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Undiscovered EdTech Company With Significant Upside, Driven By Multiple Expansion And Organic Growth Opportunities

|Includes: Aspen Group Inc. (ASPU)

Summary

Aspen poised to post strong double digit sequential revenue growth.

USU enrollments likely to increase 50% sequentially in Q4 and positioned to grow 100% Y/Y in FY19.

ARPU per student expected to rise in FY2019 as new graduate degrees increase ARPU by 2-3x.

First Pre-licensure campus opened in June.

Recent secondary provides company with ample cash balance to get the company to break even within next 4 quarters.

Sector Overview

A sector of the market that continues to witness strong growth is the education market. Building on the theme that the best investment we can make is investing in ourselves, we have seen very strong growth in subs or enrollment for ed tech companies. As you can see in the tables below, these high growth, high visibility education technology businesses are being given 5-10x multiples by the market and have experienced significant growth over the past 5 plus years.

Company

Market Cap

Ticker

PS Ratio

CY2018/FY2019

PS Ratio

CY2019/FY2020

Revenue

Y/Y Growth

TAL

10B

TAL

8x

7x

50%

2U

4.6B

TWOU

14x

12.5x

38%

Chegg

3.2B

CHGG

8.5x

7.5x

17%

Instructure

1.4B

INST

5.1x

5.3x

28%

Grand Canyon

5B

LOPE

4.6x

4.5x

9%

PluralSite

3.45B

PS

14x

12.5x

28%

Aspen, Inc.*

150m

ASPU

3.3x

3.2x

78%

*Aspen has a net 15m cash position on its balance sheet so EV is closer to $137m post equity 3m equity share issuance at $7.15 on 4/19/17. On April 24th 2018, Aspen announces an early retirement of $10 million Credit Facility.

Annual Revenue (in $ millions)*

2013

2014

2015

2016

2017

2018E

2019E

2020E

2021E

TAL

225

313

434

620

1,045

1,500

2,050

2,075

3,680

2U

83

110

150

205

287

400

530

700

900

G.Canyon

598

691

778

873

974

1054

1140

1208

1280

Instructure

26

44

73

110

158

207

262

325

406

PluralSite

169

208

255

Chegg

255

304

301

254

255

298

360

438

542

Aspen

5.2

8.45

14.25

21.5

40.5

64.5

100

*Denotes FY end April

Several of these companies including Tal Education and Grand Canyon have provided investors with 10x returns over the last 5-7 years as these companies have demonstrated strong growth, which has also led to multiple expansion. Instructure, PluralSite and 2U are currently in the middle of their expansion stage as compounders and Chegg is also re-accelerating its growth.

Aspen Group (NASDAQ: ASPU) What’s the Opportunity?

While the education companies in the table above all have impressive growth characteristics and attractive business models, there is only company that is still yet to be discovered by institutional funds and that is Aspen. Aspen is a $125m enterprise value company projected to grow 75% in FY2019. Given Aspen’s low high multiple and high growth rate, it is the one company in the above table that has the potential to grow its revenues 10x over the next 5 years and generate a 5-10x return for investors. Similar to other companies mentioned in this article, Aspen has a disruptive ed tech model, which has allowed it to position itself as the low cost operator in the fast growing nursing sector in the education market. As of FY18 Q3, Aspen has an active student body of over 6,000 enrolled students and over 4,400 in its nursing degree programs.

The nursing market is large and growing. There are over 3 million nurses in the United States and according to the Bureau of Labor Statistics, the employment of registered nurses is projected to grow 15-20 percent from 2016 to 2026, which positions nursing as the fastest growing sector in the economy. According to the 2016 America’s Health Rankings Annual Report, the United States (U.S.) ranks 26th of 35 Organization for Economic Co-operation and Development countries for life expectancy (“Comparison With Other Nations | 2016 Annual Report | AHR,” 2016). One reason for the poor health outcomes may be attributed to the nursing shortage issue. Reuters - Hospital Operator HCA Spends Big To Keep Nurses On Board. Many states are operating with an unsustainable nursing shortage (ANA, 2014; Kaiser Family Foundation, 2016). Additionally, many majority rural states rank with the lowest amount of nurses (HRSA, 2015). By 2020, there will be 1.6 million nursing job openings, 700,000 of which will be newly created jobs (Carnevale, Smith, & Gulish, 2015). NY Times - We Need More Nurses.

Additional factors driving the accelerating demand in nursing are the growth in baby boomers (2.5-3 million people age into the Medicare system each year), a supply demand imbalance between retiring nurses and a need to train new nurses and the demand for more family nurse practitioners. Additionally, hospitals hoping to earn Magnet status must provide proof of plans to increase their BSN workforce to 80% by 2020, which has been an additional driver of growth. The data has shown that better educated nurses make less errors on the job, which has led to an increase in more and more hospitals investing in their nursing workforce through paying for ongoing education. HCA and Kaiser Permanente are two of the largest health systems in the country that combined employ over 140,000 nurses. The article below demonstrates how HCA, the largest health system in the country is investing to assist with both the nursing shortage, but also with improving the quality of nursing through ongoing education.

Aspen differentiates itself from other online nursing schools by being able to offer industry low tuition rates that are approximately 35%-50% lower than other peer educational institutions. The payment model is structured so that students pay anywhere from $250-$375 per month for their degree programs depending upon which bachelor or graduate degree program they are enrolled. Aspen’s pay as you go model is highly unique to the industry as every other institution we surveyed makes students pay for their education upfront by the semester. Given Aspen’s low monthly pay as you go payments, students do not graduate with debt and Aspen University is not heavily dependent upon the federal government to subsidize its students. In fact, historically the majority of for profit universities rely on the government for as much as 85% of the student tuition costs where as approximately 20% of Aspen’s student body receives federal government aid.

The second distinguishing factor of Aspen’s business model is that its student acquisition cost is only around $875 per student whereas other for profit universities typically spend between $3600-$5000 to acquire a new student. Historically, the lifetime value of an Aspen student is approximately $7000-$7500 or a 8.5 to 1 return ratio. Now that the university is adding new degree programs at much higher price points (doctoral degree $35,000 and FNP $27K), the LTV and average revenue per student will expand given the degree cost is 2-3x higher than their BSN and MSN degree programs. Additionally, Aspen is investing in a CRM system, which should further help with their student onboarding and retention efforts, which will also contribute to higher ARPU per student over the life of their degree program.

We have been impressed with the focus Aspen has placed on culture and data analytics. As an example Aspen’s graduation rate is approximately 62%, 11% higher than the national average. As part of our due diligence in meeting with the company, it became clear that retention is a very strong focus at Aspen and will be at USU as well. Faculty advisors are in place to coach and counsel students and administrators use technology to monitor real time data for on-line class attendance, and academic performance so if students struggle, the university can hopefully pick up on the early warning signs. Due to the University’s focus on data analytics and real time performance monitoring as well as utilizing university advisors, Aspen has been able to maintain graduation and retention rates at the top of its peer group.

ASPU Leadership

Aspen is led by CEO and founder, Mike Mathews. His background resides in Internet marketing after he successfully built Interclick into a leading online advertising network that was acquired by Yahoo for $270m in 2011. Because Aspen has vertically-integrated marketing and operates like an ad network (working with publishers directly) placing all ads utilizing their own brands, and by benefitting from referrals and other successful marketing tactics such as direct outreach to hospitals (the company already has 90 corporate partnerships in place with hospitals), the company has an unprecedented lead conversion rate of around 13%. Aspen’s marketing efficiency therefore allows the company to offer incredibly low tuition rates and still generate a robust SAC (student acquisition cost) to LTV (lifetime value) that is better than any SAAS or direct to consumer subscription business we have ever analyzed. We believe that the company’s front end student acquisition engine is worth over $250m today in stand alone value and that the company could leverage its proprietary knowledge and process across multiple industries. If one analyzes the rest of the for profit schools in industry, one notices that these institutions are struggling to grow enrollment and the reason for this is that they can’t offer degree programs that are affordable to a wide range of students in the B2C channel given their student acquisition costs are 4-5x higher than Aspen. Instead, Aspen’s competitors have been focusing on the B2B channel for growth. A tighter labor market and an improving economy has enabled some corporations to either pay for or subsidize the cost of ongoing education. Aspen has recently launched an outside salesforce to start calling on more hospitals and health systems and put them in position to compete for some significant wins. We wouldn’t be surprised that once Aspen achieves scale that one of the larger universities would acquire the company to gain access to the B2C channel.

For example, if you look across other several successful billion dollar plus direct to consumer companies such as Netflix, Match.com, Dollar Shave Club, LinkedIn, Soul Cycle, Wayfair, Cimpress and Gaia these companies are converting less than 2% of their leads and most of these companies have CAC to LTV ratios between 3-5x and high customer churn rates. When you compare Aspen to other best in class direct to consumer businesses, it becomes more clear that Aspen has created a BEST IN CLASS customer acquisition model and a highly attractive value proposition for students and increasingly hospitals.

As part of our due diligence, we contacted enrollment advisors from other education companies who told us that the student leads they receive are generic, not highly customized and they are purchased from third party lead generation companies. Additionally, these enrollment advisors said that the business models deployed by their previous employers are all based on high volume cold calling. It is no wonder that that the turnover of enrollment advisors at these institutions is high as well as the cost to acquire students. Aspen recruits enrollment advsiors from the industry and not surprisingly, their attrition is extremely low.

Given that the company is adding new, higher priced degree programs now that it has acquired regionally-accredited United States University, the company’s LTV should meaningfully accelerate over time as these new programs ramp students. These students may cost as much as $1500-$1800 to acquire (up from $800 for BSN’s), but the LTV is $8000-$40000 higher for these new FNP, Doctoral and Pre-Licensure programs. More impressively, Aspen’s corporate partners have made Aspen’s degree programs even more affordable and attainable given the corporate sponsor’s willingness to often help cover a portion of the tuition. Oftentimes, Aspen’s students end up going to school for next to no cost and get as much as a 15%-100% increase in salary depending on the degree they graduate with.

ASPU and Industry Growth Rates

In terms of the business, the company grew over 65% in FY17 and is expected to grow over 50% to 21m in FY18, which ends in April. Revenue is expected to re-accelerate and ramp to over 75% growth in FY19 and enrollments to ramp to over 70% versus mid single digits for the industry. The company reached breakeven at $14m in revenue and then management made the decision in the fall of 2017 to invest for growth and capture more market share given the strong industry dynamics and the company’s lower cost and more flexible tuition model. In addition, the company announced the acquisition of United States University in the fall of 2017, which came with only roughly $3m of revenue, but it brought with it regional accreditation that will allow it to extend its online reach nationally and offer more degree programs beyond nursing as it looks to enroll more students. The company had to front load marketing, administrative and teaching costs at USU so investors have yet to see the revenue ramp from the USU initiative. The Family Nurse Practitioner 2 year degree program is one degree that management has discussed on recent earnings calls that we expect will ramp aggressively in the back half of FY2019. The degree cost is $27K and is paid monthly. There are over 234,000 family nurse practitioners in the U.S. today alone and the market is adding over 25,000 new FNP’s per year and the growth is expected to accelerate. AANP - More Than 234,000 Licensed Nurse Practitioners in the US. USU’s FNP program is the lowest cost FNP program in the country. Therefore, it is not unreasonable to think that with time, the program could enroll between 1000-2000 students per year. If Aspen is successful in developing relationships in the B2B channel with the large hospital networks, the company should be able to capture a higher percentage of market share overtime.

By 2024, the Bureau of Labor Statistics projects that the NP profession will have grown by 35% compared to 30% for physician assistants and 13% for physicians. If Aspen were to capture 5% of the FNP market that would imply that they would enroll over 1,250 new students per year or over 100 new FNP’s per month. Once Aspen has ramped its call center and marketing programs, capturing 5% of this market is actually quite conservative when you consider that Aspen has the most flexible and lowest cost program in the country and it converts a staggering 13% of its leads. Now that Aspen is adding an outside salesforce to feed leads to its call center of 60 plus agents and growing, its enrollment growth should only accelerate further. In fact, if you read the company’s public earnings call transcripts, the company plans to add another 15-20 reps by May 2018 and is also increasing its marketing spend from its initial $150,000 per month to almost $600,000 per month.

In addition, we expect USU to add additional degree programs over the next 12-18 months in Technology including specialization degrees in data analytics, web development, cyber security, software development, robotics, AI and IT as well as degree programs in Psychology. Psychology is another degree program where there is a shortage of practitioners and accelerating demand where USU could fill a great need in the market.Washington Post - Why It's So Hard to Find A Mental Health Professional Today there are 27,000 annual master degree graduates and growing.

By the end of CY2018, the company could have close to 100 enrollment advisors (almost double from a year prior) and given that average rep is adding 7-8 students a month that equates to a run rate of roughly 8400 new students per year.

Today there are over 5 million students online and the numbers continue to accelerate. Below is a table of the universities with the largest on-line programs and their costs relative to Aspen. Given the cost of Aspen’s degree programs are significantly lower and the company has a much lower fixed cost operating model, we are confident that Aspen and USU will be able to ramp their enrollments.

Enrollment

Growth Rate

Pre-licensure tuition cost

RN/BSN Degree

Southern New Hampshire

75,000

10.0%

$19,250

Western Governor’s

83,000

-10.0%

$18,900

Grand Canyon

60,000

8.7%

$28,200

Arizona State

52,490

20.0%

$29,000

U of Phoenix

142,500

-5.0%

$27,600

Walden

52,000

-10.2%

$30,100

Liberty

85,000

-10.0%

$22,000

American Public U.

84,000

-0.05%

$32,400

Chamberlain*

32,000

5.5%

$82K

$26,550

Aspen/USU

6,066

52.0%

$47K

$9,750

*Chamberlain is exclusively nursing and the majority of enrollment is in pre-licensure

Pre-licensure Nursing Degree Program

Another longer term program that will drive growth for Aspen is its newly announced under-graduate, pre-licensure BSN nursing degree program. The company announced in February that it will open its first campus in the greater Phoenix area. This announcement is significant in that the pre-licensure market is 4x-5x greater than the post licensure market. While the ramp of the first campus will be gradual, the campus will be able to accommodate up to 900 students and at peak capacity could potentially generate $12-15m in annual revenue. Overtime, there is nothing preventing Aspen from being able to open 10-15 campuses. For example, the Chamberlain School of Nursing (owned by Adtalem Education) has more than 10,000 enrolled students with students paying over $85,000 for the pre-licensure program. Enrollments are still growing mid single digits despite the much higher price tag, which we view as a positive for Aspen’s entrance into the market. Aspen’s pre-licensure program is priced at approximately $46,000 for the 3 year degree. Today, Chamberlain generates over $300 million in annual revenues.

Now that Aspen is offering both pre-licensure and post licensure nursing degree programs, we believe that over time, the company will be able to scale to over $300m in revenue from its nursing programs alone. When you consider that USU intends to expand into other educational verticals including Psychology, Technology, Business and Education and the Military VA, etc., one gains increasing confidence that Aspen certainly has the potential to increase 10x or more in value if the company executes well.

Recent events and Stock Sentiment

At the end of April, Aspen raised $23m in a secondary equity offering at $7.15. The capital raise was a positive for the company as it enabled Aspen to retire the $7.5m of debt on its balance sheet and enabled the company to increase the cash on its balance sheet to $16m. This cash position is now significantly large to allow the company to aggressively pursue its new initiatives and should remove what has been an overhang on the stock. The other overhang on Aspen’s stock has been that the company’s expenses have accelerated as they have hired additional faculty, administrators and enrollment advisors to support the launch of new programs at USU and the launch of their first pre-licensure campus. Investors are waiting to see the corresponding revenue ramp from these initiatives. However, as noted in the recent secondary prospectus, Aspen pre-announced 28% sequential revenue growth in its cuurent FY18 Q4. (Q3 $5.7M, Q4 $7.2m) The upwardly revised quarterly guidance had ONLY called for 17% sequential growth. This growth clearly demonstrates that the USU programs are gaining traction and seeing strong enrollment especially in the FNP program, which has still not been fully rolled out.

Catalysts for Taking a Position in Aspen

Our view is as follows: the company raised revenue guidance coming out of its most recent 3rd quarter and just announced revenue numbers meaningfully above Q4 street expectations, so we think the risk is to the upside not to the downside in the company’s ability to start accelerating its revenue ramp over the next several quarters. In addition, Aspen exited Q3 with 103 new USU student enrollments and an active student body of 446 students. We expect new enrollments at USU to accelerate by 50% sequentially and end FY18 with over 500 students. We expect Aspen to finish FY2019 with over 1000 enrolled students or an increase of over 100 percent, which would also lead to increase in revenue of over 100 percent. Secondly, as the company now begins FY2019, the valuation becomes increasingly compelling and should serve as a catalyst for buyers to step in. If one waits for certainty in the results and sell side to get more bullish, investors may have to pay up significantly to chase an illiquid growth stock. Lastly, the company could reach break even by Q4 of the current FY2019, which will serve as another catalyst for investors.

We also believe that overtime, Aspen is going to be viewed more like a direct to consumer on-line subscription Internet marketing company that has an education product than as a brick and mortar education company. A good comparable company to Aspen is Gaia Inc. Gaia is a high growth Internet subscription content company. The company has a $355m market cap (that is and recently raised $41m in a secondary offering at over 7x CY2018 sales. Gaia in contrast to Aspen has a CAC to LTV ratio of 3-4x and has a lead conversion rate of less than 2%. Below is a list of public direct to consumer Internet companies and as one can see, Aspen compares very favorably. In addition, Lynda.com, an online subscription education course company was acquired by LinkedIn for $1.5B or 8.5x sales in 2015, which we believe is another good comp for Aspen’s business. We believe over time investors will value Aspen among other Internet subscription product businesses.

Company

Market Cap

Ticker

PS Ratio

CY2018/FY2019

PS Ratio

CY2019/FY2020

Revenue

Y/Y Growth

2U, Inc.

4.6B

TWOU

14x

12.5x

38%

PluralSite

2.5B

PS

14x

12.5X

28%

Tal Education

10B

TAL

8x

7x

50%

Match.com

9.8B

MTCH

6.2x

5.2x

23%

Chegg, Inc.

3.2B

CHGG

8.5x

7.5x

17%

Gaia, Inc.

300M

GAIA

8.2x

4.7x

75%

Netflix, Inc.

50B

NFLX

9.8x

7.5x

30%

Aspen, Inc.

150m

ASPU

3.3x

2.2x

78%

*DollarShaveclub was acquired in 2017 for approximately 7x sales

Summary

The valuation arbitrage between growth stocks with daily or 3 days to liquidity and growth stocks with illiquidity has not been this pronounced in years. Growth investors will pay any multiple for liquidity in today’s market, which is creating a highly attractive and far better risk reward for those investors who can sacrifice short term liquidity for the opportunity to make significantly larger gains with lower business risk over the long term. As we have seen recently with PluralSite, 2U, Gaia and USAT, as the market cap increases so does liquidity. As a company goes from 100m market cap to 250m to 500m to $2B, the universe of institutional money managers that can own stocks expands by over 100x. Aspen has started its FY19 year where expectations are for $37-$40m in revenue. In 2 years (FY2021), Aspen is on a trajectory to reach $100m in sales. Without any multiple expansion from reaching scale, the company would be worth $350m. The data would suggest that for those that are patient enough to wait, the multiple should expand (similar to other companies) as the liquidity improves driving an increase in institutional demand. In sum, you can buy liquid companies today with 25%-40% growth for 8-15x revenue with greater risk of multiple compression than likelihood of multiple expansion or you can risk short term under-performance and buy illiquid growth companies that have 2-3x higher growth that have the opportunity for several turns of multiple expansion overtime.

Longer-term, we believe Aspen can generate 25% EBITDA margins once the company achieves $150-$200m in revenue. Lastly, Aspen will be added to the Russell 2000 on June 22nd, which should create a near term buying catalyst.

Disclosure: I am/we are long ASPU.