Adtalem Global Education Inc. (ATGE) on Q1 2022 Results - Earnings Call Transcript
Operator: Greetings, and welcome to Adtalem Global Education First Quarter Fiscal Year 2022 Earnings Conference Call. . As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. John Kristoff, Vice President, Global Communications and Investor Relations. Thank you, sir. You may begin your presentation.
John Kristoff: Thank you, Jen. I'd like to remind you that this conference call will contain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 with respect to the future performance and financial condition of Adtalem Global Education that involve risks and uncertainties. Actual results may differ materially from those projected or implied by these forward-looking statements. Potential risks, uncertainties and other factors that could cause results to differ are described more fully in Item 1A Risk Factors of our most recent annual report on Form 10-K filed with the SEC and our other filings with the SEC. Any forward-looking statement made by us is based only on the information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statements, whether written or verbal that may be made from time to time, whether as a result of new information, future developments or otherwise, except as required by law. During today's call, our commentary will refer to non-GAAP financial measures, which are intended to supplement, though not substitute for, our most direct comparable GAAP measures. Our press release, which contains the GAAP financial and other quantitative information to be discussed today, as well as a reconciliation of GAAP to non-GAAP measures is available on our website. Please note that all financial results and comparisons made during today's call are on a continuing operations basis, excludes special items and are in comparison with the prior year period unless otherwise stated. Telephone and webcast replays of today's call are available for 30 days. To access the replays, please refer to today's press release. We'll begin today's presentation with prepared remarks from Steve Beard, Adtalem's President and Chief Executive Officer; and Bob Phelan, Senior Vice President and Chief Financial Officer. Following the prepared remarks, we will have a question-and-answer session. And with that, I'll now turn the call over to Steve.
Stephen Beard: Thank you, John. I'm pleased to welcome you all to our First Quarter Fiscal Year 2022 Earnings Call today, my first in my new role as President and Chief Executive Officer of Adtalem. During the quarter, we made significant progress against key initiatives that will allow us to accelerate the performance of our health care-focused assets. We are well on our way to becoming a pure-play health care education provider with the scale and capabilities to capitalize on the robust and durable demand for skilled health care professionals. This scale and these capabilities are valued by our employer partners and our students alike. As CEO, I intend to fully leverage these strengths to drive significantly improved operational and financial performance for our stakeholders. Key to this objective has been the addition of Walden University to our portfolio. As part of the integration process, we have introduced a new enterprise level operating model that allows for a more efficient and strategic use of shared services across the portfolio. This new model will also enable our institutions to focus on curriculum, academic outcomes and student success while providing consistent high-quality support across the entire student journey, from admissions to matriculation to completion. The efficiency inherent in this new model complements the value capture elements of the integration, bringing greater speed and certainty to our efforts to realize cost synergy goals of $60 million in annual run rate cost savings by the second anniversary of completing the transaction. The new operating model also requires executive leadership with proven track records of success in matrix organizations and a proven ability to drive consistent and profitable organic growth. In August, we announced the appointment of John Danaher, a physician executive with extensive experience across higher education, hospital systems and health care-focused education, as the new President of Adtalem Medical and Veterinary. Also, we announced the appointment of James Bartholomew as Senior Vice President, Chamberlain and Institutional Shared Services. James has a proven track record in leading academic institutions of scale and assumes responsibility for the strategy, operations and growth at Chamberlain at a critically important time. In addition, he takes on the key role of optimizing our shared services model to drive enhanced quality and efficiency. I have also refreshed and enhanced the capabilities of my senior team to include Bob Phelan as our permanent Chief Financial Officer; Maurice Herrera, as our Chief Marketing Officer; and Steven Tom as our new Chief Customer Officer. Bob brings more than 30 years of finance and operations experience, along with a passion for developing and leading high-performing teams. Maurice brings nearly 30 years of marketing leadership experience and has a proven track record of successfully shaping and accelerating growth through a blend of innovative brand and digital marketing strategies. Steven has led Walden's digital transformation at the intersection of customer experience and technology, improving personalization, omnichannel engagement, innovation and self-service. With these appointments, I firmly believe that we are much better equipped to meet the needs of our students and employer partners as a leading provider of health care education. Taken together, we expect these changes to our operating model and leadership team to drive enrollment growth, improve persistence and significant cost savings while maintaining superior student outcomes, all of which are key to significantly improving our financial results and long-term value creation. And speaking of student outcomes, I would be remiss if I fail to note that we remain dedicated to student success as a critical measure of our performance. Our outcomes continue to compare favorably across the higher education landscape, even as we expand access to high-quality education to diverse and underserved communities. As one measure of those outcomes, the U.S. Department of Education published its 2018 cohort default rates in late September. I'm proud to say that all Adtalem institutions came in well below the overall national averages for proprietary and not-for-profit institutions, public or private. Before I hand it over to Bob for more details on the quarter and segment level performance, let me provide a high-level overview of our financial performance in the quarter. We delivered revenue and operating income within expectations including 29.9% year-over-year revenue growth due to the acquisition of Walden and 4.3% organic revenue growth. Within our segments, total new student enrollments decreased 14.1%, driven primarily by Chamberlain and Walden, while total enrollment decreased 4.5%. At Chamberlain, we had a challenging comparison to the record new student enrollment levels we achieved in September 2020, with new student enrollment for the September 2021 session trending closer to historical levels. The declines are primarily attributable to COVID-related headwinds in our post-licensure nursing programs at both Chamberlain and Walden and the Delta variance surge this summer placed much greater demands on working nurses, negatively impacting the demand for ongoing education. We expect these headwinds to subside over time as COVID transitions to more of an endemic stage. In the interim, we're increasing our investments in marketing while taking a more targeted approach in our efforts to capture an increasing share of the existing demand. Longer term, we believe market demand among health care providers for highly qualified nurses will continue to accelerate, creating opportunities to improve growth rates for both Chamberlain and Walden. Along these lines, we are encouraged by Chamberlain's continued expansion of its health care provider partner programs as we highlighted in our earnings release. At Walden, social and behavioral sciences programs continue to perform well. Similar to Chamberlain, the decrease in new student enrollment involvement represents a return to more historical trends in Walden's nursing programs following the surge in enrollment levels in the prior period, and we do believe that is attributable to COVID-related headwinds in post-licensure programs. We also believe new and total enrollment at Walden was adversely impacted by negative publicity surrounding the now concluded U.S. Department of Justice inquiry. By way of reminder, this inquiry concluded with no determinations of any misconduct by Walden. Operationally, the integration process is proceeding according to plan, and we remain very confident in delivering our projected cost synergies. Overall performance in our Medical and Veterinary segment is solid. However, at Ross Med, we're seeing some challenges given the convergence of a surge in COVID-19 cases on the Island of Barbados, with the timing of our return to in-person campus instruction this fall. This quarter, we appointed Heidi Chumley as the new dean of Ross Med. And Heidi brings more than 20 years of experience in medical education, including 8 years of leadership at AUC, where she elevated the academic, operational and financial outcomes at that institution. This new leadership's top priority to drive operational improvements at Ross Med in future quarters can mitigate near-term headwinds. Finally, our Financial Services segment showed very strong performance in the quarter, aided by strong demand and ongoing innovation in product mix and customer support. The new financial services senior leaders I appointed last year continue to drive strong growth and operational improvements across each of our Financial Services businesses. As we announced in August, we are exploring strategic alternatives for our Financial Services segment, and that process is underway and proceeding very well. The level of interest we've received in these businesses is extremely high and I'm confident that we'll be able to execute a strategy that unlocks significant value, allows for substantial delevering of the balance sheet, and yields a pure-play portfolio with an attractive health care focus. In closing, the first quarter of fiscal 2022 yielded solid results in the face of lingering pandemic-related headwinds. But to be clear, the long-term prospects for Adtalem could not be more encouraging. As we execute successful integration of Walden, realize the full benefit of our cost synergies, implement a more efficient operating model, unlock the value of our Financial Services segment, and turn our full attention to competing in the very attractive health care space with market-leading scale and brands, I'm extremely bullish on the opportunity to create superior value for our stakeholders. I'm grateful for the opportunity to lead this great organization at this important time. I have no doubt that we will meet our moment and emerge as the leading provider of professional talent to the dynamic health care industry. And with that, I'd like to pass it over to Bob to discuss our financial results and performance within each of our segments in greater detail.
Robert Phelan: Thanks, Steve. Good afternoon, everyone. I'll start by providing some highlights on company-wide performance and then walk through performance in each of our segments. I'd also like to remind everyone about our updated reporting segments. Following completion of the Walden acquisition, we've updated our business segments as follows: Chamberlain, Walden, Medical and Vet, and Financial Services, I would refer you to the 8-K we filed recently for historical information broken down in the new business segments where applicable. In the first quarter, revenue increased 29.9% to $348.3 million compared with the prior year, primarily due to the acquisition of Walden. Excluding Walden, we generated 4.3% organic revenue growth to $279.7 million compared with the prior year. Cost of educational services was $163.1 million in the first quarter, an increase of 43.5% compared with the prior year. Student Services and Administrative Expense was $159.5 million in the first quarter, a 59.2% increase when compared with the prior year. The increased cost of Educational Services and Student Services and Administrative Expense is primarily driven by the inclusion of Walden in the current period and higher costs associated with the return to in-person campus instruction at Chamberlain and our medical and vet schools. Consolidated operating income, excluding special items in the first quarter was $54.6 million, a 0.4% increase compared with the prior year, attributable to higher revenue, mostly offset by higher costs from a return to in-person campus instruction, new campus expenses and increased marketing expense. Net income from continuing operations, excluding special items, was $31.3 million, a 24.1% decrease compared with the prior year due to higher interest expense related to the acquisition. Looking at our segments and beginning with Chamberlain. The segment reported first quarter revenue of $135.6 million, an increase of 1.4% when compared with the prior year. Operating income declined from $30.2 million to $20.9 million due primarily to increased investments in marketing and higher costs associated with the return to in-person campus instruction. New and total enrollment in the September session decreased 13.4% and 2.8%, respectively, compared with the prior year. As Steve said, this decrease in new student enrollment was primarily attributable to a return to historical levels from record high levels in the September 2020 session and COVID-related headwinds in our post-licensure programs. We expect these headwinds to subside over time and believe that demand for nurses will continue to outpace supply over the long term, which inherently creates stronger growth opportunities for us in the future. Turning to Walden. Revenue in the first quarter was $68.6 million. The segment operating loss was $11.6 million, driven primarily by intangible amortization expense. Segment operating income, excluding special items, was $11 million. New and total student enrollment during the quarter decreased 15.5% and 5.5%, respectively, compared with the prior year. Again, due to the comparison with the surge in new student enrollments in the prior year, COVID-related headwinds in our post-licensure programs and other factors that Steve highlighted. Our integration efforts are progressing well, and we remain on track to realize the $60 million of cost synergies in the first 2 years of Walden ownership. In our medical and vet segment, revenue was essentially flat compared with the prior year. Segment operating income declined from $22.8 million to $15.7 million, driven primarily by higher costs related to return to in-person campus instruction. September session medical and vet school new student enrollment decreased 4.6% and total student enrollment decreased 6.9% compared with the prior year, driven primarily by declines at Ross Med. Now turning to Financial Services. As Steve noted, our review of strategic alternatives for the segment's businesses is proceeding well, and we continue to be excited about the level of interest we are receiving. We also continue to be confident in our ability to execute on a strategy that delivers significant value for our shareholders and allows for thoughtful delevering. First quarter revenue increased 19.9% to $59.3 million compared with the prior year, driven by increases in revenue across each of the main businesses within the segment. Operating income was $12.6 million, an increase of 73.7% compared with the prior year. Segment operating income, excluding special items, increased 54.8% to $13.4 million compared with the prior year, driven primarily by higher revenue which resulted in improved operating income. ACAMS' revenue increased as nonconference certification offerings continue to perform well, and conference revenue began to show a recovery. Better revenue growth was driven by expansion of its continuing education program offerings and an increase in CPA exam preparation revenue. OnCourse Learning's continued focus on execution in a favorable mortgage market and strength in its continuing education business drove increased revenue in the quarter. Turning now to our balance sheet. We ended the first quarter with cash and cash equivalents of $360.1 million and outstanding bank borrowings under our existing term loan B and senior secured notes of $1.65 billion. Turning to cash flow in the quarter. Net cash provided by continuing operations was $40.9 million. Our capital expenditures for the quarter totaled $7.3 million. As a result, free cash flow in the first quarter was $33.6 million. As a reminder, we define free cash flow as cash provided by continuing operations less capital expenditures. Moving on to our outlook. We are reaffirming our previous guidance of adjusted revenue to be within the range of $1.685 billion and $1.735 billion and adjusted diluted earnings per share of $4.20 to $4.45 from continuing operations, excluding special items. With that, I will now turn the call over to the operator for Q&A.
Operator: . Our first question comes from the line of Jeff Silber with BMO Capital Markets.
Jeffrey Silber: I wanted to drill a little bit further into what was going on with some of the nursing enrollment -- nursing programs, excuse me. I think you mentioned the issue was mostly in the post-licensure program. The way I understood it is that nurses are making a lot of money now, so there's no reason for them to go back to school if they can still work and make a lot of money. One, is that what you're talking about? And then two, if that's the case, would you have seen or did you see an increase in pre-licensure programs because of the same issue?
Robert Phelan: Yes. Thanks for the question. So the primary drivers, the one you cited, the scarcity of experienced nursing talent in the market is such that those nurses are in very high demand, they've got lots of market opportunity to earn lots of money. And as a result, they're less focused on continuing their studies. In addition to that, we've got lots of nurses who might be inclined to continue their studies but are otherwise burned out by some of the burdens associated with caring for patients in the COVID environment. So that's been the primary driver in the post-licensure space. On pre-licensure, we've seen a slowdown as well, but it is not of the same magnitude as what we've seen in the post-licensure space.
Jeffrey Silber: Okay. Any reason -- I mean, again, the pre-licensure programs, most of these folks are not necessarily nurses. I'm just curious why they're not attending if it's such a hot industry.
Robert Phelan: No, look, I think that too is part of the broader sort of COVID dislocations. I think enrollments in higher education programs across the board are suffering as folks are reluctant to return to school in this environment. And even in programs, where we are seeing steady enrollments, we see students taking lighter loads and fewer hours and that sort of thing. So again, we think this is temporal. We think it will pass in due course. But there is a COVID fatigue headwind that I think shows up in both pre-licensure and post-licensure.
Jeffrey Silber: Okay. That's fair. And I know a lot of the other companies are seeing similar issues. I want to go to the guidance. So it sounds like some of these issues were somewhat new. I know they may have been happening for a while, but they seem to have exacerbated over the past few months. Yet you reiterated guidance, and I think the enrollment declines were certainly worse than we had expected, and I assume others as well. Can you give us some comfort how we can get to our original guidance given how things have changed over the past few months?
Robert Phelan: Yes. So I think we anticipated that there'd be some falloff in enrollments. Obviously, that falloff was more severe than we anticipated. Having said that, revenue for the quarter was within expectations, albeit at the low end of those expectations. We're still growing our programs. And the other thing that you should keep in mind is that -- and you know this as well as I do, we're on an academic fiscal year. It's the first quarter. We remain optimistic that some of these headwinds will dissipate over time. And as a result, we've not seen enough of this trend to be prepared to suggest that our full year guidance is out of reach.
Jeffrey Silber: Okay. I know it's still early. So I understand that. So that's great. All right, I'll jump back in the queue.
Operator: Our next question comes from the line of Jeff Meuler with Baird.
Jeffrey Meuler: Yes. So on the Delta surge and the impact, you mentioned increasing marketing. I guess there's a potential offset. Just are you increasing marketing spend into a lower marketing efficiency environment or not? And what's funding that, because there's no change in the guidance and I know you're confident in the synergies, but it doesn't sound like those are increased. So just help us understand, I don't know, on the order of magnitude around marketing or if there's erosion of efficiency, just want to understand the credibility of that potential offset.
Stephen Beard: Yes. So I'll start, and Bob can jump in behind me. But we think there are targeted opportunities to invest at the top of the funnel to try to preserve as much of our share as we can in an otherwise demand-challenged environment. That's true in the nursing programs. We think there are also opportunities to do that across the medical programs. And again, given our level of confidence in what we can do from an overall margin perspective with the cost synergies we're trying to achieve over the year, we feel comfortable at this early stage in the year of making those targeted investments because, obviously, the benefits -- the economic benefits over the lifetime value of those students are really attractive to us. So we think it's an investment worth making at this point in the cycle.
Robert Phelan: I would agree with that. And the only other thing I would say is that we're specifically segmenting and looking at the population of students to be smarter with how we are going to market in terms of trying to get those students into the pipeline.
Stephen Beard: The only other thing I would add just about marketing generally, we mentioned in the prepared remarks that we recently brought on a new Chief Marketing Officer, Maurice Herrera. And one of the things we've tasked him with is helping us think more expansively about how we bring a more dynamic allocation of the investment resource across the products we take to market so that we're not necessarily funding new investments with new money. We're actually taking investment from places where we think the return is relatively modest to places where we think the return is more attractive. And we're experimenting with that kind of dynamic resource allocation as we speak.
Jeffrey Meuler: Got it. Walden, I understand some potential impact from the DOJ inquiry, but looking, I guess, to gain confidence around that. Have Walden inquiry trends since improved? Or I mean, the logic is there as to why that would have an impact, but just trying to sort through that other potential, I guess, temporary impact from that and what's -- what are you seeing to give you confidence that, that was the case?
Stephen Beard: Yes. So there's a bit of a lag in when the efforts at remediation around, some of the noise around DOJ actually show up in the model. So if I go back several months, increase we're suffering as a result of that and there were quite a bit of questions on the part of students about the efficacy of the program, accreditation, what does this mean. And as you know, we had folks in the market for reasons they understand best that sought to really amplify this negative message around the efficacy of Walden's programs up to the point at which the DOJ inquiry was resolved. So it's going to take a little time for those remediation efforts to flow through the consciousness of our prospective students, social media, word of mouth, but we fully expect that within a reasonable period of time, maybe a quarter or so, we will see those increase and those conversions get back to trends that we would have expected in our modeling of that business in the early days of our ownership.
Operator: . Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Steve Beard for closing remarks.
Stephen Beard: Sure. My thanks to everyone for joining the call. Before we sign off, though, I do want to take a moment and thank all of our colleagues at Adtalem who've done amazing work for students and employers over the last quarter. We've got a really aggressive and ambitious change agenda and our teams across all of our institutions have been super resilient and super agile in embracing that change agenda. And so I just want to thank them for their commitment and support, and we look forward to picking up the conversation again next quarter.
Operator: Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.
