utilize in 2023 and beyond, which will reduce our future state tax liability. Capital expenditures during the quarter were $17.8 million, which includes $10 million for the purchase of our Leverton, Pennsylvania facility. It also includes the build out of our new Elance campus.
Lastly, we are obtaining our guidance to reflect our continued strong performance and Q4 business momentum. We're raising revenue outlook to be between $370 million and $375 million. We're raising the lower end of the range of adjusted EBITDA, we now expect to range between $24 million to $26 million. We're raising our adjusted income outlook to range between $12 million and $14 million. In terms of student starts, we're increasing our projections to range between 8% to 11%. And lastly, we are refining our capital expenditure outlook to range between $30 million and $33 million. Capital expenditures guidance includes the new Atlanta build-out, but excludes recently purchased facility in Levertown, Pennsylvania. In terms of stock-based compensation, we expect it to be approximately $5 million for the year and Q4 stock expense to be around $800,000. In conclusion, throughout the first 9 months of 2023, we have consistently achieved better-than-anticipated results across our key performance metrics. We remain focused on our key growth initiatives, and I want to acknowledge the entire team's efforts and contributions in delivering another strong performance this past quarter. I'll turn the call back over to the operator so we can take your questions. Operator?
Question and Answer Session
Operator
(Operator Instructions). And our first question will come from Alex Paris from Barrington Research. Our next question will come from Steven Frankel from Rosenblatt Securities.
Steven Bruce Frankel
I wonder, Scott, if you could give us a little more color on the nice momentum here in starts. Do you think this is reflecting the fact that students no longer feel some of those inflationary pressures that was keeping people on the sidelines? Or is there something else going on that you think it's driving the changes?
Scott M. Shaw
Thanks, Steven, I think it's a number of things. You are right. Last year, during the summertime, gas prices were quite high, which really impacts our students on a day-to-day basis. And while gas prices aren't as low as they've been maybe historically, it doesn't seem to be impacting students as much. There is still continued lots of talk about inflation. But I guess what I have to attribute it to is there just seems to be the stronger interest overall, as I mentioned, in our types of programs. And I think this base off of what I hear, somewhat anecdotally as well as what I read out there, certainly, the current generation is thinking much more speculatively, I guess, about college. And so I think there are more people interested in doing what we do, and I think more people are seeing value in working with their hands. And so I think there are a number of things that are frankly working in our favor and I anticipate that, that should continue for quite some time just because there is strong demand out there, and you constantly are seeing articles about the need and demand for people that work with their hands. So a lot of things are certainly working in our favor. That's for sure.
Steven Bruce Frankel
And then on the cost side, how are you doing in attracting and retaining staff?
Scott M. Shaw
Yes. Good question. The good news is we're doing better. Our turnover in staff is down year-over-year. We are seeing, frankly, more applicants per person that we're looking for. So we think that bodes well. That means maybe the employment market is softening for some as we're seeing stronger demand and more interest and things have definitely stabilized from where they were.
Operator
And our next question will come from Alex Paris from Barrington Research. (Operator Instructions). And Mr. Paris, we're unable to hear you if you're able to disconnect and try dialing back and using the call me feature, we'll go to your question next. Our next question is going to come from Eric Martinuzzi from Lake Street Capital Markets.
Eric Martinuzzi
Congrats on the good numbers and the strong outlook. I wanted to drill down on the new student starts. You talked about kind of just the overall appetite for folks questioning maybe the value of a 4-year degree. Just within your program, so I'm wondering if you could stratify into kind of the transportation and skilled trades versus health care and other. Are you seeing it equally across those 2 different categories?
Scott M. Shaw
Yes. We are actually seeing it across kind of all of our programs. Obviously, some are stronger than others, but you don't see a difference between whether it's a health care program or skilled trades program or automotive program, they're all up from last year, which is a really promising sign as well as geographically, we don't see any softening in any particular markets as well.
Eric Martinuzzi
And then as far as the centralized financial lead, just that conversion of enrollment to start, is that having some impact or not really?
Scott M. Shaw
It's not having an impact on our starts. I mean I think if anything, we started more students as we mentioned than we anticipated. So we still are working out some bugs in that area to make that more efficient. It's not nearly where we want it to be. But our objective is to make the whole process around financially much more user-friendly for our students and their families, and we're going to continue to work in that direction.
Brian K. Meyers
And Eric, to highlight what Scott mentioned in our earnings release, we do disclose the transportation was up 7.6% and health care was up 5.8%.
Eric Martinuzzi
Okay. Appreciate verification there. The cash, Brian, we finished out September at $70 million. You did say that, that includes the $10 million that was spent for Leviton, which we expect to get that back and then turn that into investment in Levittown with the sales leaseback and if there's some Atlanta build-out in there. But how do we think about kind of a normalized cash balance post the puts and takes for Leviton and Nashville investments and remaining Atlanta investment.
Brian K. Meyers
Right. So at year-end, obviously, we're going to put out a what our CapEx is going to be, which is going to be significant last year with the announcement with Houston and building out Nashville and Philadelphia. But what I'll say is, for the fourth quarter, even with significant capital expenditures and like we mentioned that we're going to be looking to do a sale leaseback to get the purchase price for Philly. I think our tenants balance will be similar to the 9 months, so it will be approximately $70 million we're anticipating even with the capital expenditures in the fourth quarter.
Eric Martinuzzi
Got it. Okay. And then the tuition, I know it's probably planning stages for 2024, but your revenue growth has benefited from tuition increase this year. What's the plan for next?
Brian K. Meyers
We're looking at a tuition increases right now. There will be tuition increase. It might not be across the board as it was in this year, but we're looking by program, the ones that have significant enrollments with smaller gaps, so we're analyzing that today, and we will have tuition increases. Probably it could be anywhere from 2% to 5%.
Operator
(Operator Instructions). Our next question will come from Rajiv Sharma from B. Riley.
Rajiv Sharma
Again, a solid performance. Congratulations. I wanted to ask you about just sort of the overall operating margin. How should we look at or given the transition to the hybrid model, overall operating margin increase to change going forward. Can you talk about that? What you see, what you expect? And also related to that, the operating costs per quarter, we had higher costs per quarter this year. Are we tracking to your model? And what should we see that going forward?
Scott M. Shaw
Sure. So I mean, certainly, our objective is to move this company to a higher profitability than where we are today with getting it up to the mid-teens EBITDA margin in a couple of years. As we highlighted in this current year, we have some increased costs as we make some of the investments that we believe are necessary to help us achieve those goals. And with the new program replications and new campuses and as we increase our top line more, we will start seeing more drop to the bottom line, but you really aren't going to probably see significant amounts into the latter half of next year going into 2025. And so certainly, from quarter-to-quarter, there could be some variances, but there's no reason why this company won't be in the mid-teens from an EBITDA perspective in the coming years.
Brian K. Meyers
And your other question, we are tracking towards our internal plan. Instructional has increased, but we were budgeted to increase. And the good news, a lot of that was due to our increased population and merit increases. And marketing, actually, our marketing was down from our original budget simply because of delays in some of our program replications since it got delayed, we cut back the marketing there. But even though we were over for the year, we were on plan with that. And as I think I said in my prepared remarks, marketing is still doing very well. We had flat cost for starts, so we're not paying a lot more, but we're not paying more to that incremental for students.
Rajiv Sharma
And should we see the operating expenses again in the mid-90s going forward every quarter?
Brian K. Meyers
Yes, we'll put out to next quarter, our guidance, but yes, we're still transitioning to our hybrid model. So we'll still have some quest there sort of savings won't be as material for 2024 and similar with our rollout of our new financial aid model. We're probably not going to experience the savings in 2024 as well.
Rajiv Sharma
Got it. And then just following just moving on, on the 2 campuses, the Atlanta campus and then the Houston one. So we should start to see first quarter, second quarter and the new year would be the start of Atlanta enrollments. Can you give an idea of what sort of revenues and EBITDA contribution you're expecting from Atlanta? And then relative to that, the Houston that's largely primarily only in auto and industrial school? And is that a similar sort of top line and bottom line contribution?
Scott M. Shaw
Yes. So basically, both reflect the new model that we have for new campuses, Raj. So as we said and as we laid out in our investor presentation, these campuses should ramp up to low $20 million of revenue and about $5 million of EBITDA, about 3 years or so after opening up 3 to 3.5 years after opening up. So we anticipate that to be the same. Yes, they are both focused on automotive and skilled trades, basically, these new models, these new campuses, we've taken the best of what we've got as far as highest profitable programs and greatest demand for those marketplaces. So they really should serve those areas well. And as we say and as I just said, it will be a low 20s in revenue and about $5 million to $6 million of EBITDA each once they're up and running.
Brian K. Meyers
Right. And this week, we'll have a new Q3 investor presentation, you'll see the new updated Atlanta model included in there for 2024. So 2024, it will have a minor and might have growth and not growth and not too robust revenue and it will have EBITDA losses, which will be added back the first year of opening in our adjusted EBITDA. And Houston will have no long revenue next year that will open up in 2025.
Scott M. Shaw
And I do want to add, Philadelphia is almost like a new campus. Today, Philadelphia is our only campus with one program, and that's automotive. And we've been serving the Philadelphia market for over 60 years. when we move to the new facility, and that starts up and running in the first half of 2025, we will have the benefit of having an electrical program, an HVAC program and a welding program as well to complement the auto. And as I said, we've been in that market for 60 years, good main brand recognition, and we know from our research that those 3 additional programs are in strong demand. So it's almost like opening up another new campus, frankly, in that marketplace.
Operator
(Operator Instructions). I am showing no further questions from our phone lines. I would like to turn the conference back over to Scott Shaw for any closing remarks.
Scott M. Shaw
Thank you, operator. We want to thank you for joining us today and for your continued interest and support. Our performance through the first 9 months of 2023 demonstrates that we are achieving our objectives, and we remain steadfast on continuing our growth. We have a dedicated team and their efforts in pursuit of excellence allow us to help our students achieve their career goals. We look forward to updating you on our full year 2020 results during Q1 of 2024. Until then, have a happy Thanksgiving and a safe enjoys holiday season. Thank you, everyone.
Michael Polyviou
Crystal, actually, somebody did just pop in as Scott was closing out. Is he still available?
Operator
Yes. One moment. And pardon me, we do have a question from Robert Puopolo from Epic Partners.
Robert T. Puopolo
Scott, sorry about the last-minute entry here. Congratulations, by the way, excellent growth. Two questions. First, as you look at capital expenditures, sort of the guidance this year, $30 million to $33 million, do you distinguish between growth capital expenditures and maintenance CapEx? Or can you? I expect a lot of time it would be growth and perhaps Atlanta too, but I was just curious if you could shed some light there.
Scott M. Shaw
Sure. So typically, we look at 1% to 2% of revenue as far as what would be maintenance CapEx and all the rest is growth. So you can see that the vast majority of our CapEx this year as well as what will happen next year, we're all focused on growth opportunities, which is why we feel really good about our growth opportunities in general because not only as we've mentioned, getting good organic growth, but we're going to be able to add and replicate some of our most successful programs into other markets as well as enter new markets completely like Houston. So we believe these are really solid investments.
Brian K. Meyers
Right. So out of the $33 million, about $25 million is really growth related to the lanteran program expansions.
Robert T. Puopolo
Okay. Great. Follow-up question. And perhaps I've missed it. But in previous quarters, there have been discussions about stock repurchase plans and authorizations and so forth and how much has been purchased. Any updates as it relates to that?
Scott M. Shaw
Sure. Well, the update was we didn't make any new purchases. And as we continue to drive, I think, performance, our objective is to drive stock price up through those initiatives. And so to the extent we see greater opportunity, the Board decides that there's an opportunity to buy back stock, we certainly will do that. But right now, we've been using these resources to help fund, I believe, a good solid growth for our company.
Brian K. Meyers
And since we announced the plan, the repurchase plan, we repurchased 1.7 million shares for a little over $10 million.
Scott M. Shaw
Thanks again, everyone. I still wish you have a happy Thanksgiving and a joyous holiday season. Thanks, everyone.
Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.
