American Public Education, Inc. (NASDAQ:APEI)
JPMorgan Ultimate Services Investor Conference Call
November 14, 2012 10:30 am ET
Harry T. Wilkins – Executive Vice President and Chief Financial Officer
Christopher L. Symanoskie – Director of Investor Relations
Jeffrey Y. Volshteyn – JPMorgan Securities LLC
Jeffrey Y. Volshteyn – JPMorgan Securities LLC
Good morning. My name is Jeff Volshteyn. I’m an Education Analyst here at JPMorgan. With us today is team from American Public Education, CFO, Harry Wilkins; and Director of Investor Relations, Chris Symanoskie.
Harry T. Wilkins
Thank you so much Jeff. So we are here today to talk about American Public Education. We always start off with our safe harbor statement, which as you know says that any statements we make that are not based on historical facts are considered forward-looking statements and subject to the risk and uncertainties with those statements. I’ll give you a chance to read that real quick, and then we’ll move forward.
We believe we are really a mission-driven school. We are a provider of postsecondary undergraduate and graduate programs. We have over 87 degree programs now. We were the only school I am aware that was founded by a marine, Jim Etter, who was a highly decorative Vietnam veteran, won purple hearts in the Vietnam War. He got out of the military in 1991. And he decided he wanted to spend the rest of his career help trying to get marines a college education, because the military provides a great benefit tuition assistance, which can basically pay for your college education if you go to the school with low tuition.
But he had struggled with his education in the Marine Corp. and nobody was offering courses online back in 1991 and he wanted to do that. So he got the former commandant of Marine Corps, a four-star General Al Gray, who was commandant on then. He is former commandant now and he is still on our board. Back at our last strategic planning meeting this August with our board, we had Generals with 16 stars between them who were there which is not many other schools can say that.
But anyway, they started American Military University back in 1991. By 1993 they got their first students. By 1997, they were nationally accredited by the Distance Education Training Council. We eventually got regional accreditation in 2006, and we had become the number one provider to United States Military of postsecondary education. We’ve about 20% of the Military market now.
In 2002, we also formed the American Public University system and began offering courses to not just military under American Military University, but also to the public at large under American Public University. We now have over 100,000 students. We also have a very unique programs because of our background with the military. As I said, we have 87 degree programs, so we have some unique courses for military. We were the first school in the United States to have a degree in homeland security before 2001/9/11 we had a homeland security degree. We have space studies. Well, I think we have the only bachelor’s degree in space studies that’s online. We have several astronauts Dr. Alan Hale, who discovered the Hale-Bopp comet is one of our faculty, he teaches from a conservatory in Arizona, he is on our faculty.
The advantage of being online means that we can greatly expand our reach to faculty members. JR Reilly, who heads our science department, is a faculty member who was in Colorado. We have former people from Israeli intelligence, teaching our intelligence studies program living in Tel Aviv. So we could never do that if were having traditional classrooms in Charles Town, West Virginia, you could attract that worldwide faculty. So I think a lot of people who don’t understand online education, fail to give the credence to the variety of people you can attract to your school, so we become a leader in some of these areas.
We teach Emergency and Disaster Management and yet if you look at the pie chart on the lower right hand corner, which we – will give our studies five degree program, over 20% of our students are enrolled in (inaudible) programs. Public service and health is another 20%, security and global studies 17% and then we have traditional courses like business and management, IT education, so we have a great variety of programs and the other thing that’s seen about our school, we haven’t raised tuition since 2001. So because of that we really have created a very low cost high quality product in postsecondary education.
We believe that our tuition is about 20% below the average in-state tuition rate any public university in the country and we really consider the public schools, the community colleges, the public universities as our primary competition. We had unique small class sizes. We have about 16 students per class. We limit class sizes to 25 students per class. We have a very flexible schedule, our classes are offered either eight or 16 weeks in length. They start at the first Monday of every month. You can enroll in class, 59% of our students are in bachelor’s programs, 19% are going for the master’s degree, and 22% are in two year programs, social programs.
As I said we really are committed to affordability. This chart is designed to show you the – our class in comparison with some of our competition. On left side, you can see the undergraduate tuition class, which include books is below our competition. UMUC, which is University of Maryland University College, is the second largest provider to the military. It’s – of course the State school will price below them.
Typical four-year universities were are about 20% below their cost and you can see some of our for-profit competitors were far below their costs at the undergraduate level. At the graduate level, it’s even more diverse. Even though if you put our MBA program for instance, which is 12 course, if you put it against like University of Phoenix, pretty much the same 12 courses, our tuition is far more affordable than their programs.
And yet we have a very rigorous academic commitment to quality. We’ve something called a PAD system, which is our partnership at a distance system, we use data warehouses, dashboards, and we’ve our LMS, our Learning Management System, which we call Sakai is a part of an open source network of software that’s used by other universities also I think we are the largest user of Sakai right now.
But because all of the exchange with students takes place in the electronic classroom, we really can monitor the exchange between students and teachers and measure student outcomes better than traditional education institutions could in the past. So for instance if a student – if a professor doesn’t respond with student e-mail within 36 hours, our computer knows that. Our computer sends an automatic e-mail to the program director saying this faculty member didn’t respond to the students about this e-mail. So we can follow up on it.
We can really monitor our students performance and actually now take those results and perform predictive analysis. So if we can tell a student that did not respond to as many posts in the classroom if they had done historically, that’s a leading indicator that they maybe getting ready to this enroll. We can proactively get engaged with those students, with our student advisors to try to help with our retention.
So when we deal creditors and licensing bodies and we give them reports that they are used of seeing when outcomes assessments we do for our students and our faculties’ performance, they just don't get that information from other schools. So we have over 1,200 automated e-mails and probably another 1,200 reports that we get from our system every day. That really helps us manage the quality.
And then of course, we can make improvements in the systems. We have this feedback billboard, we are constantly getting feedback on our performance of our students, our faculty, we make changes in our curriculum, in our systems, to improve the performance. And after time, you do that day after day, year after year, you really develop a high-quality program.
Our faculty are very focused on teaching in excellence. If you took the résumé of our faculty, we put them up against any universities faculty, they published over 300 books and articles last year, won over 100 academic awards, spoke in 800 conferences. We also have one of the leading library systems in the world. We won actually several awards now for our library system. We have over 120,000 volumes of material available to our students to help with research.
We have 18 full-time librarians who are working 24/7 to help students because we have students in virtually every time zone in the world. So they are doing research whenever they can and they need help from librarians. So, I really think our 24/7 library support system and the volume of material that we can get by the online university, everybody is doing research through the Internet, it makes us a leader in helping provide our students with the academic information they need to do well in the classes.
The other thing that people may not be aware of is that there is a lot of pressure now on educational institutions to justify their outcomes, to show their outcomes. The outcomes assessment has become a kind of a buzzword for the last decade in our business. And the Department of Education is saying, look, we are funding a lot of this education, they are putting pressure on the crediting bodies to say, you need to show us the results where this money is being well spent.
So they’ve developed some standardized tests. We have always – at least in my lifetime I had standardized test at the high school level, SAT test, ACT tests and schools disclose the results. Now there is something called the ETS Proficiency Profile examination, it's administered by ETS, the same center in Princeton, New Jersey that does the SAT test. They are doing the standardized test that universities are giving to their graduating seniors.
So our crediting body requires schools in their region to give this test to graduating seniors. You are not required to post your results, although 1,200 schools do post their results. Of the schools that post their results, our seniors perform better than the national average in every area that they test, all seven areas listed here. As of the last year, we got the results for everybody.
2011 our students were outperforming the national average, which we think is very commendable since the schools included in this like Notre Dame and Northwestern are the schools that are very, very strict in their environment. And we have an open enrollment school. If you have a high school diploma, we believe in giving you a chance to get a college education.
So we think, we put up our seniors results with just about anybody in the country. Because of this, we really won some – just trying to get some national recognition, there is a Sloan Consortium is a group of schools they were traditional schools, but a decade ago when it looked like online education was here to stay, some traditional academic institutions headed by the University of Illinois decided that they wanted to give out some awards for schools that were doing a good job in online learning.
We were the first school for-profit school ever be nominated for a Sloan award. And we were really ordered in 2009, not only where we nominated, but we actually won the award for best practices. The Ralph E. Gomory Award, like the Best Pictures Academy Awards, you can actually only win that award once. We were the first for-profit school to win that. Since then we won several other Sloan awards for effective practice, you can win those every year and we won them in 2009 and 2010.
We really also measure our students experience, we ask the students to give us feedback. 98% of our graduating seniors say that they had a positive experience with us, 96% say that they had it all over again they would come back. We also interview our alumni a year after they graduate, 95% of them agreed that they have – we have met their expectation in their education experience.
We also interview the employers of our alumni, once that respond 99% of the employers who we interview from our alumni say that they would hire another graduate from our school. And while you will see some charts in a moment that show our enrollment increases we’ve had over the last decade, our percentage of graduates that graduate successfully has actually increased higher than our enrollment. So we are doing a better job of retention in getting people through the system.
We just gave us earnings call last week. I’m going over some of the highlights here. We still are been driven by our civilian growth. We have our – if you look at the wheel chart there, you can see that by primary funding source about 35% of our students are federal aid recipients, about 13% are from Department of Veterans Affairs, G.I. Bill students, about 39% are military – active-duty military getting tuition assistance benefits from the Department of Defense and about 14% are paying cash, most of those are corporate sponsored students.
And the growth rates below that, so we grew about 23% for the nine months ended September 30 this year versus the nine months ended September 30 last year. We grew about 23% with our Title IV recipients, 91% with our VA students and about 8% in the military, we were the largest provider, we continue to gain market share there, and about 7% in cash based students. We really have a relationship marketing approach, which is little different I think approach. We want to spend some time talking about that now.
In the pie chart, there you can see about 50% almost of our students are referred to us, we have a great referral rates within the military more than 50% of our military students are referred to as by the people in the military, and our civilian market about 30% to 40% of students are referral. We also do traditional marketing with print ads, we do some TV and radio interactive media. We have a good relationship with Wal-Mart, we have a contract with Wal-Mart which was just renewed for another three years. Wal-Mart has agreed to exclusively market our educational products to their employees in exchange for us giving 15% scholarship for every employee that attends.
They also announced that we're going to start paying us do some of the training for their store managers, which is another area that we really continue to work with Wal-Mart. We have developed a retail management degree which we think is a state-of-the-art retail management program with the help of Wal-Mart who is by far the leading expert in retail management.
We also have the only that I am aware, logistical management degree and reverse logistics rates that's out there. Wal-Mart’s warehouse people are very attractive to that with us. So from our work in the military developing these programs to help military deliver supplies efficiently and effectively, which is logistics that we’ve developed these programs which also serve the corporate community quite well.
Some of the relationships we have, Wal-Mart was our first real corporate relationship which he had three years ago, since then we have about 50 now. We just announced the NFL Players Association. We have a relationship with them, Dollar General, Sundaes Horizons, BAE Systems which is a large defense contractor. All these employers looked at that relationship with Walmart and they said, hey, listen this is a good idea. Right now Walmart is not reimbursing the employees for their education they get with this. They have promised to do that at some point, to have a tuition reimbursement program.
But whether you have a tuition reimbursement program or not, it’s a good deal if you can convince your employees to go to our school, it’s online, it doesn’t usually interfere with their work schedule, and they can get a better trained workforce. And a lot of employers are finding, they need to get their employees training, they need to be upgraded, and some of the course content that we have in logistical management, reverse logistics, which is dealing with recycling materials. There’s very few places you can go and get state-of-the-art training in that.
Counter cyber-terrorism, we have – our IT program and our intelligence studies program is one of the leading programs in the country for educating people how to fight cyber-terrorism, which is a big threat to businesses today. So more and more we’re finding employers who are coming to our schools with a help to educate their own workforce. It’s a good use of their dollars in the employee benefit that they have.
In keeping with that relationship, approach to marketing, we just announced in our call last week that we have entered into a partnership with New Horizons, which is a worldwide IT training company. We actually are a member of a group that acquired the franchise New Horizons worldwide, which has a relationship with over 200 franchisees throughout the world.
They are the leading provider of Microsoft certification courses and also they do a large portion of Cisco certification courses in the world. Their clients are mostly Fortune 100 companies. If you purchase a Microsoft system usually with a contract, there is a training component, and usually Microsoft sends their – sends you to a New Horizons center to get the training.
We really feel that working with New Horizons. We can get our corporate outreach people can work with their corporate outreach people to help serve corporations who many times have a training budget and a separate employee benefit budget for tuition assistance to regional accredited programs.
So by working with them we can put the best program together for their IT professionals. And we have examined our academic spend last six months going through New Horizons top 100 programs and we feel that about 70% of them could qualify for academic credit, if you get an IT degree with us.
So New Horizons is educating our 500,000 people a year with their network of franchises. So those people and there is 2 million to 3 million in the database, many of them have learned courses, which were eligible for college credit with us, they didn’t even know yet. So it's a great source of reference for us. It's a great way to work with them to help serve corporate needs and it's a great way for us to get access to a global marketplace.
We really think because we haven't raised our tuition in 12 years, but our tuition price is very competitive globally now and with our ability to deliver products online, we think that there is a global market for our product. We never advertise globally. We sit there in Charles Town, West Virginia, it’s not that easy for us to access a global market space, but with New Horizons network of international franchises, we think we can work with their corporate sales force to educate people internationally on the opportunities with us to get IT degree online.
One of the reasons we moved to our new LMS, the Sakai system is that we can now offer classes on handheld devices, one of the few schools that can do that. That’s a big issue internationally where we sometimes – before that you had to have a laptop computer and Internet access. Now you have the ability to offer courses on handheld devices just that everybody has a cell phone, not all countries have Internet capability with computers for their citizens, but a lot of them, I mean, almost everybody has a cell phone. So, we really think there is an opportunity here to help become a global provider for secondary education.
So we have some current initiatives that help diversify and build future efficiencies. We really think that 2013 is going to be a year; we were going to see some margin improvement. We have this ePress initiative, which is a really big thing for us, because it really doesn’t impact much of our competition because I think we are the only school that pays for books for their undergraduate students, most of our competition charges for books, but we have historically paid for the books for our students and that cost until this year about $65 per student per class for the text books.
Through our ePress initiative by using more e-books and by actually having some of our professors publish their own textbooks, we’ve able to reduce that cost from $65 per textbook per class to about $48 right now and we think we can get it down to $35 per class next year. That’s a pretty big intuitive for us.
We think we will end up saving about $8 million on an annualized basis from our textbook costs, which for us pretty right through the bottom line. So if we think we get about $4 million of savings this year about $8 million next year. And if you just do the math, about $300,000 pretax income as a penny if you use our share count. So you can see the impact on the EPS that could have.
We also are automating more of our Title IV process and we saw – we went through a period last year where we had a big influx of – I call it like a flash mob of Title IV users. There is – because of our – the way our Title IV program works, our federal student loan program works, students have the ability to sign up for a college and go to class, get money from the government for their living expenses, but not really succeed academically and there is no penalty if you do that in one school and move onto the next, move onto next, as long as you’re a full-time student somewhere, you never really enter repayment.
You have to be at a school for six months before you enter your repayment period. So there is a percentage of our population in our country that actually uses this as a way to get by during tough economic times and we have a very large influx of these students last year, we’ve taken some measures with our computer system to prevent these students from attending any longer, because of this big spend that we made in the IT in processing our Title IV funds, we really think we will be able to develop the ability to process our Title IV funds in-house instead of relying on third-parties to do that.
And we spend about $300,000 a month outsourcing that which we think we can probably do in-house at much lower costs. So, again $300,000 pretax is about a penny, so the potential savings from that in the second half of 2013 is pretty significant. The other thing, even though we haven’t had a tuition increase in 12 years, for the first time we instituted a technology fee increase in September. So it’s a $50 per course technology fee, to help offset the cost of the additional technology we are doing in the class room. We weigh that fee for active duty military and for Wal-Mart students.
But about 50% of our students will now pay this fee in 2013 that we never had before. So it’s an effective 4% or 5% increase in revenue for about half of our students. And again that should help with the margin improvement next year. So you start adding these things up with these new opportunities to expand our enrollment internationally through our partnerships with New Horizon to the corporate partnerships, the partnership will Wal-Mart, which we just renewed. And you add to that the positive impact on margins of some of these improvements and I think we’re setting the stage for a pretty good next year even though we haven’t given any guidance for next year.
So that’s our story, we really think that American Public University can become America’s State University. If you look right now, the situation is at state level. States are getting funding cuts obviously from lands ITs were down, so property taxes were lower. Incomes were down, we are getting less income taxes flowing in and they really can’t cut funding in K-3, 12 educations that much. They can’t really stop repairing roads.
So where states are cutting is funding postsecondary educations, they’re cutting funding to their state universities. The university is responding to that by raising tuition and also by restricting in-stay residents because they can charge more to out of state residents who come in. Now they never say they are doing it for money, they say they are doing it to expand their regional presence or something. But the reality is that, it’s harder if you are a community college graduate, it’s hard for you to get in to your state university. Good luck, going to a community college in Ohio and getting into Ohio State. Good luck, graduating from Prince George’s Community College, (inaudible) Maryland and getting into the University of Maryland. I mean you're not going to get in.
So they've effectively displaced community college graduates many of whom are really good students from getting a four-year degree and we really think that we can fill that gap. That we can go to these community colleges, we started a community college outreach program, we have 12 people doing that now, and we think we can help people who are successful students at community college, get a bachelor's degree because our tuition is 20% below the average in-state tuition at their own state university and we will let them in.
So, the more restrictive the public universities get, the more opportunity for us domestically. These corporate – we now have 50 corporate partnerships, three years ago we had none, that’s a great referral source for us to build our business domestically. This opportunity from the New Horizons’ international franchise is to expand our reach globally is a great opportunity for us.
And then we think that the whole postsecondary education market really is moving online. I mean we show the military – we've experienced, I’ve been in this business for about 25 years now and during my lifetime in this space, the entire adult market has moved online. We saw the military market moved online.
When I first started working with APEI in 2001, about 25% of the people in the military were taking courses online. Now it’s 75%. I think the same thing starting to happen with traditional educations institutions. More and more high school graduates are wanting to take courses online than they go to college, just because continence and the flexibility of it and fewer and fewer schools are in a position to beat that demand.
So as the whole market moves online were sitting there with 87 degree programs, with the most affordable tuition out there and quality programs. So I really think we have the right product in the right place at the right time, the market is moving in our direction and I think it is a good place to be. I’m glad I’m working for this company and not working probably where you guys work.
But anyway that’s our story and we will be happy to answer any questions you may have.
Jeffrey Y. Volshteyn – JPMorgan Securities LLC
Thank you, Harry. Are there any questions?
Harry T. Wilkins
That’s a very good question. Our industry is probably most of you know has undergone a tremendous regulatory scrutiny and new laws have been passed to try to perceive the views as in it. The interesting thing is that they passed all these things, gained full employment, the new marketing rule, we didn’t really change anything that I’m aware of. I don’t really believe we’ve made any changes, because I think that means that we’ve been practicing fairly well all along.
So we’re in favor of the increased regulation, to be honest with you because we really think – we are now in the favor of abusive marketing practices either. We think that brings the whole industry down. We don’t want to be the best house in the bad neighborhood; we want our neighborhood to be a good neighborhood. I still think we will be the best house, but it’s a better scenario for us. So that’s a great question, but we really didn’t change anything because I think we are doing everything right to begin with.
Let me throw one in New Horizons, so you bought the minority stake in the company, I know it’s small investment.
Harry T. Wilkins
How was your position with them different now that you are part owner versus just signing a partnership joint venture of some sort?
Harry T. Wilkins
That’s a very good question. Why make the investment all why don’t just partner with them. We have a very strong balance sheet, we have over $100 million of cash and we’ve been frustrated, of course our board wants us to invest it very conservatively and when you do that with cash these days, you get no return on your investment. So we made a decision about 9 months ago actually the CEO Wally Boston and myself went to board and we said, we like to take about $20 million or $30 million of that and invest it in companies that we think are potentially good investments that will give us a much better return of cash than we are getting with banks and also could refer us more students for our core business.
So this was the first venture, we actually started negotiating with them in January and took till September to actually get a deal done. But we’re part of a group that acquired the franchise or the parent company and gave us access to the franchises. We think it’s a good investment. As part of that investment, we made a $6 million loan, which will get us 6% interest or 5% interest and eventually 6% interest, we are going to get about $300,000 a year in interest income and that’s more than we’re getting in our $100 million we have invested right now.
So we we’ll get a better return on cash. It gives us access to a wide market of potential working IT professionals that we wouldn't have access to otherwise. And our attorneys help with some language in there where you have if things get really well, we may have an option to acquire the whole thing or at some point maybe get out of it, if it doesn’t get well. So we have some things built in that it gives us some options there.
Excuse me. Could you talk a little bit more in detail about how you’re really able to provide your product at such a lower cost than your competition and really even provide products that undercuts non-profit universities?
Harry T. Wilkins
It’s really has been the result. It may not have ever been our intention. It just kind of came to pass. We’ve been in it because we were absolutely committed. Our founder was committed to never having a soldier who had to come out of pocket to go to our school. So we never could charge more than tuition assistance would reimburse. And we haven’t raised tuition assistance since 2001 and we haven't raised our tuition since then. So that's the kind of been our philosophy.
So what we have to do is figure out ways to do things differently. We couldn’t market the same way that we’ve – other schools have historically marketed. We can’t buy leads, send them to a professional sales force where you close one out of a hundred lease. We couldn't do it that way. So we couldn't spend the market cost, how do you do it? Well, you have to develop relationships and you do it one at a time.
One military base at a time, we have military outreach people, one police department at a time, one fire department at a time, one fire department at a time. Over 12 years, 14 years, we developed this resource network, a referral network, now it’s with employers, that will refer us 50% of our lease, it don’t cost us a dime. Because we – everyday made relationships that benefit us, the referral students and that’s how we’ve really got up from a marketing standpoint.
From an academic standpoint, from an administrative stand point, we needed to automate things. But we couldn’t do it by not having a system that had 1,200 automated e-mails. So if you’re six months from graduation now, our computer recognizes that and sends you an e-mail explains everything about you need to know about the graduation. I just worked at a company called Strayer Education, we had a whole graduate department that spent time contacting students how do you get your (inaudible), how do you get your caps and gowns, how do you get your diploma. Our computer does it now on its own.
So we have this PAD system, Partnership At a Distance system is our internally generated computer system, our finest department, currently that I’m head of, has 235 request from them on system improvements that we need to make, that we’ve seen what works, what doesn't work, our student services do the same thing, we monitor the questions that we get from students. When students have to call and ask a question about something, and it happens frequently enough, we automate that, so that they can get that information from the Internet or it’s automatically sent to them.
So it's just that over time, we’ve built this automated system for providing the administrative services more efficiently, delivering your books more efficiently, getting new student advising more efficiently, evaluating our faculty more efficiently. Most schools have people doing that and we don’t. So it’s in every area whether it is marketing, whether it is processing [information] student advising, textbooks, every area we just had to get more efficient because we didn't want to tuition, we were committed to not doing that.
Our competition in the meantime, it was easier for them to just raise tuition 3% to 4% or 5% a year. While you do that for a decade and they really separate themselves. Our price differential, it’s just built up over time, it hasn't been something we decided to do next week, we haven’t had to cut any of it.
I believe you recently launched the nursing program. Could you just talk about what your expectations are there and why nursing and sort of how big could it be?
Harry T. Wilkins
Yes, well we’ve never – there is couple of things that are missing, even though we have 87 degree programs. Again, it goes back around military, there was a couple of things the military like that we don’t offer, we don’t have engineering programs right now, we don’t have any medical programs right now, I hope we didn’t. So nursing was an area that we identify because the other thing that’s happened in nursing with the whole Obamacare I thing, a lot of states are now requiring registered nurses to have a degree. So we have a [RN2BS] degree.
So if you are a registered nurse, we can help you get a bachelor degree online, which many nurses now need to be able to get a job at the hospital. And that’s how you just assess the market need, we think this will lead us more into down the healthcare path and looking at future programs we are designing to try to access more of that healthcare market because 12% of the people in the military actually work in the healthcare profession and whenever we rollout a new program, we have kind of a built-in market for it in the military, we have a great presence, great recognition in the military. If we rolled out our engineering program, those people in the military would love it, aeronautical engineering particularly. So we have these looking forward with our strategic plan, we have a number of programs we want to rollout particularly to meet a need that’s not being met and we are working on it. That’s just one of them.
In the past you’ve talked about being sort of an online enabler for other institutions willing to go, interested in going online, can you update us on that effort?
Harry T. Wilkins
That’s a great question. What’s really happening now is that other institutions are seeing the need to offer courses online, students are demanding it and one of the things that’s happened with us in the last 18 months, I would say is that we are starting to see students who come to us, who have – who transfer from other schools. They really get enthused and stay for three or four courses and they leave, well, we started to say, why are they doing that.
So we started to look into it, and we found that these were students who really were going to other universities, they may have been going to high state university, but they wanted to take some courses online and they counted for credit at their school. And their school didn’t offer them. So we’re starting to get a lot of these students who are that’s more of a blended model. They may want to go to their state university, but they also want to take courses over the summer, Saturday’s and Sunday’s and whenever they have the time to do it.
And they can do that with us, so I think that a blended model is something that’s going to be a big market for and we can work with other schools that have traditional classrooms because we can provide the online instruction better than they can. Basically, we’ve been doing it longer. So, in the first attempt to do that, we actually have a relationship now which we announced with Shepherd University which was a university of about 5000 people in Shepherdstown, West Virginia. And they’re going to, we’re going to help them put programs online. They are going to use our LMS or learning management system to host their online instructions.
They’ll be doing all the instructions, we take their content, its their content. We load it in our system and we put charge on the fee for doing that. I think there is an opportunity to do that. There is other people who are starting to enter the market, that aren’t educational institutions that are offering to provide that service to schools at a very prices. So I really think that eventually if we wanted to we could spin off our IT department and we could be one user and other schools to be used, they could be kind of revenue center, but I mean so many opportunities right now for us. We are not totally focused on that. But I do think we’re kind of moving in that direction, I think partnering with other schools is a great way to start moving in that direction, we’ve started that now.
Is pricing announced in there close to your tuition price and why it is discounted or is it more of a technology fee?
Harry T. Wilkins
Well, the events – these schools are charging so much more tuition that they can afford to give us some of that to provide the service to them. So it’s a fee of the services to them, so it’s a fee of the service is what that’s leading to it and each one is going to be kind of individually negotiated and we have to figure out how to do it ourselves, we’ve never done it before either and we really know what’s it really going to cost.
So I mean, that’s why we are starting on kind of small school. And I think there is really a market for these kind of second tier schools if you will, not presenting bad about them, but these schools of 4,000 or 5,000 people they really don’t have the money to invest in the technology to launch online courses. Those are real market there that we would help serve that need. And we certainly have the excess capacity in our system to help do that.
With regard to the fiscal cliff…
Harry T. Wilkins
With regard to the fiscal cliff, what would be the impact on your business directly and indirectly and particularly I’m focusing on cuts, automatic cuts in the education budget?
Harry T. Wilkins
Yeah, I mean, it remains to be seen of course, we don’t know what the impact will be. I’m not aware of anything that a couple of – let’s got about two years ago now when they have the marines, it was last year, last year I guess. There was some indication that the military is going to try to cut tuition assistance, which is the main benefit that they used to recruit students. And the marines actually announced they were going to do that. Personally, I don’t think they were going to cut it by 25%. We are not really convinced there will that much of an impact on us, if they did that because there is other benefits available, active-duty military personal, if they’ve been in active duty for two years are eligible for G.I. Bill benefits even though they are in still active-duty, usually they wait till they get out of military to take advantage of it, but it’s there.
And I think what happen when that – when marines announce that and then we send it two weeks later, I think people in the government realized, hey, wait a minute, why are we going to cut tuition assistance, this is the primary way we recruit people into the military. We need to recruit 3,100 people a year in our military. This is the prime method to do it. Are we really going to cut that benefit, but it doesn’t really save the (inaudible) money because the students will just use their G.I. Bill, Department of Defense won’t pay it, the G.I. Bill will fund it and there is nobody talking that I’m aware of about cutting veterans benefits. I mean that would be political suicide, I would think and I am wrong for us to do this. The veterans have fought the longest war in our nation’s history and after they fight that we are not going to takeaway the benefits we promised them.
So, if it doesn’t save any money from the Federal budget, if they are just going to take the tuition assistance reduction (inaudible) fund that doesn’t save money to do it. It hurts your recruiting efforts why would you do it. So I’m not aware of anything, we’re three months almost into the new federal fiscal year. I haven’t heard anybody say that they’ll cut tuition assistance. I haven’t heard anybody say they’ll cut veterans benefits.
As far as cutting Department of Education funds, our students – I almost wish they would lower the limits that people can borrow. We are not allowed by law to limit the amount that people can borrow to go to our school, even though our tuition is so much below the federal borrowing limits. You can reduce the federal borrowing limit quite a bit and people can still go to our schools. So if they reduce that money that students can borrow, it really wouldn’t hurt us that much at all because our tuition is so well.
Similarly Pell Grants, really very few percentage of our students are Pell recipients, most of them are working adults. So even if they cut Pell, which I don’t think they would do politically either, I don’t think that would hurt us that much. So I’m not really aware of anything at this point that has been proposed, that would really hurt us that much, but we would react to it in the way we always have reacted to any changes.
And just getting on to the other thing, Pell is safe from the first round of cuts. We’re going to have as an advertisement, we are going to give about here 2.15 and we are going to go through details of what might go in the fiscal cliff, what might be guarded and what might be say, so come back by 2:15. May be it actually comes after (inaudible).
Harry T. Wilkins
It was a question over there I think so. Okay.
Harry T. Wilkins
Yeah, we have full time, we have 450 full time faculty and we have 1,400 part time faculty. So I think that’s a good mix. The part time many of whom are working is also they give us a good practical application in the classroom. Our full time faculty have the academic quality of any universities faculty and they give us academic credibility. They develop our treatment. They keep us turn and quality education. So I think it’s a good mix to have both.
Jeffrey Y. Volshteyn – JPMorgan Securities LLC
Any last minute questions?
Harry T. Wilkins
I think we’re on…
Just curious you mentioned there the kind of traditional schools moving on line. You view the impact of competition as more and more schools, I agree more education is going on line, but as more traditional schools come online is that not limit your potential base of students and cost rates on the enrollment side of things.
Harry T. Wilkins
Yeah I mean it remains to be seen. Certainly we had competition before I think well this will be moving from one set of competitors to another. But I think we can put our quality and our price against anybody. You have to look at the price too, our price is so far below everybody else’s. They have these things called MOOCs now, massively open online courses that Stanford offered and MIT offered.
We will actually have a consultant with us to be hired to attend these courses and the academic quality was far below what you would expect to be honest from the schools, but I think there is going to be more movement in that direction. And we’ll be at the forefront of it. If there is a movement for massively open online courses I would love that. If we had one faculty member for a thousand students that would be our margins are going through the roof.
So I think we are aware of everything that’s going out there and with the trends on I think we will be able to compete effectively partnered with schools when we can because we can do the online stuff better than they can. They can do the classrooms teaching better than we can. But we can do the online teaching better than they can. And we we’ll compete with them.
Jeffrey Y. Volshteyn – JPMorgan Securities LLC
Okay, thank you very much guys.
Harry T. Wilkins
Christopher L. Symanoskie
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