Adtalem Global Education, Inc. (NYSE:ATGE) Q4 2022 Earnings Conference Call August 11, 2022 5:00 PM ET
Company Participants
Chandrika Nigam – Director, IR
Stephen Beard – President, CEO & Director
Robert Phelan – SVP & CFO
Conference Call Participants
Jeffrey Meuler – Robert W. Baird & Co.
Jeffrey Silber – BMO Capital Markets
Operator
Greetings. Welcome to the Fourth Quarter Fiscal Year 2022 Earnings Call for Adtalem Global Education. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Chandrika Nigam, Senior Director, Investor Relations. You may begin.
Chandrika Nigam
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 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 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, do 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 the 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 continuing operations basis, exclude special items and are in comparison to 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 then hear from 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, Chandrika. Good afternoon, everyone, and thank you for taking the time to join our fourth quarter and full year 2022 earnings call today. I’d like to begin with a high-level review of our progress on the strategic priorities we laid out just under a year ago.
2022 was a transformational year for Adtalem capped off by a solid finish in the fourth quarter. Despite the headwinds faced by our sector, we met our expectations on both the top and bottom line and continue to expand margins. These results reflect the commitment to execution by our colleagues across the portfolio.
To recap. We made good progress on the integration of Walden, delivering our first year target of $30 million in run rate cost synergies and using the integration as a catalyst for transforming the whole of Adtalem, starting with the introduction of a more dynamic, efficient and better integrated operating model.
During the year, we completed a successful divestiture of our Financial Services segment, which enabled us to significantly reduce our net leverage and strengthen our balance sheet while focusing on our go-forward strategy to be the leading provider of professional talent to the health care industry. And finally, we began a $150 million accelerated share repurchase program with the goal of returning capital to shareholders using existing cash while demonstrating our confidence in the long-term prospects of the company.
I’m encouraged by our progress to date. Our clarity of purpose and sharpened focus on the attractive health care education space positions us well to deliver substantial value for all of our stakeholders.
Now let’s take a closer look at the highlights for the full year. We delivered fourth quarter and full year results in line with our expectations despite the challenging environment for our institutions. Total enrollment of over 77,000 students resulted in revenue of $1.4 billion. As the year progressed, we expanded operating margins through the rollout of our new operating model, and the realization of synergies from the Walden acquisition.
For the full year, we grew operating margins by 230 basis points year-over-year, and we reported adjusted EPS of $3.24, which was 40% higher than the prior year. Our performance in the fourth quarter reflects an 11-month drive to reposition the organization and enhance operational effectiveness. And while we are still in the early stages of this effort, we believe the results will prove compelling. Although enrollments have been negatively impacted by pandemic-related headwinds, particularly in nursing, we are better positioned today to capture higher returns as the overall demand environment improves.
Last quarter, I shared several initiatives focused on enhancing operational effectiveness, most notably in customer experience and marketing. That work is ongoing, but I’m pleased to report that we’re making good progress. For example, on the customer experience side, we’ve recently launched a new approach to measuring student engagement across our institutions that empowers our faculty with predictive analytics that can support our efforts to drive improved persistence.
And on the marketing side of the house, we recently introduced new rigor to measuring the efficacy of our brand and media investments, including brand tracking, media attribution, campaign effectiveness and A/B testing tools that allow us to test variations of our campaigns to determine which elements performed best.
Finally, these efforts in enhancing operational effectiveness are complemented by an ongoing focus on strengthening our financial position and driving improved long-term financial performance. With the reduction in our net leverage to 1.5x, we have a strong balance sheet. And we maintain an enterprise-wide cost discipline that allows us to thoughtfully manage expenses while making targeted investments and enhanced capabilities.
In summary, we believe that we are taking the necessary and proper steps to position ourselves for success as we look to maximize the academic and economic value of our market-leading breadth, depth and scale.
With respect to academics, we’re proud to produce highly trained, practice-ready professionals at scale for a collective force for good in the communities and organizations they serve. Expanding access and driving superior student outcomes are foundational to this dynamic, and our commitment to delivering this value has never been stronger.
Let me share a few examples from the fourth quarter. Chamberlain University secured a grant of over $1 million for its practice-ready specialty focus program, which prepares nurses to contribute day 1 to a variety of specialized settings such as perioperative services. Also, our medical schools graduated more than 750 students with over 74% entering primary care specialties that helped to combat their critical shortages of physicians across the country.
In 2022, 26% of Adtalem’s medical school graduates are underrepresented minorities, of whom more than 100 identify as black or African American. Taken together with last quarter’s first-time residency attainment rates at these schools, which were the highest ever since we’ve operated these institutions. We continue to be encouraged in our ability to expand the value we create for our medical students.
At Walden, Dr. Doug Gilbert, a member of our faculty was named a Fulbright Scholar. He’ll travel to Lithuania, which is the host country supporting his work, and he has put up nearly 40 members of the Walden community that have taken part in what is one of the most widely recognized and prestigious scholarships in the world.
Also during the quarter, we made 2 promising additions to our senior leadership team with the appointment of as the President of Walden University and the promotion of Evan Trent to Senior Vice President, Chief Strategy and Transformation Officer.
Michael has extensive operational and strategic marketing experience. Before joining our team, he was the leader at McKinsey & Company’s growth transformation practice, where he led a number of successful transformations across various B2C industries, including retail, education and media. Prior to joining McKinsey, he served as the Chief Marketing Officer and Chief Strategy Officer for Strayer University, where he drove improvements in marketing, pricing and product innovation. I’m excited to have Michael on the team, and I’m confident that his deep industry experience in driving large-scale growth programs across the higher education sector will help Walden realize its full potential.
Since joining Adtalem in 2019, Evan Trent has played a critical role in the formulation and execution of our strategies. He was central to the acquisition and integration of Walden University, and the divestitures of our Brazil and financial services businesses. He has also served as a valuable thought partner to me and other senior leaders across Adtalem. Evan will lead the next phase of our integration work where we transition to accelerating the performance of our institutions across all of our value-creating activities.
With that, let me now provide some color on our outlook for fiscal ’23. With respect to enrollments, over the past year, pandemic fatigued health care professionals have been under tremendous pressure, resulting in continued enrollment declines in post-licensure nursing programs. And COVID-related hospitalizations have risen again recently.
Suffice it to say, it remains a challenging time for the higher education industry overall. And a robust job market and high inflation have only added to those challenges. Having said that, we are cautiously optimistic that the demand environment will improve in the latter half of fiscal ’23, which should enable us to leverage the benefits of the investments we’re making across the full range of enrollment and student support activities. We’re closely watching market signals that affect demand. And some early indicators are worth noting, including: first, a rise in the number of federal student aid applications by 5% year-over-year, notably driven by low income and underrepresented students.
Next, after a year of declines, online search for nursing programs began trending upwards in the fourth quarter of fiscal ’22, potentially signaling improved market dynamics in the coming months. Moreover, our employer partners have suggested that travel nurse compensation is coming off its pandemic highs and beginning to trend downward, which could favorably affect demand for post-licensure nursing programs.
And finally, our employer partners are focused on creating predictable pipelines for nursing talent by deploying financial incentives to minimize economic barriers. Considering these indicators, we anticipate having the opportunity to grow enrollment in fiscal ’23 with the benefit of an enhanced operating model, better operating leverage and, of course, high-quality student outcomes.
And I’d be remiss if I didn’t point out that our business is not materially exposed to economic impact from the volatile supply chain disruptions or oil price fluctuations that are a hallmark of the current global macro environment. It’s against this backdrop that we announced that we expect our revenue for fiscal 2023 to be within the range of $1.38 billion and $1.45 billion. And that we expect adjusted diluted earnings per share to be within the range of $3.95 to $4.20. Bob will elaborate further on our guidance in his remarks.
Despite the uncertainty that has come to characterize life for all of us during these times, our colleagues here at Adtalem are working tirelessly to enhance the value we create for students. Now more than ever, we are mission-driven and purpose-led. And we have exciting opportunities ahead of us with a new focus, with market-leading brands and an experienced management team, all of which I believe positions us for long-term profitable growth.
With that, I’ll turn the call over to Bob for a discussion of our financial results.
Robert Phelan
Thanks, Steve. Today, I’ll review our financial results and key drivers for our performance in the fourth quarter and the full year. Later in my remarks, I will discuss our expectations and assumptions for fiscal year 2023. Clearly, we finished 2022 in a solid fashion and I’ll elaborate on the drivers for the same.
Let’s begin with a summary of our financial performance, starting with the top line. Revenue in the fourth quarter increased 62% to $361.2 million compared with the prior year, driven by the acquisition of Walden. For the full year, revenue was $1.39 billion, up 53% or $480.2 million versus the prior year. The year-over-year improvement was driven primarily by the acquisition of Walden. As a reminder, Walden was only owned by Adtalem for part of the first quarter during fiscal 2022.
Consolidated operating income, excluding special items for the quarter, was $88.1 million, an increase of 175% compared with the prior year due to the addition of Walden and operating efficiencies. We continue to expand our operating margins to 24% compared to 14% for the same period in the prior year. For the full year, consolidated operating income, excluding special items, was $271.3 million an increase of 73% versus the prior year, resulting in operating margins of 19.6%, an increase of 230 basis points year-over-year driven primarily by operational efficiencies and realization of cost synergies associated with the Walden integration.
Net income from continuing operations for the quarter was $59.9 million and diluted earnings per share, excluding special items, was $1.31, growing 173% over fiscal 2021. For the full year, net income from continuing operations increased 33% to $158.2 million, resulting in diluted earnings per share of $3.24 or a 40% increase compared with the prior year, excluding special items.
Next, I’ll discuss financial highlights by segment. The Chamberlain segment reported fourth quarter revenue of $140.2 million, a decrease of 1% when compared with the prior year and operating income of $41.1 million, up 37% from $30.1 million in the prior year. The increase in operating income was primarily the result of lower marketing and continued benefit from cost synergies.
Total student enrollment during the quarter decreased 5.8% compared with the prior year, which was primarily attributable to COVID-related headwinds in our post-licensure online nursing programs leading to fewer new starts. Total pre-licensure on-campus enrollment continued to grow, aided by improved persistence.
Turning to Walden. Revenue in the fourth quarter was $137.1 million, and operating income was $12.8 million. Segment operating income, excluding special items, was $36.1 million. Total student enrollment during the quarter decreased 9.5% compared with the prior year because of COVID-related headwinds in our post-licensure nursing programs, leading to fewer new starts.
As recently noted by the CDC, COVID-19 cases reached the highest level since mid-February during Q4, causing hospitalizations across the country to double since May. Our post-licensure nursing programs were affected as a result of this surge which further burdened nurses leading to fewer new starts.
On the other hand, our social and behavioral programs continued to perform well. It’s important to remember that while COVID headwinds are expected to subside over time, enrollments typically trail behind the macro trends, and we continue to believe that demand for nurses will outpace supply over the long term, representing growth opportunities for us in the future.
In our medical and vet segment, we are beginning to see better operational performance resulting in improved financial results. Revenue in the fourth quarter increased 3% to $83.9 million compared with the prior year, and segment operating income increased 30% to $14.5 million. Operating income, excluding special items, was $19.6 million, an increase of 74% compared with the prior year, driven by the revenue increase coupled with the benefit from cost synergies.
Total student enrollment increased 3.5% compared with the prior year, which was primarily attributable to growth in new student enrollment and higher persistence in all our programs. With the ongoing abatement of COVID-19 travel restrictions resulting in higher starts in our initiatives to improve persistence, we expect a more favorable environment for enrollment in this segment. We’ll remain focused on our cost discipline initiatives to improve the profitability of the schools.
Now let’s turn our focus to cash flow, balance sheet and capital structure. For the full year, net cash provided by continuing operations was $163.8 million and capital expenditures totaled $31 million. As a result, free cash flow for fiscal 2022 was $132.8 million, an increase of $3.9 million compared with the prior year. As a reminder, we define free cash flow as cash provided by continuing operations less capital expenditures.
During the year, we made great strides in our financial strategy by deploying capital to strengthen the balance sheet as well as to maximize return for our shareholders. In fourth quarter, we repurchased $394.1 million of our senior secured notes. As a result, gross debt was $859.2 million as of June 30, reflecting a significant reduction of 31% during the quarter and almost 50% since our acquisition of Walden.
Net leverage finished at 1.5x, well below our target of 2x. Our progress in reducing debt over the past 2 quarters has been achieved while we executed a balanced approach to capital deployment as we continue to invest in organic growth opportunities, and as you know, we executed on our accelerated share repurchase program in March, where we bought 4.7 million shares of the company’s common stock. Going forward, we intend to further strengthen our balance sheet while we continue to reinvest in our businesses for future growth.
Turning to our guidance. In fiscal 2023, we anticipate growth in new starts, improvements in persistence and pricing and an additional 1.5 months of revenue from Walden compared with FY ’22. However, it’s important to remember that we are beginning this fiscal year with a lower enrollment base versus 2022. Taking into consideration the net effect of these different factors, we expect FY ’23 revenue to be in the range of $1.38 billion and $1.45 billion and adjusted diluted earnings per share of $3.95 to $4.20 from continuing operations, excluding special items, reflecting continued year-over-year expansion of our operating margins.
In light of the complexities of the markets we serve, I’d like to provide more color as I walk you through the factors we took into consideration when developing our guidance. First, it’s important to keep in mind the calendarization of our financial results for fiscal ’23. As Steve mentioned in his remarks, enrollments are expected to ramp up in the latter half of the year as we anticipate COVID headwinds will begin to abate. Accordingly, we expect both revenue and EPS to improve to a greater degree in the second half of the year as our investments towards initiatives and persistence and marketing from new starts will begin in the first half of the year and gain traction throughout the year.
Also, throughout 2023, we remain focused on driving productivity and increasing operating efficiency through our expense management initiatives and cost synergies from the integration of Walden. We remain on track to deliver an additional $30 million in cost synergies on the completion of the second anniversary of the acquisition of Walden, which will help drive the year-over-year improved operating margins.
As I look back on our performance in 2022, it’s one where we showcased our ability to operate with greater efficiency and a track record of consistently improving financial results that have positioned us well for the future.
With that, I will now turn the call over to the operator for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question comes from the line of Jeff Meuler with Baird.
Jeffrey Meuler
I know you gave it to us in a lot of detail already, but just trying to better understand kind of the guidance and market assumption, I guess. So it sounds like, correct me if I’m wrong, but you’re already seeing the improvement in Med Vet, where you’re expecting more incremental improvements and it’s more based upon early leading indicators, is about post-licensure nursing. And then I guess there’s pockets of Walden that are already performing well.
Just help us understand what gives you confidence in, I guess, what specific parts of the business, you’re assuming a better environment? And what gives you confidence with embedding that, I guess, into guidance at this stage?
Stephen Beard
Great question, Jeff. Thank you. So as you noted, we’re already seeing some encouraging signs in Med Vet, and we’re expecting that to continue over the course of their enrollment cycles in fiscal ’23. We are also seeing encouraging trends in the social and behavioral sciences programs at Walden, where we’re expecting a lagging improvement, if you will, is where we’ve had the most trouble during the pandemic, which is the post-licensure nursing programs.
And as you know, Walden is all post-licensure nursing. That’s the biggest product they take to market. And obviously, Chamberlain has a mix of pre-licensure and post-licensure. But we do think, given a bit of relief from some of the headwinds from the pandemic that enrollment trends will improve in the back half of the year. And we also know that the demand environment for those programs and those professionals has only grown stronger over the last couple of years. So that’s what we are sort of pricing into the guide, if you will.
Jeffrey Meuler
Okay. And then what’s the operating margin assumption? And you have a lot of below-the-line tailwinds that are contributing to the EPS growth. So if we back into it, it seems like there’s not a lot of margin expansion considering you’re going to get an incremental $30 million of expense synergies. So just help us with the offsets. I heard increased marketing spend and spend ramping on persistence initiatives.
Stephen Beard
Yes. So we do expect over the course of the full year in fiscal ’23 to further expand margins. That won’t necessarily happen sequentially because we intend to invest, particularly in marketing where we see the opportunities to drive the improved enrollment that we’re looking for. Also, as you mentioned, we’ve got investments we’re making to drive improved persistence, which also helps the enrollment picture. But year-to-year or year-over-year, we do believe there’s an opportunity to achieve further margin expansion, and we’ll see that flow through on a full year basis.
Jeffrey Meuler
Okay. And then just last on capital allocation. I think you said 1.5x net leverage, 2x target, but the plan is to strengthen the balance sheet? Just help me understand the rationale for that with your leverage currently below target.
Stephen Beard
Yes. So we’ve got the accelerated share repurchase program in flight. We’ve obviously got an authorization from our board for open market purchases beyond that ASR. With respect to the debt, we’re certainly comfortable with where we are from a leverage perspective. But as we think about the dynamics in the debt markets, things that are happening with interest rates, there may be some targeted opportunities to take some debt off the table in a way that brings the overall interest expense line down. So Bob will be focused on that as we go through the year. And should those opportunities present themselves, we’ve got the cash flow to go after it.
Operator
Our next question comes from the line of Jeff Silber with BMO Capital Markets.
Jeffrey Silber
So I know in the past, you’ve talked about some operational constraints in terms of getting clinical rotations for some of your students and/or finding faculty. I just was wondering if we can get an update on that if that’s gotten any better.
Stephen Beard
It’s not a constraint on growth at this point. Obviously, the market for talent is tight, but we feel like we’re pretty well positioned, particularly on the nursing side of the business. And as we think about clinical opportunities for our medical students, we feel like we’re in good shape there as well. So as we sit here today, both clinical opportunities and faculty are not a constraint on our ability to grow enrollments.
Jeffrey Silber
Okay. That’s great to hear. And I hate to shift this over to a regulatory discussion, but you had a lot of disclosure in your 10-K. Given there’s a lot of moving parts, I know not everything is finalized yet, but specifically, — it looks like the 90-10 rule is changing. You’re going to have to include military and veterans, not just you, but everybody in the calculation. I’m just wondering how that would impact your ratio.
And also, I think you had some disclosure about your financial responsibility score from a corporate level potentially going below 1.5. I just wondering if you can talk about that as well.
Stephen Beard
Yes. So as you know, Adtalem voluntarily moved to 85-15 some years ago as part of its student commitments. Obviously, the final rules on what that might look like have yet to be finalized. But as we evaluate what’s available and out there from the department to date, we don’t expect to have any challenges with a rule reduction, 85-15, even with the inclusion of the military and veterans benefit. So we feel like we are in good stead there.
With respect to the composite score. As you know, Adtalem has a passing composites score with the Department of Education currently. We expect that when we submit audited financial statements to the department, as we do every year for purposes of calculating that score, the additional goodwill on the balance sheet related to the Walden acquisition will drive that score down. And at that point, we may have to provide additional credit support to the department in connection with our Title IV participation.
We feel like we’ve got the wherewithal to do that from a capital structure perspective. So any additional requirements that the department might make of us, we think, are well within our means to handle and handle comfortably. So that, too, we don’t anticipate being an issue for us or our ability to grow the enrollments of the business or grow our program. So again, on both dimensions, we think we’re in good shape.
Operator
Next question we have is from the line of with Baird.
Unidentified Analyst
So I’m coming at you from the fixed income side of Baird. I just wanted to follow on to a couple of those guys’ questions. Just on the Walden front, are you able to give us fourth quarter revenue as compared to what they did in the fourth quarter last year before you owned them?
Stephen Beard
No. We’ve not provided historical performance data on Walden as a stand-alone entity prior to our ownership because they reported as part of the segment that included other assets. So no, I’m not able to tell you what Q4 revenue was for Laureate when they owned the business.
Unidentified Analyst
Right. So if we look at Laureate, what they reported then, it’s not apples-to-apples to what you guys just reported for Q4, right?
Stephen Beard
No. It was buried in a segment I think they referred to as online. It included some operations in Mexico and elsewhere in the United States. So it’s not a clean apples-to-apples comparison.
Unidentified Analyst
Okay. We can — obviously, we can look at the student numbers year-over-year, but we just don’t have a revenue number.
Stephen Beard
Absolutely, yes. Sure.
Unidentified Analyst
And to the same point — and again, I’m a little more focused on the EBITDA side and the leverage side. When you guys report that 1.5x net leverage, that adjusted EBITDA number does not give you credit for 1.5 months of Walden, right? So that number is actually a little bit understated?
Stephen Beard
That’s correct.
Unidentified Analyst
Got you. And again, that’s not a number where you can sort of gross us up to what the number would have been if you had owned Walden for that extra 1.5 months?
Stephen Beard
No. We’ve not tried to put a normalized EBITDA number out there.
Unidentified Analyst
Right. But we just know that’s a tailwind then in a good way. And then maybe taking one more shot at this from another angle. When you give your fiscal 2023 guidance for revenue for the to , is there an apples-to-apples number for fiscal ’22 that we can compare that to? So again, it’s just another way of asking if there’s some other Walden piece we can fill in, so we can compare apples-to-apples, but it sounds like maybe not.
Stephen Beard
No, I don’t think so. I apologize for that, but there’s not an apples-to-apples comparison for you.
Unidentified Analyst
No, I got it. On that 2023 guidance number, do you guys have a 2023 EBITDA guidance number for that?
Stephen Beard
We don’t guide to EBITDA. But as we go over the course of the year, we’ll talk a little bit about what’s happening with margins, but we don’t guide to EBITDA.
Unidentified Analyst
Okay. And then just to go back to Jeff’s questions about the sort of 1.5 net leverage currently with the 2x target. But then you made the comments, Steve, I think, that you guys may see some targeted ways to take that down. Specifically, could that be buying bonds in the open market below par, where that’s an opportunity right now?
Stephen Beard
I think it really depends on — look, the opportunity we’d be looking for would be the opportunity to bring down overall interest expense. And again, the world looked a lot different 4 months ago than it does now and who knows where it looks 4 months from now. But if there’s a — an opportunity to do that either on the bond side or on the term loan side, we’ll take a hard look at that because we’ve got the cash to do it.
Unidentified Analyst
Right, for sure. And then just one last one for me, if I could. You guys filed an 8-K back in February about the Department of Education announcement related to DeVry and tied to Cogswell Capital and all that. Do you have any update on that situation? Has anybody contacted you about that? Or do you have any viewpoint on where that might go?
Stephen Beard
No. We’ve — as I think I said a quarter ago, we’ve not heard from the department. I don’t believe DeVry has heard from the department. While I think the administration’s efforts to do broad-based debt forgiveness are in full swing, I think the overall risk profile for DeVry and for us around this issue hasn’t changed materially, so no updates in that regard.
Operator
And we have reached the end of the question-and-answer session, and I’ll now turn the call back over to Steve Beard for closing remarks.
Stephen Beard
I just want to take a moment to thank all of our colleagues across the Adtalem portfolio for their incredible work in fiscal ’22. We believe we set ourselves up well for a fantastic year in fiscal ’23. And we’re looking forward to getting after it and proving out some of the we’ve talked about today. So my thanks to the team.
Operator
And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.
Be the first to comment