National American University Holdings, Inc. (NASDAQ:NAUH) Q1 2017 Earnings Conference Call September 29, 2016 11:00 AM ET
Adam Prior - The Equity Group Inc.
Ronald Shape - Chief Executive Officer & System Interim President
Lynn Priddy - Provost and Chief Academic Officer
David Heflin - Chief Financial officer
Dallas Janes - Van Clemens & Co Inc.
Greetings for the National American Holdings University Fiscal 2017 First Quarter Conference Call. At this time all participants are in a listen-only mode. An interactive question-and-answer session will follow the formal presentation. [Operator Instructions]. Also as a reminder, this conference is being recorded.
I would like to turn the conference over to your host Mr. Adam Prior of The Equity Group. Please go ahead.
Thank you and good morning, everyone. Thank you for joining us. Yesterday’s earnings release is available at the Investor Relations section of National American University’s or NAU’s website at www.national.edu. You are also welcome to contact our office at 212-836-9600, and we would be happy to send you a copy.
In addition, a recording of this call will be made available at NAU’s website for the next 30 days. National American University Holdings, Inc. also has an accompanying slide presentation available in PDF format on the NAU website, which we will reference on this call.
Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contain certain forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve certain risks and uncertainties that may affect the business prospects and results of operation of National American University Holdings and such risks are detailed in the company’s filings with the Securities and Exchange Commission.
Regarding the disclaimer language, I’d also like to refer you to Slide 2 of the presentation for more information. Specifically, the company expects to file its fiscal 2017 first quarter financial results on Form 10-Q tomorrow, and encourages all investors to read through all the company’s filings with the Securities and Exchange Commission for a thorough review of NAU’s business and financial results.
Let me note a brief disclaimer that the company operates in two business segments: the academic segment, which consists of the undergraduate, graduate, and doctoral education programs, and ownership in and development of multiple apartments and condominium complexes from which it derives sales and rental income. The academic segment is where the company derives the largest portion of its business revenues.
For the fiscal – company’s fiscal 2017 first quarter, the academic segment generated revenue of $20.8 million, and the company’s apartment and condominium segment generated 298,000 in revenues.
With that, I’d now like to turn the call over to Dr. Ronald Shape, Chief Executive Officer of National American University Holdings. Please go ahead, Dr. Shape.
Thank you, Adam, and welcome, everyone. I would like to take a moment to recognize several of our executive leadership on the call this morning; Dr. Lynn Priddy, Provost and Chief Academic Officer; Dr. David Heflin, Chief Financial officer; Dr. Bob Paxton, President of Strategic Initiatives and External Relations; Mr. Anthony De Angelis, Chief Information Officer; Mr. Joe Sallustio, Vice President of Marketing and Enrollment Management; Mr. Paul Sedlacek, Chief Compliance Officer and General Counsel; Mr. John Woolsey, Vice President of Human Resources and Development; Mr. Michael Johnson, Director of Military Support Services. In addition, we have several other leadership individuals from across our system.
During this morning’s call, I will discuss our investor highlights, provide an update on our key business strategies. Dr. Priddy will provide an update on our academic initiatives, and Dr. Heflin will provide an update on our financial performance and focus. We will then conclude with a question-and-answer session.
Beginning on Slide 3, we highlight some of the strategic initiatives that we are focused on for fiscal year 2017, and provide a brief outline of our enrollment results for the first quarter. One of the key initiatives that we have been working on over the past several months is the expansion and development of our international student population. In particular, we continue to focus on our expansion into Canada and have provided some additional details as to the funding eligibility and approval status by province.
As noted on Slide 4, we have received approval in eight provinces, which allow students to utilize Canadian financial aid when they enroll in NAU’s online degree programs. While we are very pleased with the approvals that we have received across the eight provinces, we continue to work diligently to ensure our policies, processes and procedures comply with the provincial and Canadian aid systems. In addition, we continue to work with other institutions across Canada to support their graduates who may wish to transfer to NAU and complete an advanced degree.
Next, we continue to see the impact of the institutions that have either closed or significantly reduced their footprint. As you can see on Slide 5, with very few exceptions, there has been a substantial impact of closed institutions across our markets. In particular, Indiana and Texas have seen the largest reduction of institutions, and we continue to work diligently with a multitude of agencies to support students who may have been displaced in these markets.
We have map programs from closing institutions to programs at NAU, develop transfer and articulation agreements created a specialized team to work directly with students on transfer options. We have had teams visit campuses that are closing to meet collectively and individually with students to provide them with information on NAU.
We have identified core substitutions, where appropriate to maximize transfer credit and provide scholarships to help students finish their degree with as little impact as absolutely possible. Many of these students are deciding whether to finish their degree versus options to have their federal student loans forgiven. We will continue to provide these students with the information they need to make an informed decision accordingly.
As noted on Slide 6, we continue to see mixed results on our year-over-year student enrollments. We are pleased with the growth in our continuing education and workforce development efforts in the 119% student enrollment growth in this category. Likewise, we continue to be pleased with the growth in our graduate and doctoral student enrollments.
Our graduate students enrollments were up 28.9% over the same period last year and our doctoral student enrollments were up 3.9%. Our undergraduate and diploma enrollments were down 19.7%, resulting in a total student enrollment decline of 16%.
Slide 7 provides the actual historical student enrollment by credit hour comparison, as well as the current projected enrollments for fall 2016. For the fall, we’re anticipating 61,875 credit hours, which would result in a 7.1% increase over the summer term and a 14.7% decrease over the same period last year.
As we consider the impact of our enrollment pressures and the actions we have taken to minimize those pressures, I wanted to share a new slide that I hope will provide additional insight. As noted on Slide 8, we realized the greatest impact on enrollment declines during the 2014, 2015, academic years, with the peak occurring in the winter term 2015/2016.
As we have shared in previous calls, starting in December 2015, we launched a new system-wide enrollment training initiative, launched several new academic programs, improved the performance metrics around our marketing spend, invested more in social media and implemented new strategies around student persistence and retention from data we gave – we gathered in participating in the Higher Learning Commission’s Persistence and Completion Academy.
We believe the combination of these efforts are producing the desired impact we would like, albeit not as quickly or as significant as we would all like. But regardless, as the chart indicates, we are seeing improved declining enrollment numbers.
Slide 10 illustrates the geographic footprint that we have developed over the past several years. Although we remain committed to our geographic footprint model, we continue to closely analyze the sustainability of each of our physical locations. During fiscal year 2017, we will continue to monitor how our student population utilizes our physical locations; how interaction between students, faculty, and staff at those locations impact student success; and based on these metrics determine how best to position our footprint to serve our students.
With that, I will turn it over to Dr. Priddy, our Provost and Chief Academic Officer to provide an update on our academic operations.
Thank you, Dr. Shape. Before focusing on academic programming, I’d like to build up the commentary of Dr. Shape regarding three things: academic services and support for students from closing institutions; flexible system for adapting and customizing academic programs to unique student populations; and the positive impact of the University’s new entry and curricular sequence on student learning and persistence.
Slide 12 highlights key academic initiatives designed to target student learning, satisfaction, retention, and completion. Over the past two years at both the graduate and undergraduate level, academics have tapped on emerging educational trends and the latest research from the DaNa [ph] project, achieving the dream Gates Foundation and e-Luminate to redesign programs, courses and learning environments.
Since the mid-90s, NAU has offered a performance-based competency-driven curricula with the capacity to be unbundled within the traditional constructs of Higher Ed. Using this curricular structure and revised policies, the University has realigned programs and courses to allow for a streamlined path from Diploma to Master’s Degree, entering at any point along the continuum.
The redesign involves all undergraduate and Master’s offerings, including Nursing, Legal Studies and Information Technology programs, which now include embedded certifications, new areas of emphasis, such as cyber security and laddered or direct degrees.
For example, NAU’s Baccalaureate programs now offer up to 13.5 quarter graduate credits towards multiple aligned Master’s Degrees. Further, Nursing students or nurses in the field who may bring an RN or an Associate Degree in Nursing can complete a direct path through the Bachelor’s to the Master of Science in Nursing, because more than 70% of our NAU students bring transfer credit and experience a learning that can be evaluated for credit, the University has now tested and will fully implement new processes for optimizing credit for prior learning, also available at any point on the degree continuum.
Supporting these processes are new transfer and residency requirement processes that maximize credit for previous college work, relevant military and other training, international transfer, articulated credit, and prior learning from work experience. In addition, we streamlined entry testing and consolidated entry courses. Designed to serve working adults in the military, the new processes and policies have increased the average number of transfer credits by more than 25%.
As reported previously, the redesign of programs has included the integration of prerequisite remedial and the new quantitative reasoning math course sequence. Based on work from the DaNa project and achieving the dream, these entry process changes have reduced the high failure rate at entry have allowed students to be more successful academically in their first courses, including math and have promoted quicker entries into the field focus courses most working adults seek.
Accompanying these revisions, our parallel efforts to expand tutoring, mentoring, advising and career services as well as library, writing a math one-stop assistance, excuse me for just a minute. To ensure students attend, engage, learn and persist, the University has began a comprehensive redesign of its online courses and their learning environments.
New technologies allow for significant improvements in the functionality and student experience in the typical distance education course room, including increased faculty to students, students to students and student to employer interaction. The mobile first initiative that accompanies to redesign completes the focus to adapt traditional higher education offerings to the expectations of our working adults students. All undergraduate and Master’s courses are scheduled to be updated by the end of that fiscal year 2019, with the next generation of learning management tools, including the roll out of comprehensive mobile phone functionality.
As Dr. Shape indicated, the course and program redesign has allowed NAU to provide students displaced by closing institutions with curricular options that allow for minimal disruptions to their ability to complete their education.
Slide 13 illustrates the extent of the impact on these students for spring, summer and fall terms. Working with states, the Department of Education, programmatic and regional creditors, the University has now served more than 600 former students from Westwood College, Wright Career College, Brown Mackie College and ITT.
The evaluation of prior learning has further allowed the University to confirm that these incoming display students have achieved the necessary competencies and the level of learning from the previous institution necessary to complete their degrees at NAU. In fact, 85 students who enrolled at NAU in spring as a result of closed institutions have graduated as a result of the collaborative work with these external agencies and the adaptive curricular and assessment of learning processes at the University.
Slide 14 will be familiar as it provides the breakdown of the University students by academic area and by degree offering for the summer of 2016 term. As of previous reports, we continue to see stability in the distribution of academic programming during this term with increases in graduate enrollment.
Finally, we see a gradual shift in enrollment improved -- improvement continue with the increases in Bachelor’s, Master’s and Doctoral Degree-seeking students with the associate degree-seeking students declining slightly.
Slide 15 shows course completion and persistence, two benchmarks the University uses to track student progress and more broadly the value of our academic program, course completion, and student persistence. We continue to report strong and improving course completion by our students, in part based on the intrinsic academic curricular, process and policy changes that were addressed earlier.
In the fiscal 2017 first quarter, our undergraduate course completion percentage showed improvement over the fiscal 2016 period from 90% to 91.4%. Graduate numbers as expected show even results with the prior year, meeting the plus 90% benchmark. Likewise, our term-to-term student persistence rates remained above 80% and showed the results of efforts to retain students.
From spring to summer 2016, 83.39% of our students continued taking courses, stronger than both of the same periods in 2014 and 2015. Summer to fall 2016 shows an increase to 84.8%, nearing the persistence rate of the same periods in 2014 and 2015. We continue to pay close attention to these metrics, and as evidenced in the academic initiatives referenced earlier, multiple initiatives directly target course term and degree persistence.
In addition to the initiatives mentioned, the University has completed two faculty student mentoring pilot tests across the Kansas City and Twin Cities campuses. The initial results from two quarters of data indicate that embedded faculty student mentoring and targeted online courses decreased drop rates by more than 20% and decreased D and F grades by more than 10%.
We are refining and building the faculty student mentoring and other engagement strategies into all online courses, as described above in the learning management system redesign. The revisions to remedial entry courses in math offerings addressed above have also impacted new and continuing students, significantly improving successful completion of college success, math and writing courses.
The work in the Commission’s Academy continues to provide the data and support for these and other engagements persistence and learning efforts. The Academy work is two-pronged, providing data that identifies which strategies are successful with which students and shifting the University students success data from status historical reports to predicted analytics that flag and report on four levels of student risks tied to seven factors.
The analytics and weekly data indicators are new reentry and continuing student engagement, attendance and academic success. Campus and central teams respond with interventions designed to impact student course term and degree persistence, learning and completion. Although, we continue to focus on enrollments, we balance those efforts with this equally important focus on working with our current students and guiding them to ultimate completion.
We will continue to collect and analyze relevant data to ensure that we are encouraging and assisting our students to persist in their program of study, which will ultimately allow them to achieve their educational goals.
Slide 16 and 17 depict the key metric of success, the number of NAU graduates. In fiscal year 2016, by degree and program groups, as reported previously, NAU holds seven or more graduation ceremonies to celebrate more than 1,200 graduates. In fiscal year 2016, 71 students earned theirdiploma, 606 in Associate of Applied Science Degree, and 489 of Baccalaureate Degree. Finally, 93 students earned their Master’s Degree and the Doctoral program honors its first two graduates of an Ed.D Community College Leadership. Expected this fall, the remaining students in the inaugural cohort of the doctoral program are expected to graduate.
Now, I would like to turn it over to Dr. David Heflin, who will provide an overview of our fiscal 2017 Q1 financial performance.
Thank you, Dr. Priddy. On the next slide, we address a key measure within higher education and institutions cohort default rate for Title IV student loans. Earlier this week, we received the Department of Education’s notice that NAU’s final three-year cohort default rate, or CDR for 2013 is 23.4%, reflecting a slight increase from our three-year CDR from 2012 of 20.6% and 2011 of 21.4%.
We’re not pleased with this increase. And as a result in March of this year, we made a change with our third-party provider and are now working with Loan Science to ensure more timely notification and follow-up with our student borrowers. Since we have made this change, we have seen the delinquency rate among our borrowers drop from 40.8% in 2014 to 22.8%. We are very pleased with the significant improvement and the reduced delinquency rate.
However, these efforts will not be fully reflected until our 2015 three-year rate is published. In addition to the change in our third-party provider, we continue to believe it is of utmost importance that we provide timely financial counseling and support to our students. We always encourage our students to borrow responsibly and have trained loan repayment personnel staff to support this effort.
We will continue with Loan Science to assist our withdrawn students during their grace period with additional financial information, counseling, and support services. We believe these combined efforts will have a positive impact on our 2015 cohort default rate.
Moving to the financials, Slides 20 to 23, I’m going to touch on a few highlights that I believe are worth noting, but I will avoid the process of going line by line through our financial statements. I encourage each of you to review our press release. The Form 10-Q that we plan to file tomorrow and our investor deck for any specific details and, of course, I’ll be happy to take any questions during Q&A.
With that, our revenues decreased to $21.1 million in the fiscal year 2017 first quarter from $24.6 million for the same period last year, with our academic segments total revenue decreasing to $20.8 million from $24.4 million in the prior-year period. This decrease is primarily due to decreased credit hours and lower book sales due to lower enrollments.
Since April of 2016, NAU has operated an additional physical site in the lower Colorado, solely for the purposes of the teach-out of Westwood College students. This location will not continue as an NAU location following completion of the teach-out. For the first quarter of fiscal year 2017, revenue from the teach-out activities totaled over $1.1 million, expenses totaled $900,000, and net income totaled $200,000.
We continue to work on improving our operating efficiencies and making sure our costs are aligned with our current enrollment numbers. As such, we have made additional expenditure reductions during this quarter to realize savings that are beginning to have an impact on financial results.
In addition, campus closures in fiscal year 2016 created expense reductions in the first quarter of $1 million compared to the first quarter of the previous year. I would note that the investment associated with the Westwood College teach-out and the additional costs associated with transitioning – transfer students from Wright Career College offset some of the cost reduction efforts during the quarter.
Additional salaries from these efforts reduced salary savings associated with closed campuses and regional management realignment during fiscal year 2016. Additional investment associated with efforts to transition Wright students into NAU and cost associated with developing the Surgical Technology Degree program also cut into overall expense reduction efforts during the first quarter.
As a result of these initiatives, cost of educational services increased slightly from $6.3 million in the first quarter of fiscal year 2016 to $6.5 million in the first quarter of fiscal year 2017. Also on Slide 20, you will note that our cost reduction efforts resulted in a year-over-year reduction in SG&A for the first quarter from $19 million to $16.5 million.
Moving to Slide 21, net loss attributable to the company for the fiscal year 2017 first quarter was $2 million, or $0.09 per diluted share based on 24.1 million shares outstanding, compared to a net loss of $1.3 million, or $0.05 per diluted share based on 25.2 million shares outstanding in the prior-year period.
The company’s loss before income, taxes, depreciation and amortization for the first quarter of fiscal year 2017 was $1.5 million compared to LBITDA of $500,000 in the prior-year period. A table reconciling LBITDA and EBITDA to net income or net loss can be found in yesterday’s press release.
Moving to the balance sheet highlights shown on Slide 22, as of August 31, 2016, the company had cash and cash equivalents and investments of $20.8 million, working capital of $19.1 million, and stockholders’ equity of $37.4 million, compared to cash and cash equivalents and investments of $34.3 million, working capital of $33.3 million, and stockholders’ equity of $50 million – $50.1 million at August 30, 2015.
During fiscal year 2016, the company paid out $4.4 million in dividends and repurchased $3 million of common stock. The company has no outstanding lending debt at this time.
Slide 23 identifies the year-over-year change in cash balance and highlights the reasons behind the decline in the cash balance, including the previously mentioned payment of dividend and repurchase of common shares.
Finally, as we announced during our previous call, the Board – this company’s Board of Directors authorized a stock repurchase plan authorizing the repurchase of up to $500,000 of common stock in open market or privately negotiated transactions. As of August 31, 2016, we have repurchased 30,440 shares of common stock for a total of approximately 52,000 as part of the currently open plan to repurchase $500,000 of common stock.
The opportunity to reprice – to repurchase another 448,000 shares of common stock remains. The timing and actual number of shares purchased will depend on a variety of factors, such as price, corporate and regulatory requirements, and other prevailing market conditions. The plan has authorized for a period of one year from the date of April 4, 2016, but maybe limited or terminated without prior notice.
We continue to believe in the strength of our business and our ability to deliver on our growth strategies over the long-term, and we believe the stock repurchase program is a reflection of our confidence. We will provide an update on the status of the repurchase program during our quarterly earning calls going forward.
In conclusion, NAU remains committed to its promise on providing quality academic programming and supporting positive student outcomes. We are excited about the initiatives we continue to work on in fiscal year 2017, and we believe these opportunities will serve to strengthen the long-term foundation upon which National American University was formed 75 years ago.
With that, I’ll turn the call back over to Dr. Shape.
Thank you, Dr. Heflin and Dr. Priddy. Operator, we would be happy to take any questions at this time.
We will now be conducting a question-and-answer session [Operator Instructions] Our first question comes from Dallas Janes from Van Clemens. Please go ahead.
Hey, good morning, Dr. Shape.
Good morning, Dallas.
I just had a quick question for you guys about the Globe University Minnesota School of Business situation up here in the Twin Cities. I see they have closed already four campuses right in the Twin Cities area, and I’m just wondering the progress that you’re making as far as transferring, helping some of those students move into programs at NAU?
Thanks for that question, Dallas. Yes, we’re seeing some students in that market as well as our Sioux Falls, South Dakota market seeing some of the students show up on our doorstep seeking for transfer, and we’re assisting each of those students individually to help them complete their education. Also working with some of the staff – our staff to see if we can do something more formally to help students, and we’ll continue to explore those opportunities over the next several weeks here.
Okay, great. Thanks.
Yes, absolutely. Thanks so much, Dallas.
[Operator Instructions] And if there are no further questions, I’d like to turn the floor back over to management for any closing comments.
Thanks for that, Matt. I appreciate it picking up another comment, I would share to Dallas’s question that he just asked is to share with our listeners, investors, some of the challenges as we see institutions across the country closing, and I guess, the volumes of institutions closing and the volumes of students being faced with those challenges. And one of the things I would share, because it’s come up in a number of different meetings is, where are these students going, because there is no indication anywhere across the country that these students are being absorbed someplace.
And so I share this with all of our listeners, so that folks understand it’s – I think, it’s a unique environment, where we find our students currently with the opportunities that they have in front of them and the choices they have to make to continue their education to seek out loan forgiveness from the investments they’ve already put into their education.
So we continue to do everything that we possibly can to assist students from all the locations, and quite frankly, from around the country to assist those students anyway we can. I think, as I mentioned, we put teams together. We’ve looked at degree mapping. We’ve provided scholarship opportunities for students to help at every possible level. So I wanted to share that comment to go a little bit deeper to Dallas’s question.
We would like to thank everyone for joining us. We are available to answer any additional questions you may have. You are also welcome to contact our Investor Relations group, The Equity Group. We look forward to speaking with you again during the fiscal 2017 second quarter results conference call. Thank you, everyone.
This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.
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