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American Public Education, Inc. (NASDAQ:APEI)

Credit Suisse 15th Annual Global Services Conference

March 11, 2013 4:30 pm ET

Executives

Harry T. Wilkins - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Kelly A. Flynn - Crédit Suisse AG, Research Division

Kelly A. Flynn - Crédit Suisse AG, Research Division

All right, we're going to get started with American Public Education. Here presenting on behalf of the company is CFO, Harry Wilkins. And I'd like to thank you for coming. And I'll turn it over to you, Harry. Thanks.

Harry T. Wilkins

And thank you, Kelly, and thank you all, for coming today. American Public Education, Inc. is an online education provider. We own American Public University System which has 2 brands, American Military University, American Public University. Our Safe Harbor statement, which I'm going to leave up there for a second, for everybody to read.

As far as investment highlights go, we really think we're a premier market leader, with very strong academic reputation, which we'll talk about in a few slides. We have a very effective, low-cost platform for online delivery. We haven't raised our tuition since 2001. We really feel that's enabled us to be far below our market. We have a slide, we'll show you -- that shows our tuition's about 19% below the average in-state tuition at most public universities in the United States, and that's what we perceive to be our primary competition, are community colleges and public universities.

We have significant market expansion opportunities. We've developed corporate relationships, which can drive our growth, I think our partnership with Wal-Mart, which we'll talk about. We have an opportunity to work with other education institutions. We've been approached by education institutions to help take their programs online. It seems like many schools are trying to take their programs online now, and nobody can really understand how come we have such a high-quality program at such an affordable price. And rather than try to emulate that, they're coming to us to ask to partner with us or have us help us them take their programs online. So that opportunity to become a school as a service, we think, is a good opportunity for us going forward.

And we like to develop partnership relationships as we have throughout the military, we have with other corporate partners. We also think we have international opportunities. We made our first significant investment in another company last fall with New Horizons, which we think is the world's largest IT training company. We bought a 20% share of their franchisor, their franchisees operate in 70 countries with 300 franchises. They educate about 1 million students a year in Microsoft training and Adobe training, and we think that will be a good platform for us to use to perhaps roll out certificate programs to other working adults in other countries. We also have -- or are anxious to expand our program offerings. We have 87 degree programs right now, but we want to expand in other areas like healthcare, engineering programs, where we don't really have much of a market right now. And we think those market segments can be very good opportunities for us.

So as we diversify to drive our future growth, it will mitigate some of the risks that we'll talk about, in having our current company, which is funded about 80% by the federal government, and we'd like to expand that to more cash-paying students and corporate partners and international students. We have a very strong balance sheet. We have over $120 million in cash. We have no debt at our holding company.

So as I said, APEI is the name of our holding company, it owns American Public University System, which has 2 brands, American Public University and American Military University. According to Eduventures, we are the second-largest fully online university. We're ranked 22nd by US News and World Report, for whatever they rank based on, I guess, we're not quite sure, but in the country, we're ranked #22nd by them. And we are poised for expansion. There's a lot of niche opportunities and high-growth opportunities. We have an asset-rich platform. We have a great faculty. We have a great Learning Management System, our Sakai system. We have our developed and patented PAD system, which is our administrative software system. All of which are very scalable. All of which enable us to generate significant free cash flow from our operations, last year about $60 million or $70 million is what we plan on generating from our main company, that we can use to fund our future expansion.

We have a history of -- I won't give you our whole history of our country, but we have a very strong history in the military, which has led to some interesting developments with the sequestration issues that we'll talk about in a second. We are founded in 1991 by a marine. I don't know how many universities have been founded by a marine, but we were founded by a highly decorated Vietnam veteran, James Etter. When he got out of the Marine Corps in 1991, he wanted to dedicate the rest of his life to helping marines get a college education. He had gotten his education in the Marine Corps and he found it to be very difficult. Because in those days, nobody was doing it online. He wanted to have an online university, he got the Commandant of the Marine Corps at that point, Al Gray, a 4-Star general, who's still on our board, 85 years old now, to help him. And they start -- they developed American Military University, had their first students in 1993, got nationally accredited in 1998, and then achieved regional accreditation in 2006, rolled out American Public University, and really started out with that strong military base and now have grown to 127,000 students, I think, is what we reported on our last call, over 100,000 students and growing.

The interesting thing about our company right now is that we get about 38% of our revenue from Tuition Assistance, which is the benefit that active-duty military get. We're #1 provider of post-secondary education in the United States military by far. There's nobody really that close to us.

And of course, last Friday, for the first time, to everyone's surprise, the Army and the Marine Corps announced last week that they were going to cease Tuition Assistance benefit to our soldiers until this whole budget issue could be worked out. We don't know if the other branches will follow suit, we filed an 8-K to that effect this morning and announced those $15 million additional stock buyback this morning. But the reason -- I mean, we're kind of incensed about it, not necessarily from a professional standpoint, but from a personal standpoint, as Americans. The Tuition Assistance is a great benefit to our soldiers, it's a benefit they are promised when they're recruited. That's how they recruit soldiers. They say, we'll give you a job then we'll pay for your college education. After our soldiers finish fighting the war, the longest war on our nation's history, to take that benefit away is really disgraceful, I think. And the fact of the matter is, the soldiers have other benefits. They can use their VA benefits, they can use Department of Education benefits. Most of our soldiers doing their first 4 years of serving the military are so poorly salaried, so poorly compensated, they're actually eligible, many of them for Pell Grants, which is also free money.

So the soldiers have other sources of funding available to them, we think they'll utilize that to make-up for their Tuition Assistance. But again, that doesn't save the government any money. So the whole thing, I'm not sure how much of it is political. It's not really going to save the federal government any money, the soldiers will use their VA benefits. But to take away a benefit that you promised to our military, after they fight for you, is pretty despicable. And I hope there is some push back and that they won't -- they will have to rescind this order to stop funding TA.

Back to our kind of unique DNA. We really stress access and affordability. We really want to make a high-quality education available to people and keep it at a reasonable price. We can access our programs 24 hours a day, all of our courses are currently online. And as we'll talk about in a minute, we have 87 degree programs, very diverse programs, including Liberal Arts. We're one of the few schools in the United States that have a totally online Liberal Arts program. You can major in Philosophy or English with us. Very few for-profit schools offer those -- that kind of curriculum.

We're dedicated to a high-quality academic staff and faculty. We have been recognized for best practices, we'll talk about that in a minute, and won a lot of awards. One of the things people I don't think really realize about an online university is, the diversity that you can attract in terms of faculty, and even students. So if we have a class in Intelligence Studies that we teach, we can have a faculty member, who is the head of security, a former head of security of Israel, is on our faculty, and he could be teaching a class where there's 8 people in the FBI and 8 people from the CIA and 4 people from Army intelligence. And they're in an environment -- and they're sharing information about counter-cyberterrorism or whatever the topic is that week, and that's just a rich, learning environment. You really can't create that anywhere else. You're not going to get that from the local community college. Where -- if we were in Charles Town, West Virginia -- if we had a class in Charles Town, West Virginia, the people had to commute to, we couldn't attract that quality of a person. We teach Space Studies, we have 4 astronauts in that program. We have Dr. Alan Hale, who discovered the Hale-Bopp Comet, he's one of our instructors. He lives here in Arizona on a mountaintop at his observatory. But he teaches every week in our school, and you couldn't attract that. So online learning, that's why I think people are starting to recognize what a quality education product it truly is. It's actually a better product than you can get in a traditional classroom because you just can't get that type of faculty physically to be there 3x a week.

We talked about cost. We really think it's a differentiator with us, since we haven't raised our tuition since 2001. On the left side of your page is our undergraduate tuition compared with a lot of our competition. We are about 19% below the average in-state tuition rate at every university in the United States. At the gradual level, it's even more diverse. We are about 33% below the average in-state cost for a degree in a public university, and we're far below our competition. We really think the timing is right. In this economy people are really looking -- and for the first time, really at our nation's history, at how much education really costs. Prior to this, people were kind of cost-insensitive about their education. You decided where you want to go to school, you figure out how to pay for it. Now we keep -- we think people are focused more and more on cost. We also think we have a growing high school market that's going to move to education online when they go to college and they're going to be very cost-conscious.

And if you're talking about a university, why do we think American Public University can become America's State University, basically? It's because of the -- neither the affordability and accessibility of our product, but because of the uniqueness of our programs. We have 87 degree programs up to the Masters level. We teach -- we're the first school in the United States to have a degree in Homeland Security, we teach Space Studies, Emergency and Disaster Management. We teach Liberal Arts. Because of our relationship with the military, we teach Explosive Ordinance Disposal, we teach Asymmetrical Warfare. Those are the things you're not going to find at your typical university. But then we also teach traditional studies. So the pie chart on the lower right shows the breakdown, about 21% of our students are in Liberal Arts, but also about 17% are in Security & Global Studies, and then 27% are in Business or Management. So we have a very traditional breakdown.

The -- well, the chart on the left shows our -- by degree, we have most of our students from the bachelor's program, about 18% are in their master's program, and about 23% are going for an associate's degree. We have small class sizes, average about 16 students a class. We don't even have classes larger than 25 students. And again, with a very flexible class -- as classes start the first Monday of every month. They're either 8 or 16 weeks in length, and we have very engaging and enriched curriculum. We're -- our Sakai system now enables us to offer classes on handheld devices, which is very unique, and we'll need that when we go to an international market for our product.

We try to have continuous improvement. This slide, which is probably tough to see from a distance, but it really talks about how we have this whole evaluation process, both the academically and internally, is how we get more efficient by enhancing our system, and have this cycle where we make changes, we rollout new programs, we automate changes. We have about 1,200 automated e-mails for our students, our PAD system, Partnership At a Distance, is our in-house system that's patented.

So the system itself -- because all the interchange between the faculty member and the student takes place in a computer, the computer itself can monitor how things are going. If a student's grade-point average falls below acceptable level, the computer realizes it and notifies the student adviser to contact the student. If a faculty member doesn't respond to a student's email request within 48 hours, the computer knows it and notifies the program directors that one of their faculty members isn't being responsive to the student.

So we notify the students 6 months before graduation. We send them an email that tells them everything they need to know about graduation, how to get their cap and gown, how to get tickets.

So the student doesn't have to contact us, so there doesn't have to be a lot of interaction with people, it makes for a very efficient and effective way to offer education.

This slide, again, is probably hard to see from the back, but it talks about our focus on teaching excellence. I won't spend too much time talking about this. We have faculty members that will talk about this all-day long. But our faculty are world-class, they certainly have the same qualifications, if not better, than faculty at any university you come across in our country. And we have really a world-leading e-Library system. Our library system has won awards. We have, I think, 18 librarians now working over 24/7. They live in different time zones, so they're always staffed. Over 120,000 books. Most people do their research online now, and in our library, we put up against anybody's in the world.

So we have strong student outcomes. We were really the first school that I know of -- when our current CEO took over from the founder in 2005, he said, we're going to put our student outcomes on the web for everybody to see. And we thought he was crazy, good and bad. But that concept of student outcomes and making them available to people has really driven our -- us to become a leader in this whole area in academics.

And maybe some of you aren't aware of it now, but there are actually standardized tests for college seniors now, just like we have SAT tests for high school, juniors and seniors. We now have a standardized test for college seniors and it's called the Proficiency Profile. It used to be called the MAPP, Measurement of Academic Proficiency and Progress, now it's called the Proficiency Profile. It's administered by ETS, and it's a nationalized test and this chart shows the results for the last 5 years combined by the schools who report. Over 1,200 schools report. Our accrediting body requires us to report it to them, but not all schools publish their results. But of the schools who publish their results, these are the 7 areas that they test, and over the last 5 years, our students have beat the national average in every area that they test except math, we're about even with the rest of the country in math. But we think that's pretty significant because we're an open-enrollment school. If you have a high school diploma, we believe you should have a chance to get a college degree.

Most of the other schools who report are restrictive in their enrollment. I mean, Notre Dame is in here and Northwestern, yet very traditional schools. And our students do very well, in comparison with the test that we give them at the end.

In addition to that, we won a number of awards. We've gotten recognized by our peers. There's something called the Sloan Consortium, which was made up of traditional academic institutions that got together when online learning first became -- it became evident it was going to stay. A bunch of traditional institutions led by the University of Illinois said they would give awards to schools, they would look at the quality of online learning and give awards out.

The Sloan award -- the Ralph E. Gomory Award from the Sloan Consortium is the preeminent award, it's like the Best Picture in Academy Awards. We're the only school, for-profit school that has ever been nominated for that award. And we won that award 2 years ago. You can only win it once, but we have -- so that's acceptance by our traditional academic peers, that we had really, in that year, the best online program in the country. We won several other Sloan awards for effective practice since then. You can won those every year, and we won them just about every year that they've been offered.

We really try to create a positive student experience. We survey our alumni at graduation and 1 year after they graduate, 96% of our alumni said that we met their expectations, 94% said they would recommend us to coworkers, 99% -- we survey the employers of our alumni a year after our alumni graduate and 99% of the employers that we survey respond -- say that they will hire another one of our graduates, and 98% say they would recommend us.

And now you'll see some charts in a moment of our growth, but our growth of graduates has actually exceeded our growth of income, which shows, I think, we do have a quality program. We have some student testimonials. The thing to point out about these is that 50% of our graduates return for a second degree with us. I'll put that stat up against any school in the country. That's pretty amazing. It was 45% when I was here last year, and I kind of alluded to the fact that I don't think it will ever get higher, and it actually got higher this year.

Over 40% of our students are referred to us by others. Our students or companies that we work with, which really helps keep our marketing costs low, our marketing costs are among the lowest in the industry. People always ask us, how do we do it? Well, 40% of our students are referred to us. We don’t have to spend any money to market to them. And they try to be your best students, too, usually in the long run.

So there's benefits of trying to grow in a quality way. Our nontraditional marketing, the fact that we have relationship marketing really helps us develop these relationships like we made an investment in the New Horizons that I talked about, where they have an international network of salespeople working with working adults, educating them and over 1 million a year in changing technology. We want to work with them so they can refer us students to -- that want to continue and get their degree, or certificate programs, which we're getting ready to rollout for students who just need some job skills to get a better job and then go back and get a degree.

So partnering with companies like that, partnering with Wal-Mart, where we're actually doing some training now. Wal-Mart's paying for us to train some of their store managers this year. We already have an exclusive education relationship with Wal-Mart. Wal-Mart will not market any other school for their employees other than our school, and that's developed into a good, long-term relationship. We're on our fourth year of that partnership with Wal-Mart.

They like our Retail Management program. They like our Logistical Management program for their warehouse people. Those unique programs, like Reverse Logistics and Logistical Management, is why we have that relationship with Wal-Mart and BAE and some of the other corporate partners that we have. These are just a list of -- kind of a random list of some of the corporations that we have existing partnerships with. But again, I would say on the right side of the page, Wal-Mart, which is the largest U.S. private employer, we have a relationship with them, New Horizons, which we think is the world's largest independent IT training company, we have an exclusive relationship with them, and now over 250 community colleges. What's happening in the U.S. is the public universities are under a lot of pressure, pricing pressure, because states are cutting -- getting their budgets cut with income taxes and personal property taxes and land taxes being less, they have to cut somewhere. They can't cut funding K-12 education. So they have been cutting, funding post-sector education. Well, the universities have responded by raising their prices, which is good for us because we don't raise ours. Or by, having more out-of-state people come and restricting in-state residents, because they can charge more to the out-of-state people. So the in-state residents don't have any place to go, so community college graduates throughout our country, they really can't get into their state universities most of the time now. So we really think American Public University can become America's state university for community college graduates who want to get a bachelor's degree and are willing to go online. I mean, we really are a better choice. We're 20% below in cost -- the in-state tuition cost, at their own university, plus we'll take them in and they probably can't get in the university.

Here's a really good-looking picture of our executive team. Let's get through that one. And then we have these charts that go up into the right like, most other companies would like to have. We have these and I think we have a good history of growing the business. The thing to focus on, though, that I really think our management team is now focused on, is all of this growth for the last 5 years has come from APUS, which APEI's really largest and only subsidiary. We really realize now, that's the subsidiary -- all this money is 80% funded by the federal government. We really need to diversify away from that. That's why we made the first investment that we made in that partnership with New Horizons last year. That's why we have the corporate partners that we have. We really want to build that cash-paying student base, we want to have APEI become a global education company, not just a preeminent online university as we have been. This company can continue to grow and hopefully, can continue to generate the $60 million or $70 million of cash flow a year, that will fund the growth of APEI's business to expand in other areas, maybe acquire other schools. What's happening is as the valuation of public education companies have actually come down over the last couple of years, the valuation of private education companies has also come down. And we think now there are some intriguing opportunities for a school like us to acquire programs we don't currently have, rather than have to build them ourselves from scratch. If it's a nursing school, if it's a PhD program, if it's an engineering school, where we really don't have a big niche right now. We think there's an opportunity for us to use our balance sheet to acquire some schools like that, and then work with them to have synergies and grow their business and ours.

So we have some attractive opportunities ahead. I actually wanted to leave some time for questions, so I'm going to end the presentation now and open it up for some questions, before we have to move on. Yes?

Unknown Analyst

Just centered at the partners, with community colleges, are those partnerships that American Public has, or ones that you established through New Horizons?

Harry T. Wilkins

No, those are partnerships with American Public University Systems. We have 13 full-time community college outreach people, and all they do is visit community colleges. We've actually signed agreements with 250 of them, articulation agreements, saying that we'll accept their credits with degrees with us, and their career councils will refer us students, allow us to attend their career days. That's about 15% of the total community colleges in the U.S., but it's a pretty good start. We didn't have any 3 years ago, and now we have 250 that are signed up and referring us students everyday. Any other questions? Kelly?

Kelly A. Flynn - Crédit Suisse AG, Research Division

Yes. Can you talk a bit more about the Army and Marine TA cuts? I know you said that soldiers have access to other funding sources, but do you expect it to disrupt your enrollments? Or any other color on the impact of the outcome?

Harry T. Wilkins

Yes, right now about 20% of our students are Marines or Army personnel. And interruption in Tuition Assistance, it could impact their enrollment. It's hard to say how much it impacts them. But in the marines' case, marines take about 2 classes a year. So if you interrupt the marine for 2 months, it may or may not be that disruptive overall. But certainly, we think there will be a portion of our revenue base that gets deferred until the students apply for VA funds, which takes about 6 weeks, if that's what they intend to do, or apply for Department of Education funds, which takes maybe 30 days for them to get a Pell Grant. So we think that right now, yes, those are advising students -- troops to use other means to continue their education. And most people in the military want to get educated in the military because it helps them get promoted, you can't really make a sergeant if you don't have an associate's degree. You really can't become a commissioned officer without a bachelor's degree. So if you want to get promoted in the Army, you need a degree, and then if you're getting ready to get out, if you're thinking about getting out of the Army, it's certainly a good idea to complete your degree while the government is paying for it. So there's a lot of students in the military that want to go to school. They're going to continue to go to school somehow, and the government's going to pay for it somehow, which makes the whole thing as ridiculous. Because VA funds are still federal funds, the Department of Education funds are still federal funds. It's just the fact that it's not the Department of Defense, it doesn't really save the government anything. So hopefully, when people realize this -- they're actually some legislation that was introduced today, is my understanding. Congressman Mike Fitzpatrick introduced some very sensible legislation, just to show what a little impact TA has on the total defense budget. His proposed legislation is to reduce our foreign aid to Egypt by 25%, which would fund the entire cost of providing TA to our military. We pay each of about $2 billion a year. It costs $500 million for us to educate soldiers. You can cover that cost -- we spent $1.5 billion in foreign aid to the Republic of Congo. So you're not going to cut that, you're going to cut the benefit you promised to our fighting soldiers? It's really disgraceful. With no other questions, we have a breakout room, it's the...

Kelly A. Flynn - Crédit Suisse AG, Research Division

Pinot.

Harry T. Wilkins

I'd rather have you pronounce that. Thank you, everyone, for attending.

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