American Public Education's (APEI) CEO Wallace Boston on Q4 2016 Results - Earnings Call Transcript

| About: American Public (APEI)

American Public Education, Inc. (NASDAQ:APEI)

Q4 2016 Results Earnings Conference Call

February 28, 2017, 05:00 PM ET

Executives

Chris Symanoskie - VP, IR

Wallace Boston - President and CEO

Rick Sunderland - EVP & CFO

Analysts

Corey Greendale - First Analysis

Jeff Silber - BMO Capital Markets

Peter Appert - Piper Jaffray

Operator

Good day, ladies and gentlemen, and welcome to the American Public Education Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's program is being recorded.

I would now like to turn the floor over to Chris Symanoskie, Vice President of Investor Relations. Please go ahead sir.

Chris Symanoskie

Thank you, operator. Good evening, and welcome to the American Public Education conference call to discuss financial and operating results for the fourth quarter and full year 2016. Please note that statements made in this conference call regarding American Public Education or its subsidiaries that are not historical facts are forward-looking statements based on current expectations, assumptions, estimates and. projections about American Public Education and the industry.

These forward-looking statements are subject to risks and uncertainties that could cause actual future events or results to differ materially from such statements. Forward-looking statements can be identified by words such as anticipate, believe, seek, could, estimate, expect, intend, may, should, will and would. These forward-looking statements include, without limitation, statements regarding expected growth, expected registrations and enrollments, expected revenue, expected earnings and plans with respect to recent and future initiatives, investments and partnerships.

On our call today, we may discuss certain non-GAAP financial measures in connection with our GAAP results for the 12 months ended December 31, 2016 and 2015. These non-GAAP financial measures are not intended to be a substitute for GAAP results. However we believe they will allow investors to better compare results to prior year periods.

American Public Education urges investors not to rely on any single financial measure to evaluate its business and to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures that are included as part of an exhibit to our current reports on Form 8-K that we filed shortly. Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors including the risk factors described in the risk factor section and elsewhere in the company's annual report on Form 10-K filed, quarterly report on Form 10-Q and the company's other SEC filings. The company undertakes no obligation to update publicly any forward-looking statements for any reason, unless required by law even if new information becomes available or other events occur in the future.

This evening it’s my pleasure to introduce Dr. Wallace Boston our President and CEO and Rick Sunderland, our Executive Vice President and Chief Financial Officer.

Now at this time, I'll turn the call over to Dr. Boston.

Wallace Boston

Thank you, Chris. Starting with slide three, recent highlights and results. Our quarter of 2016 reflect our progress in improving student persistence at APUS and achieving new student enrollment growth at Hondros, while maintaining our focus on quality and attracting students with greater college readiness.

Although we continue to experience challenges with respect to enrollment at APUS, we are encouraged by the possibility of an improved regulatory environment with less anti-core profit rhetoric [ph] the potential of a more favorable outlook for the administration of the DoD voluntary education program and the prospect for success with our efforts to reengineer certain enrollment management processes.

In the fourth quarter of 2016, net course registrations at APUS declined 10% compared to the prior period. Although net course registrations by new students declined 29% year-over-year, net course registrations by returning students decreased 7%, compared to the prior-year period.

We believe that the difference in the rate of decline of registrations by new students and that of returning students relates at least in part to improvements in persistence and the change in our quality mix of students.

For the three months ended December 31, 2016, the first course pass and completion rates of undergraduate students using federal student aid or FSA at APUS increased approximately 19%, compared to the prior-year period. We believe the year-over-year improvement in first course pass and completion rates is an indicator that our efforts to attract and retain students with greater college readiness are working.

The overall decline in net course registrations by new students at APUS was primarily driven by a 46% year-over-year decrease in net course registrations by new students using FSA and 19% year-over-year decrease in net course registrations by new students using military tuition assistance or TA.

We believe the decline in net course registrations by students using FSA was due to several factors, including our efforts to improve our quality mix of students through changes to our admissions processes, and adjustments to our marketing activities that may have negatively affected enrollment in programs, and to increasing competition for online students.

We believe the decline in new students using TA is primarily the result of changes in the administration of the TA program by the Department of Defense, or DoD by various DoD rules that impeded our ability to support both enrolled and prospective students on military installations.

Net course registrations by new students using veterans benefits decreased 3% year-over-year and net course registrations by new students using cash and other sources decreased 10% compared to the prior year period.

In the fourth of 2016, total enrollment at Hondros College of Nursing declined approximately 13% year-over-year. However, new student enrollment increased approximately 1% compared to the prior-year period.

This is the first year-over-year increase in the second quarter of 2015. The team at Hondros is executing well in the pursuit of its long-term goals. However, we still have work to do.

As previously noted, the NCLEX licensure exam pass rate for Hondros's ADN program has not met the requirements of the Ohio Board of Nursing or OBN for the previous four years. As a result, we expect that Hondros's ADN program may be placed on provisional approval status by the OBN, in March of 2017.

As a result, the OBN may propose to continue provisional approval for set time period or may proposed withdrawal approval pursuant to an adjudication proceeding, also OBN approval would restrict HCONs ability to recruit or enroll students in certain states or result in other sanctions being imposed.

That said, Hondros is been implementing changes, including curriculum changes and its NCLEX pass rates for the PN and ADN programs have increased in recent periods. In addition, Hondros has applied for and is pursuing initial accreditation by the Accrediting Bureau of Higher Education Schools, ABHES, a national accreditor for Allied Health Schools.

This is particularly important development given that Hondros's current accreditor ACICS, a seize being recognized accreditor enabling title for eligibility and the Department of Education has given institutions 18 months to find another accreditor.

We are excited about the turnaround that Hondros is experiencing. New student enrollment for the March 31, 2017 or winter term of 2017 increased 22% year-over-year and Hondros opened its new Toledo campus in January, excluding students enrolled at the new Toledo campus, the same campus new student enrollment growth for the winter term was 12% year-over-year team.

The team at Hondros is focused on increasing its NCLEX pass rates, earning ABHES accreditation and further improving quality and placement rates, in addition to executing its long-term strategy to offer new programs and open new campuses to serve the nursing and public health community.

That said, we must note that on February 24, Hondros received a letter from ACICS with respect to the placement rate for the practical nursing program at Hondros's independence Ohio location in the suburbs of Cleveland.

To give you some perspective on the independence location, enrollments for the term in the practical nursing program at that location increased 19% year-over-year. Based on a policy that became effective in December of 2016, ACICS has indicated that unless north Hondros notifies ACICS that it is discontinuing the practical nursing program at the independence location, and ACICS expects to issue a show cause letter requiring Hondros to demonstrate why ACICS approval of the practical nursing program at the independence location cannot be withdrawn.

We are in discussions with ACICS about the applicability, timing and operational policy. However we believe that we continue our practical nursing program, it will - then we will have an additional year to come back in compliance with the placement rate standard, during which time we will have to submit a variety of reports to ACICS and notify current and new students at the independence location about our status and placement rates.

At this time, we are unable to quantify the impact of the program being a show cause status, or any future action that will result in our seizing to enroll students at the independence location.

Similarly, at this time, we cannot quantify the impact of any such developments on other programs, including those for which students in the practical nursing program serve as a feeder [ph] or honor application to ABHES.

Moving on to slide number four, student focused approach to quality. In summarizing the full year 2016 results, I'm pleased by how we've maintained our focus on quality and affordability, while working diligently to overcome important challenges.

Although affordable tuition has its own inherent challenges, the benefits to the families and communities we serve our measurable. We estimate our total cost of tuition books, and required fees are approximate 19% less for undergraduate and 38% less for graduate students than the average published in-state cost at public four-year institutions.

Of course, affordability is nothing without quality. In the face of increased competition for online students and rapid regulatory change, we believe are unwavering focus on quality has helped advance our reputation throughout the higher education community.

In 2016, we enhanced our offerings through a course redesign project that aimed to help increase the interactivity of our classrooms. We utilize to the cost of CIVITAS, our predictive analytics tool to improve student engagement and persistence, and we expanded the use of ClearPath by Fidelis, our advising and mentoring platform to help boost student engagement and persistence.

We also revised our application and assessment processes to more effectively enroll students with greater college readiness. We have deployed several initiatives since 2013, with the goal of attracting students with both academic intent and college readiness, and in more ways than ever before to help them succeed.

The results have been significant improvement in the undergraduate first course pass - pass rate and completion rates of students utilizing FFA each year since 2013. We believe that, among other factors, the increase in persistence, our improved quality mix of students and a change to the multiple disbursement method of disbursing federal student aid to first time APUS undergraduate students also help reduce our bad debt expense this past year.

Most of all, I am proud of our hard working students. In 2016 APUS conferred degrees to approximately 11,000 students to join the ranks of more than 70,000 AMU and APU alumni worldwide. In our 2016 end of program survey, 95% of the respondents indicated that they were very or completely satisfied with the education they received.

Moreover, 91% of our seniors who participated in the 2016 national survey of student engagement or NSSE indicated that if they had to start their education over again, they would choose APUS.

In addition to these impressive results, we made strong additions to our leadership team in 2016 in order to advance our enrollment management processes, diversify our program offerings, and make strategic investments in support of our long-term strategies to such opportunities arise.

Going on to slide number five, APUS enrollment stabilization. Looking ahead, we plan to focus on three major initiatives to achieve our goal of enrollment stabilization at APUS. First, we intend to reengineer our enrollment management processes. Our recently hired Senior VP of Enrollment Management will be leading our efforts to better integrate front-end systems and improve processes to facilitate efficient student on boarding, and student service.

The enrollment team intends to refine our marketing techniques with predictive modeling overlaid with channel data to boost lead capture scoring and conversion. Part of our plan also includes creating greater engagement with prospective audiences by mapping segmented personalized messaging to student audiences according to their unique decision journey.

Finally, we aim to sharpen our digital marketing campaigns to leverage relationships with military and other high-value student populations, especially in segments where we have built a strong presence.

Second, we intend to continue expanding our program offerings in areas where demand is growing and where employers struggle to find talent to fill job openings. APUSs new Provost is leading the charge to develop these program offerings with an eye towards innovation and course development and creating a high-level interactivity to drive student engagement and success.

Lastly, we believe APUS is well-positioned with affordability and quality to help employers advance the capabilities of their workforce and lower the cost of human capital. In addition to helping jobseekers close significant skills gaps and find employment and/or advancement.

The demand for such offerings may further intensify, given the magnitude of skills gap in America and the new administration's focus on jobs and employment. In fact, to support this growing need, we recently launched our new competency-based programs under initiative we call Momentum, with the first courses starting on March 6th, 2017.

We believe our competency base program is differentiated from others and that it is built into an adaptive learning platform for students to take a diagnostic pre-assessment for each competency.

This assessment functions to drive the students personalize learning content, as well as provide important information to faculty mentors and subject matter experts as they guide each student's learning pathway toward a final, mastery assessment.

The final mastery assessments are trained in real-world situations called authentic assessment. Students entering the Momentum program must possess an associate's degree or higher, while financial aid will not be available at the programs launch, we hope to be able to offer it in the future, dedicated advisors, and specially trained admissions representatives when sure students understand how the Momentum program differs from traditional degree pathway.

A strategic outreach team has direct engagements and relationships through which we reach nearly 300 companies and organizations. We recently created the center for applied learning or CAL, to support our corporate and workforce development efforts.

Through CAL we plan to deliver customized, just-in-time professional learning solutions and a mobile platform to help bridge the gap between workforce potential, and corporate performance. This of course is an addition to degree programs we already offered to strategic partners.

In closing, we are pleased by the progress we have made with respect to improving student persistence and reducing bad debt expense at APUS and by the new student enrollment growth at Hondros.

We are encouraged by recent developments, including the possibility of a more favorable regulatory environment with less anti-for-profit sentiment, as well as the potential for the elimination of the sequester [ph] on defense spending. Of course stabilizing total enrollment at APUS and returning to growth is critical importance to our organization.

With the strong leadership team in place, including in the areas of enrollment management and academic innovation, we have a dynamic group. These individuals and all of the team members APUS bring tremendous academic and business credentials to the reengineering of our enrollment management processes, improving the quality and depth of our program offerings and implementing our long-term investment strategy.

Furthermore, we believe the growing emphasis on workforce development and competency-based learning, combined with the expansion of our strategic relationships will also help us reach our goal in enrollment all stabilization.

At this time, I would turn the call over to our CFO, Rick Sunderland. Rick?

Rick Sunderland

Thank you, Wally. Going on to slide six, financial results summary. American Public Education's fourth quarter 2016 consolidated financial results include an 8.5% decline in revenue to $78.6 million, compared to $85.9 million in the prior year period.

Both our API segment and our Hondros segment reported declines in revenue when compared to the prior year. In the fourth quarter our API segment revenue decreased 9.1% to $71.1 million, compared to $78.2 million in the prior period. The decline in API segment revenue is primarily attributable to a decrease in net course registrations.

Hondros segment revenue decreased 2.5% to $7.5 million in the fourth quarter of 2016, compared to $7.7 million in the same period of 2015. The decline in Hondros segment revenue is primarily due to a decline in enrollment in Hondros.

On a consolidated basis, cost and expenses decreased 4.0% to $67.4 million, compared to $70.2 million in the prior year period. For the fourth quarter consolidated instructional costs and services expense or ICS as a percentage of revenue increased to 38.2% compared to 34.6% in the prior year. The year-over-year increase as a percentage of revenue is due to a revenue decreased during the period, an increase in ICS costs at Hondros due impart to start up costs at the Toledo campus, which opened in January 2017.

Selling and promotional or S&P as a percentage of revenue increased to 18.4% of revenue, compared to 17.7% in the prior year period. Year-over-year, S&P cost decreased 4.4% to $14.5 million 15.2 million, compared to $15.2 million in the prior year. Accordingly, the year-over-year increase as a percentage of revenue is due to S&P costs declining at a rate lower than the decline in revenue.

General and administrative expense or G&A as a percentage of revenue increased to 22.8% from 21.2% in the prior year period. Our G&A expenses decreased 1.3% $18.0 million, compared to $18.2 million in the prior year.

The decrease in G&A expense is primarily related to decreases in compensation costs and a period-over-period reduction in bad debt expense, partially offset by higher professional fees, while the increase as a percent of revenue is due to revenue declining at a rate greater than the decline in G&A expense.

For the three months ended December 31, 2016, bad debt expense decreased to $1.2 million or 1.5% of revenue, compared to $2.0 million or 2.3% of revenue in the fourth quarter of 2015.

For the full-year 2016, bad debt expense decreased to $6.7 million or approximately 2.1% of revenue, compared to $12.7 million or approximately 3.9% of revenue in the year ended December 31, 2015.

We believe the improvement in bad debt expense is a result of our ongoing efforts to attract students with greater college readiness, the change in our quality mix of students and a change to the multiple disbursement method of disbursing federal student aid to first time APUS undergraduate students.

In the fourth quarter of 2016, we reported income from operations before interest income and income taxes of $11.3 million, compared to $15.7 million in the prior period. In the fourth quarter we reported net income of $6.9 million $0.42 per diluted share, compared to net income of $9.8 million, or $0.60 per diluted share in the prior year.

Net income for the fourth quarter of 2015 included $1.6 million of expenses related to a workforce realignment and a $2.1 million expense for a write-down of information technology and other assets in our API segment. The fourth quarter of 2016 did not include comparable expenses.

Cash generation remains strong. For the 12 months ended December 31, 2016, net cash provided by operating activities was $56.0 million, compared with $57.2 million in the prior year period. Capital expenditures declined to approximately $13.8 million for the 12 months ended December 31, 2016, compared to $26.0 million in the prior year period.

Depreciation and amortization was $19.4 million for the 12 months ended December 31, 2016, compared to $20.5 million for the same period of 2015. Total cash and cash equivalents as of December 31, 2016 were approximately $146.4 million, compared to $105.7 million as of December 31, 2015 and we have no long-term debt.

Going on to slide six, the first quarter of 2017 outlook. Our outlook for the first quarter of 2017 is as follows, APUS net course registrations by new students in the first quarter of 2017 are expected to decrease between minus 25% and minus 19% year-over-year.

Total net course registrations are expected to decrease between minus a 11% and minus 9% year-over-year. These expected declines are largely the result of anticipated - of anticipated decreases in net course registrations by students using federal student aid and by students using tuition assistance.

That said, the expected rate of decline in net course registrations by new students using FSA and to a lesser extent TA is expected to be sequentially better when compared to the fourth quarter of 2916.

In the first quarter of 2017 new student enrollment at Hondros increased by approximately 22% year-over-year and total student enrollment decreased by approximately 8% year-over-year.

As Wally indicated earlier, we are pleased to see the turnaround in new student enrollment growth and the resulting improvement in total student enrollment at Hondros. So we are continuing to evaluate the situation with respect to the practical nursing program at the Independence location.

Hondros's new student enrollment clearly benefited from the opening of the new campus in Toledo Ohio. However, on a same campus basis, new student enrollment increased 12%, compared to the prior year period.

For the first quarter of 2017 consolidated revenue to decrease between minus 12% and -10% year-over-year. Net income for the first quarter of 2017 is expected to be in the range of $0.25-$0.30 per fully diluted share, prior to taking into account the effect of impairment, infrequent or unusual transactions, if any, including as a result of the current discussions regarding each Hondros's independent, location.

Please also note that our adoption of ASU number 2016 – 09 also known as improvements to employees, share-based payment accounting may increase our income tax expense between 400,000 and 700,000 in the first quarter of 2017 and between 600,000 and 900,000 in the first quarter of 2018, as a result of the expiration of stock options with an option pricing greater than the current stock price.

For the full-year 2016 APIs operating margin benefited from a $6 million decline in bad debt expense, compared to the prior year. We do not expect a year-over-year decline of this magnitude in 2017.

In closing, we are pleased with the reduction of bad debt expense in the full-year 2016, the continued improvement and persistence rates at APUS, and new student enrollment growth at Hondros.

Enrollment stabilization at APUS is our top priority, and we are focused on reengineering our enrollment management processes - rates and at the same time advancing our long-term strategy.

Our quality and affordability remains strong drivers of the value proposition we offer to student. Lastly, we are excited about the launch of our new competency-based program Momentum, and the unique capabilities of APUS, such as the affordability and uniqueness of our programs to address the long-term workforce and skills development opportunities in the market marketplace.

Now we would like to take questions from the audience. Operator, please open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Corey Greendale from First Analysis.

Corey Greendale

Hey, good afternoon,

Wallace Boston

Hi, Corey.

Rick Sunderland

Hey, Corey.

Corey Greendale

So a few questions. First, in terms of the trend in FSA, so I think I heard you said that new students from FSA, using FSA was down 46% in Q4, I think you said its going to better in Q1. Can you just give us some color on FSA, the things affecting that, but maybe I think is affecting the sequential time lag are worse in Q4, why things getting better in Q1?

Wallace Boston

I think our base for Q1 is a much lower number, so that’s why the difference in the decline rate between Q4 and Q1. We continue to work on making sure we're increasing this per student pass rate by changing our admissions assessments and looking at ways that we can improve that quality mix.

And so we come up with the right formulation and I think given our new Senior VP of enrollment management experience with McCord & Associates [ph] where they had advised a lot of traditional universities on enrollment management, I think we'll continue to be tweaking it. But we do have a - the number for the guidance is on new FSA is minus 31, so that compared to the minus roughly 46 in Q4.

I don’t have that parse out between you know sequentially how much is an improvement versus just the lower comparable. But sequentially we are seeing a lower percentage.

Corey Greendale

Okay. That helps. And then in TA, I think you said a decrease is at lease in part due to change in administration of the program, that makes it tougher to support students, so first of all, can you elaborate little bit on what that is and just why a change in supporting students that’s affecting the new enrollment number?

Wallace Boston

I think we referred to basically some DoD policies on base access, as well as the sequester itself, President Trump has proposed $54 billion increase to the DoD budget, we think that if f that goes through or some samples of an increase goes through, historically commanders have preferred to purchase equipment or refurbish their equipment rather than put extra money into things like education. So you know, we just think that’s a plus.

Corey Greendale

Okay…

Rick Sunderland

So sequentially…

Wallace Boston

Sequentially it’s a modest improvement TA Q4 with minus roughly 19, we're guiding to minus 18, so it’s a modest change for the first quarter.

Corey Greendale

I know the new administrations are trying to move quickly on something, have you seen any change in how FSA is being ministered [ph] or anything else that would affect you already in the military market?

Wallace Boston

Actually not, we're a little - I guess that wasn’t their first 30 day priority. Our understanding is it will be a number of executive orders coming out in the first 100 days, essentially reversing some or many other executive orders of the previous administration. So we're helpful, but we haven't seen a specific one yet.

Corey Greendale

Do you have any expectation or within the $54 billion, will there be any change in terms of amount per creditor, number of creditor is just an increase in the size of the active duty population?

Wallace Boston

Well, I think size of active duty population, more so than changing in the credit reimbursement. I think they found that, you know, that number exceed in some cases by more than double what the community college number is and that's where a large amount of enrollees can be directed to.

I think that from our perspective just talking to some of the retired generals on our board, adding that additional amount in addition to possibly stemming the decline in personnel should take the pressure off on finding money for equipment.

Corey Greendale

Good. And then this next question, I am not looking for guidance beyond Q1 [ph] its more of a mathematical question, but just given, I think assuming you beat the guidance for Q1 you're going to have something like 5 in last 6 quarters where new students registrations at APUS are down 20% or more in that range. So you may not able to offset that on total enrollment with persistent improvement.

How long can that continue, so in other words, should we be expecting that the total will start to converge with the new trend at some point?

Wallace Boston

That’s our goal, everybody saying without refill in the pipeline, how much longer can we continue to make up through returning students the large decrease in new students.

Rick Sunderland

Yes, I don’t think we can do that for too many more periods.

Wallace Boston

Right.

Corey Greendale

Okay…

Rick Sunderland

That’s Corey the plans related to the enrollment management process.

Corey Greendale

Yes.

Rick Sunderland

The marketing - shifted marketing approach if you will, because we understand that the imperative to slow the decline of new student and reverse that trend.

Corey Greendale

Yes. And I understand that. I just have one last question for you Rick, then I'll turn it over. If I am doing my back of the envelope math right, and tried to add in that tax in fact you talked about, it looks like the guidance implies operating margin is down something like 900 bps year-over-year in Q1, does is that sound right to you and just can you talk at that - I see you doing a lot of things to reengineer processes, a lot of that to reignite enrollment growth…

Rick Sunderland

Yes. So without actually agreeing to that number, I think directional you're correct and I think our current perspective is we see some positives on the horizon, to be at the internal initiative or the change in administration.

So we're going to continue spend into that if get to later in the year, and if those things are materializing then we'll look at the cost side of the equation. But right now are our primary focus is not the cost side, it’s the registration and revenue side.

Corey Greendale

Okay. You actually answered the question I quite get asking. So thank you. Thanks for the help.

Rick Sunderland

Thank you.

Operator

Thank you. And our next question comes from the line of Jeff Silber from BMO Capital Markets.

Jeff Silber

Thanks so much. I am going to ask the glass half full questions, so you point out some of the processes you plan on putting in place to stabilize enrollment. First of all, are we talking about new enrollment or total enrollment and is there a timeframe on when you think you might get there?. Thanks.

Wallace Boston

I don't think we have a timeframe Jeff, we do have a goal that we certainly like to get there in 2017. You know, our new Senior VP of Enrollment Management started in December. So - but he did hit the ground running. We had him in periodically prior to that.

And I think that you know, it's really a question of looking at that mix and replacing students who the military, either for financial purposes or other reasons, made it more difficult to register for online classes and which we had a 70% referral rate too and replacing students who are coming in at 70% referral rate, the students coming in at 30% referral rate, meaning that we have the advertising gain and find ways in advertising to bringing of students that consistently took so many classes a year and persistent. So that is complicated, but we really hope to get there by the end of the year.

So - but Jeff, you're asking about new and total, I would parse it as follows, certainly the change in marketing approach is meant to stabilize the new. As we approach optimization or improvements in the enrollment management process that will of course affect both new and returning.

So you know, one is more clearly directed at the new, the other is going to be impactful positively, we expect I guess both new and total, does that answer your question?

Jeff Silber

That’s actually very helpful. I appreciate it. You had cited a couple of programs where there could be I guess, regulatory related issues. One was the practical nurse program, and independence and the other one, I think was the [indiscernible] you were speaking very quickly, was that the ADN program in Ohio?

Wallace Boston

The ADN program.

Rick Sunderland

So there is two separate matters, there is NCLEX scores [ph] related to the ADN program, which is governed by the Ohio Board of Nursing and then the independence, Ohio, which I call Cleveland, I don’t know we're kind of this some where near Cleveland. I think – yes, so that’s the – that’s related to an ACICS, which is the accreditor standard. So its two different sets of standards related to two different program.

Jeff Silber

Got it. I mean, I understood that, I was going to ask – actually ask you, is the past more to get the sort of quantification in terms of how large these programs are now, and I know you mentioned a practical nurse could be aspired [ph] to the other programs, but I just want to see you know, what we're talking about?

Wallace Boston

Well, at independence only for the last two quarters, 74% of our ADN program students have actually come from the outside. They've not been coming from the PN program, as that helps for independence.

And I think - and by the way we track what percentage of your students continue on from the PN program to the ADN program and it varies by location and some locations you know, its totally different than that percentage.

Jeff Silber

But again, how large are those, just how many students do you have in your PN program and independence?

Wallace Boston

Can't tell you, off the top of my head, but you know, we'll see if we can look at and if we can answer that in the questions somebody else has, we'll bring that back up…

Jeff Silber

I'd appreciate it. And the same question about the ADN program in Ohio?

Wallace Boston

Okay.

Jeff Silber

All right, great. And then just a couple modeling questions, the share count that’s implied in your first quarter EPS guidance is what?

Rick Sunderland

$16.2 million.

Jeff Silber

$16.2 million. Great. And then what kind of tax rate and capital spending, well, tax rate for the first quarter in the year and capital spending for year should we expect? Thanks.

Rick Sunderland

So let's go with the effective tax rate, as of the impact of the new accounting pronouncements…

Jeff Silber

Okay…

Rick Sunderland

So I'd go 35 – 30, I am sorry, 38.5 or 39 and then gave you the dollar figure as expressed is a range on the ASU and CapEx, I don't want to talk about the first quarter, but as you look at the full year, I think will be north of roughly $13.8 million that we did in 2016, maybe in the mid teen someplace, maybe little bit higher than that, but below what you have seen is our historical numbers due to our - change in our approach to our IT strategy.

Jeff Silber

Okay. Great. That’s very helpful. Thanks so much.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Peter Appert from Piper Jaffray.

Peter Appert

Thanks. So Wally you mentioned increased competition is a factor and I am just wondering if you just - don't take this the wrong way, but you just sort of throwing that out generically, or if there's something that's really changed in terms of the competitive environment that you had call out in the last quarter or two?

Wallace Boston

No, I mean, more if you look at the data, that is the date that’s reputable. I think there was a Stanford research study publicized that a lot of people are questioning you know whether or not the researcher on that study had an accurate number for online students.

But if you look at the more reliable data I mean, the share of online students that are being taught by public institutions has increased and the share of online students who were taught by for-profit institutions has decreased.

But we can't exactly attribute that to increase competition, but we also can't rule it out. I think that in our case, there particularly with our TA students is as I mentioned there were roadblocks. I mean, for example, the Army had a registration system that they spent tens of millions of dollars on and were some of the large providers like us had to spend seven figures on the convert to and they resorted to people having to get a piece of paper signed to get entry into that automated system, which is a roadblock, you know, you got to find your ESO [ph] to sign a piece of paper, so you can login, while they are doing that. So it's not as easy to sign up for classes.

Some of the other service branches were saying you know, we're not going to let you sign up for TA until you do your second enlistment. So there were roadblocks over there, on the FSA side, you know, we were trying to find quality students as we had an influx of students who were one timers, they were coming in you know, staying active in a of course long enough until they could get a refund check to federal aid and basically dropping out and walking.

And so we wanted to try to find ways to stop that and then you had some very large non-profit providers who spend a lot of money on advertising and the first thing you see on their ad non-profit, so are playing against the democrats particular rhetoric on you know that for-profits are bad. So we've had to fight a lot of it and I'd say to precisely give you a reason on the competition, it’s less precise than its just - this is the atmosphere.

Peter Appert

Okay. Fair enough. And then Wally and the competency-based programs, so those are just being introduced as of the first quarter correct?

Wallace Boston

Yes.

Rick Sunderland

Yes.

Wallace Boston

March 9th.

Peter Appert

Got it. And is there - I would imagine there might be a incremental cost to you guys of providing programs like that, is that fair or not or should we think about some economic impact from the rollout of these new programs?

Wallace Boston

There is some overhead costs to start them out. I mean, we – I don’t think we're going to give guidance just from a competitive reason on how many enrollees we need to hit breakeven. But you know, I think you once we get to the breakeven number, we should have a contribution margin.

But I would tell you that offering specific comments on our program, that the competency program rollout has been slower at most institutions, whether they are for-profits or non-profits, then the press rollout has been on how great it would be to have competency based program.

So you know, we were encouraged by academics either at are accrediting body or elsewhere to participate, given our reputation for innovation. We looked at it and said that in certain channels for example, retail management, this looks like it could be good for potential students, but I will tell you we are going in with our eyes wide open, we're not trying to say that there is going to be home run, as much as we're doing this to see if it's part of a changing trend and you know I think that we've entered it in a way that it won't be a significant overhead burden for a while and hopefully we can particularly when we get approved for federal student aid for those programs, which as you may know they are very hard to get accrediting approval for and they are almost just as hard to get financial aid approval for.

So we got the first stage done and we're offering them for cash only or employer reimbursement and we'll see where we go, as soon as we get the FSA approval.

Peter Appert

So very specifically, the rollout of the competency-based conservation programs is not a particularly meaningful factor in terms of the pressure you are anticipating on first-quarter margins?

Wallace Boston

No, not all.

Peter Appert

Okay. And then in terms of the Hondros re-accreditation and I may have missed this in the discussion, but can you just remind me where we are in that process?

Wallace Boston

Hondros re-accreditation? Yes, we didn’t really about ABHES…

Peter Appert

Yes, getting more from ACICS?

Wallace Boston

Yeah, we are in process. We were provisionally accepted by ABHES and I believe that they've – I don’t know that I have a date, but they've talked about the dates sometime later this year for a preliminary visit and I think sometime in early 2018 formal approval if the visit goes okay.

So you know, we actually - we anticipated it, so we got our application and before everybody else did, you know, we anticipated ACICS not essentially winning their appeal. So we were ahead of the curve.

Peter Appert

So, no – you are not anticipating in gaps in from the accreditation standpoint, and therefore no loss of access to Title IV?

Wallace Boston

We have no information to anticipate that correct.

Peter Appert

Got it. Okay, thank you.

Wallace Boston

Thank you.

Operator

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Chris Symanoskie for any closing comments.

Wallace Boston

Yes, operator, just want to answer one question, Jeff Silber asked what percentage of ADN enrollment was, its 35% of earning enrollment for the state of Ohio at Hondros. So Chris…

Chris Symanoskie

Thank you, Wally. That will conclude our call for today. We wish to thank you for your participation and for your interest in American Public Education. Have a great evening.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.

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