Adtalem Global Education Inc. (ATGE) on Q3 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to Adtalem Global Education Third Quarter Earnings Conference Call. I will now turn the conference over to your host, Maureen Resac, Vice President of Treasury and Investor Relations. You may begin.
Maureen Resac: Thank you. 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 on August 18, 2020, 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 was made. We undertake no obligation to publicly update any forward-looking statements, whether written or verbal that may be made time to time, whether as a result of new information, future developments or otherwise, except as required by law.
Lisa Wardell: Thank you for joining us on our third quarter earnings call this afternoon. Before we discuss our financial results, I would like to start by welcoming Bob Phelan, our Interim Chief Financial Officer, to the call. Bob is an accomplished financial leader and has been with that talent since February of last year. He previously served as our Vice President and Chief Accounting Officer and has transitioned seamlessly into managing the finance team and partnering with our business leaders and with me. Welcome, Bob. Our third quarter performance was in line with expectations, delivering revenue of $281 million and diluted EPS of $0.72. And we are reaffirming our full year outlook of 5% to 7% revenue growth and 28% to 32% diluted EPS growth. Our Workforce Solutions strategy continues to deliver strong results. We achieved 9% new student enrollment growth at our Medical and Healthcare institutions and double-digit revenue growth in our Financial Services segment, which reinforces our confidence in the full year outlook. Let me provide a brief update on our planned acquisition of Walden University. We remain enthusiastic about the complementary programs and online capabilities that brings to Adtalem. The acquisition of Walden University plays an important role in furthering our strategy, permitting us to achieve market-leading scale and reach and healthcare education, strengthening our core nursing offering expand into attractive high-demand adjacencies, including social and behavioral sciences and extend the customer life cycle from pre-licensure programs to graduate and advanced degrees, market an attractive mix of online, on-campus and hybrid learning modalities and engage our employee partners at further scale. As we announced during the quarter, we closed our $1.65 billion of financing related to the Walden acquisition, and we continue to expect the acquisition to close in the first quarter of fiscal 2022.
Bob Phelan: Thank you, Lisa, and hello, everyone. I’m pleased to have the opportunity to share our solid third quarter financial results today. In the third quarter, we continued to execute on our strategy delivering results that were in line with our expectations. Revenue increased 3.4% to $280.7 million. We are seeing strong demand across our businesses, driven by the strength of our student outcomes in our investments in marketing and new offerings. As anticipated, we faced incremental COVID-19 headwind, primarily related to reduced capacity from some of our clinical partners, which modestly impacted the top and bottom lines. We expect these transitory COVID-related headwinds to continue in the fourth quarter. Looking ahead as the number of people being vaccinated increases daily, we remain cautiously optimistic that the environment will continue to improve as we enter into the next fiscal year. Cost of Educational Services was $123.1 million in the third quarter, an increase of 3.7% compared with the prior year. This increase was primarily driven by increased costs at Chamberlain to support growth. Student Services and Administrative expense was $108.5 million in the third quarter, a 12.5% increase when compared with the prior year. This increase was primarily driven by added sales and marketing expense to support continued growth and an increase in employee benefit costs. Consolidated operating income, excluding special items, decreased 12.9% to $49.1 million in the third quarter of fiscal year 2021, primarily driven by lower clinical revenue and increased administrative expense. This was partially offset by enrollment growth over the last 18 months in Chamberlain and revenue growth in Financial Services. Net income from continuing operations, excluding special items, was $36.9 million compared with $43.2 million in the prior year and diluted earnings per share from continuing operations, excluding special items, was $0.72 compared to $0.81 and 11.1% year-over-year decrease. Now turning to our segment results for the quarter. In Medical and Healthcare, revenue for the vertical was $230.2 million, a 1.3% increase compared with the prior year. The increase was driven by enrollment growth at Chamberlain over the last 18 months. This was partially offset by lower clinical and housing revenue at Ross Med. As Lisa discussed, clinicals were impacted by the winter surge in COVID-19 cases, which reduced the availability of clinical slabs at some of our partners. Revenue at Chamberlain in the third quarter increased 8.3% compared with the prior year period. Total student enrollment increased 5.8% for the March session. Revenue for the Medical and Vet schools in the third quarter decreased 9.1% compared with the prior year, driven by lower clinical and housing revenue at Ross Med. We view the clinical revenue headwinds as transitory and expect that and pandemic eases, we will resume growth in Medical and Vet school revenue. Medical and Healthcare segment operating income, excluding special items, for the third quarter was $51.1 million, an 11.2% decrease. The decrease was driven by lower clinical and housing revenue of Ross Med and increased administrative expense. Turning now to our Financial Services segment, third quarter revenue was $50.4 million, an increase of 14.3% compared with the prior year, driven by revenue growth at ACAMS, OnCourse Learning and Becker. ACAMS revenue was strong in the quarter as they continue to diversify their offerings to address a broader range of customer needs, providing future growth opportunities. OnCourse Learning grew through revenue in the quarter by leveraging its leadership position in a favorable mortgage market and growth in continuing in professional education. At Becker, revenue was up slightly as continuing education revenue growth was partially offset by a decrease in CPA test prep revenue. Becker continues to be impacted by softness in test taking activity and hiring by accounting firms. Third quarter operating income in the Financial Services segment decreased 6.8% to $3.9 million. The decrease in segment operating income was primarily driven by increased sales and marketing expenses. Turning now to our balance sheet, we closed the third quarter with cash and cash equivalents $497.7 million and outstanding bank borrowings under our existing Term Loan B of $291.8 million. During the quarter, we finalized the financing for our planned acquisition of Walden University by closing an $800 million of senior secured notes and pricing $850 million of Term Loan B to replace our existing Term Loan B upon close of the acquisition. This $1.65 billion of permanent financing, along with its $400 million revolver is in line with the committed financing that accompanied our acquisition announcement last September. We repurchased 975,000 shares in the third quarter for a total of $37 million. And as a result, we had 49.7 million shares outstanding as of March 31, 2021. We are planning to repurchase up to $100 million of shares during fiscal year 2021. Turning to cash flow in the third quarter, net cash provided by continuing operations of $81.9 million was $34.4 million lower than the third quarter of last year, due to the timing of receipt of $35.5 million of Title IV funds in December that normally would be received in January. Our capital expenditures for the quarter totaled $10.7 million. As a result, free cash flow in the third quarter was $71.3 million compared with free cash flow of $104.6 million in the prior year period. As a reminder, we define free cash flow as cash provided by continuing operations less capital expenditures. Strong free cash flow generation is a hallmark of Adtalem’s operating model. Adtalem has generated $177.7 million of free cash flow on a trailing 12-month basis through March 31, 2021. As discussed last quarter, we continue to expect significant free cash flow growth in the coming years. We anticipate that Adtalem’s standalone free cash flow will grow in line with earnings or a low-double digit rate. Post wealth and integration, we would expect Adtalem to generate over $300 million of free cash flow on an annual basis. The strong free cash flow generation supports our commitment to de-lever the balance sheet, to below two times net leverage within 24 months of the close of the acquisition. Moving on to our outlook, for the full fiscal year 2021, we continue to anticipate revenue this fiscal year to increase 5% to 7% and diluted earnings per share from continuing operations excluding special items, to grow 28% to 32%, inclusive of share repurchases. As previously stated, we believe our standalone business in the coming years will generate revenue growth in the mid-single digits and earnings per share growth in the low-double digits. Additionally, we are excited about the future cost synergies and earnings trajectory that the planned Walden acquisition will provide that talent. We continue to expect adjusted earnings per share accretion of $1.15 per share during the 12 months following the close date, excluding special items and versus accounting effects. If we are able to close the Walden acquisition in the first quarter of fiscal 2022, the combined company would be expected to generate over $4 of adjusted earnings per share for fiscal year 2022. With that, I will now turn the call over to the operator for Q&A.
Operator: Before commencing the Q&A portion of the call, I would like to turn the call over to Stephen Beard, Chief Operating Officer at Adtalem.
Stephen Beard: Thank you, operator. Before we turn to Q&A, I have an important update on the Department of Justice matter. Last evening, Walden and Laureate informed us that the Department of Justice has concluded its investigation into Walden’s Master of Science and Nursing Program. In addition, they indicated that the DOJ has decided that it will not intervene in the underlying lawsuit that sought to bring claims on behalf of the government. For more information on the DOJ’s determination, I would refer you to Laureate’s disclosures on Form 8-K filed with the SEC earlier this evening. As for our own investigation, we are nearing the completion of a thorough inquiry conducted by independent legal advisors. And to-date, we have not identified any violations of the False Claims Act. We are pleased that the DOJ has declined to intervene, and we would remain optimistic that these developments will pave the way for closing the transaction in the first quarter of next fiscal year as planned. And with that update, I will turn the call back to the operator for questions from our audience.
Operator: Our first question is with Jeff Meuler with Baird. Please proceed with your question.
Jeff Meuler: Yes. Thank you. Good afternoon everyone. So, you are maintaining your full year guidance, but there is this disruption to clinical availability and it sounds like RN to BSN remains under pressure understandably because of the frontline nursing workers with the covet surges. But I guess my question is, the revenue is quite a bit below this quarter, than at least consensus had it modeled. You are saying Q3 in line and I guess you are saying as anticipated increases in COVID-19 headwind. So, should – to be prudent, should we assume that full year revenue is more likely to come in, in the bottom half of the range or are you not viewing it that way? Thanks.
Lisa Wardell:
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Jeff Meuler: Okay, helpful. And then I appreciate the update on the DOJ. In the 8-K, there is a line about, I guess, Walden is still having this public government investigation designation with HLC, which that may be a matter of time post the DOJ decision before that falls away. But just reminding me, on accreditation, where does Walden stand, like when does this HLC or any other accreditation, CCNE, when does it run through or when that renewed through?
Stephen Beard: So just so I understand your question, accreditation in the ordinary course or credit or approval of the transaction?
Jeff Meuler: Accreditation in the ordinary course for Walden from HLC, CCNE, any other kind of important accreditors?
Stephen Beard: Yes. So, as we sit here today, all Adtalem’s programs are fully accredited and accreditors vary depending on the program as it relates to nursing. They were accreditors to CCNE and their accreditation is up for renewal next month. And Walden and Laureate expects that accreditation to be renewed in the ordinary course.
Jeff Meuler: Okay. Thank you. I am going to jump in queue. Thanks.
Operator: Our next question is with Jeff Silber with BMO Capital Markets. Please proceed with your question.
Jeff Silber: Thanks so much. Just one more on Walden, can you just remind us what the time line is or what the – what we need to expect before that deal closes?
Stephen Beard: So at this point, the remaining stage gates are really regulatory approvals. So, HLC reviews and approves the transaction. The HLC site visit has occurred. HLC is developing its report on the basis of that site visit to be presented to HLC formally at its June meeting. And we expect – they will take it up at the June meeting. We are currently on that agenda, and we expect that they will approve the transaction at that time. After that, the last gating issue relates to Department of Education’s pre-acquisition review. That work is under way at Ed, and we have been responding to information requests from them related to their review and then once the Department of Education sides off, then we are in a position to satisfy the remaining procedural closing conditions and close the transaction on the time line that we have previously indicated.
Jeff Silber: Okay. That’s helpful. I am sorry to keep the discussion around Washington, but we had a pretty big announcement from the President yesterday regarding the American Families Plan. And then looking at over, I am thinking this could impact the company. There could be some positives, some negatives in there. I am just wondering what you are thinking. And specifically, a lot more funding going to the not-for-profit sector, do you see that as stronger competition? On the other hand, you talked a $2 billion pipeline for skilled healthcare workers with graduate degrees that in theory you could benefit from. So, I am just curious of your thoughts. Thanks.
Stephen Beard: Yes. So, I think the way we would characterize it is that the myriad of initiatives there represent a net positive for us, that there are obviously some things that to your point, the flow of dollars to not-for-profit institutions. But there is also quite a bit as we understand the package, their community college and those institutions often serve as a pipeline to our programs. And so we view that as a positive as well. And to your point, some of the investments related to broader healthcare workforce improvement also plays to our strength. So again, lots to digest. We are still studying the proposals, but our preliminary perspective is that it’s a net positive.
Lisa Wardell: Yes. And the only thing I would add to that, Jeff, is on the not-for-profit side, we see those as real partners. There is lots of things that we do with and have been with institutions, whether it’s online capabilities or content or just partnering on curriculum, etcetera. That’s something that we want to continue to do. And as Steve mentioned on the community college side, really, that’s a pathway for us. We have several programs. I will just use Chamberlain as an example, where we provide community college students with free access to several of the RN to BSN pre-licensure classes just to see whether that’s something that they want to do and feel like they can pursue, and then we will enroll them from this. So, it’s a good pathway for us. And then I think just in general, in terms of healthcare and healthcare and equities and how that relates to healthcare education, my view is great that money is being brought into that because it’s just – it’s just such a dearth of programs and organizations and institutions that are serving that social mission, and we are proud to be a part of it.
Jeff Silber: Okay. That’s great to hear. I know you are not giving guidance for fiscal 2022 just yet. And obviously, there are going to be issues in terms of the timing of Walden. But let’s assume for some reason that there is a delay in the acquisition closing. Just in terms of your core business, is it possible to give us some early read on where you think growth would come from next year and what we should be expecting, excluding Walden? Thanks.
Lisa Wardell: Well, I will let Bob answer that, but I would just say in general, as we look at the trends and we look at how the portfolio has performed during the pandemic in terms of resiliency and adaptability and new programs and things like that. ACAMS is a perfect example, right, having to think through how to shift from that in-person conference model. Although it wasn’t a large part of the model, that really is where a lot of the sort of sales and continuity for other things came from, and that has shifted. So, we think that, that will continue. And we certainly see as we have – this is not really a pandemic thing because over the last few years, we have shifted that healthcare portfolio to really meet the needs of our employer partners, which is why we are focused for managers and doctor, etcetera. And that talent from acquisition to retention to prevent churn in these large hospital partners. We think that that’s where a lot of our growth is going to come from. From a qualitative perspective, we don’t see that going anywhere we see it continuing.
Bob Phelan: I think from a financial perspective, I mean, what we have said is that we do expect to have low-double digit EPS growth and mid-single digit revenue growth. So, I wanted to just make sure we had that out there. And as you look at some of the disclosure we have got in the last part of the earnings release, you can see that the math there, even from the low end of our estimate, you can look at that and you can make some estimates off of that as well.
Jeff Silber: Alright, that’s really helpful. Thanks so much.
Operator: Our next question is with Greg Pendy with Sidoti. Please proceed with your question.
Greg Pendy: I have just a couple of questions. First of all, just on the marketing at Chamberlain. Companies in your space have been talking about inflation in terms of marketing, and I know you have been involved in sort of a step-up on the value of a Chamberlain degree. Can you kind of talk about where that stands nine months year-to-date and kind of how we should be thinking about that going forward?
Lisa Wardell: Yes. Look, let me just start by saying, in general, we certainly continue to make incremental marketing investment in Chamberlain because we see it as a real driver of growth. But – and we will continue to do that. It supports our enrollment. We got good and visibility – good visibility into May and September. But what I would also say is that we are absolutely seeing the benefit of partnerships with the hospital systems and our partners who are really helping us, if you will, with that brand and marketing as we tie a lot of our social media marketing to the mission, to our care to complete, to Chamberlain cares and we are able to really get our thrive or lift from some of the Chamberlain brand marketing that we have done over the last, I would say, 12 months to 18 months. So yes, clearly there is areas that are certainly more competitive. I mean RN to BSN with people on, we have got to really think through region to region on a marketing basis, but we are seeing good return from the additional marketing dollars. And as long as that continues, we will continue to invest in marketing on the Chamberlain side.
Greg Pendy: Okay. Great. And then just shifting gears over to the regulatory side, I understand you have good standing, I guess, on the 90-10 and cohort default rates, but can you just talk a little bit about gainful employment specifically on veterinary and the medical schools and kind of how we should be thinking about that if that were to come back into the fall?
Lisa Wardell: Yes. So, we do not have a gainful employment risk based on the starting salaries and sort of requirements of the doctor, the physician and veterinarian programs. You may recall that when this came up almost 5 years ago, the vet school was the one where we paid the most focus from a starting salary perspective because those first years that are really called – I guess, apprenticeship in that school, which are very much like a residency in an allopathic MD degree were not counted that way until those early years of lower salaries were accounted. Since then, we have partnered with some of our core veterinarian hospital partners, field hospitals as an example, and really driven an increased starting salary for those veterinarians. About 9% of the vets who graduate and enter the workforce or in the U.S. workforce graduated from Ross Vet. And there is about, I don’t know, less than one vet per opening for a veterinarian in the U.S. So, those are stats that really allow us to place our students. And then you mentioned cohort default rate, very connected to gain employment, right? So our draft cohort default rate for the vet school is now 0.7%, meaning that 99.3% are paying back their loans. So, we feel like we are in very good stead as it relates to our programs and gainful employment.
Greg Pendy: That’s helpful. Thanks a lot.
Operator: Our next question is with Jeff Meuler from Baird. Please proceed with your question.
Jeff Meuler: Yes. Thank you. I hope we would be more efficient in your follow-up call later. So, you have been repurchasing stock, but the plan is to de-lever post-acquisition close over the next 24 months. Now that, I guess, the DOJ has dropped its enquiry and we are at this stage of the process, are you planning to continue to repurchase stock until the close or at some point prior to the close do you stop repurchasing?
Bob Phelan: Well, what I would say is that, as you saw in the release, we have repurchased $37 million of shares in the current quarter, $82 million year-to-date. And what we would plan to do is continue purchasing up to the $100 million that we had talked about before. But we do have authorization, under our existing authorization for up to or I should say, a little bit more than $200 million that we were authorized for, but we are only going up to the $100 million at this point.
Jeff Meuler: Okay. And then for OnCourse Learning, if – I mean I don’t know what rates are going to do, but if the mortgage market does start to soften and the current mortgage underwriters become, I guess, less constrained and it has an impact on hiring activity. How tight is OnCourse Learning revenue to new hiring activity of mortgage underwriters?
Stephen Beard: It’s a not insignificant driver of the revenue there. So in the scenario that you just outlined, were that demand for mortgage origination professionals to slack, we would see that flow through the revenue trajectory as it relates to the mortgage product. That having been said, we are hard at work preparing to bolster our efforts in banking and credit union as well as our webinar business. It will never make up for the extraordinary run we have had in mortgage. But we would expect that proportionately, those would be larger than what we get from mortgage revenue and a steady-state run rate. So, we plan to take full advantage of this tailwind for as long as it exists, but we do anticipate that it will revert to something more normalized.
Jeff Meuler: Yes. It makes sense. And then just last for me. I am not totally sure if I am reading it correctly, but there is in Laureate slides, I guess its discontinued ops online enrollment. I think that’s Walden. But did Walden new enrollment declined 4% in the fourth quarter? And if so, I guess, why because it looks quite a bit worse than the year – the prior year-to-date last year? And any kind of update on more current trends there?
Lisa Wardell: Yes. No,
Stephen Beard: Yes. What I was going to say that I need to get back to you on that. The reporting segment for online for Laureate includes some other assets that are not part of the Walden business. So, I don’t have that data in front of me, but we can certainly come back to you with that.
Lisa Wardell: Actually, Walden is in the online, but they did not have a decline last quarter. They have not reported this quarter, but they did not have a decline last quarter. So, we will find out next week.
Jeff Meuler: That’s helpful. Thanks for clarifying. Thank you.
Operator: We have reached the end of the question-and-answer session, and I will now turn the call back over to Maureen Resac. Please proceed.
Maureen Resac: Thank you, and thank you all for joining our call this afternoon. As always, if you have any questions, please reach out to me. Thank you for joining.
Operator: This concludes today’s conference and you may disconnect your lines at this time. We thank you for your participation.
