American Public Education (APEI) Q2 2023: Rasmussen Revenue Falls 19% as Cost Cuts and Enrollment Shifts Reshape Outlook

August 8, 2023 | By EarningsIQ Research

APEI’s Q2 revealed a sharp divergence between resilient core segments and ongoing challenges at Rasmussen, where a 19 percent revenue drop and negative margin forced renewed cost action and a major impairment charge. Margin expansion at APUS and Hondros, combined with targeted program growth and cost discipline, signal stabilization in the broader portfolio, but Rasmussen’s path to recovery remains uncertain. Investors should watch for further execution on cost controls and enrollment mix shifts as APEI navigates sector headwinds and regulatory scrutiny.

Summary

• Rasmussen Reset: Campus-based nursing underperformance triggered a large impairment and operational overhaul.
• Margin Expansion at Core Units: APUS and Hondros delivered improved profitability on enrollment and pricing leverage.
• Recovery Signals Mixed: Online growth and cost cuts offer upside, but campus nursing trends remain a drag.

Business Overview

American Public Education, Inc. (APEI) operates a portfolio of education brands, including American Public University System (APUS, online degree programs for military and civilian learners), Rasmussen University (nursing and allied health, both online and campus-based), Hondros College of Nursing (practical and associate nursing, focused on Midwest markets), and Graduate School USA (federal workforce training). APEI generates revenue primarily from tuition and fees, with segment performance driven by enrollment trends, program mix, and regulatory compliance.

Performance Analysis

APEI’s Q2 results highlighted a stark contrast between its core online and nursing education units. APUS, the company’s largest segment, posted strong registration gains—up nearly 6 percent overall and double-digit growth in the veterans channel—while tuition increases and marketing efficiency drove a 600 basis point EBITDA margin expansion to 28 percent. Hondros, a smaller but fast-growing unit, delivered 22 percent enrollment growth and swung to positive EBITDA, reflecting both tuition hikes and scale benefits.

Rasmussen, however, remained the central challenge. Revenue fell 19 percent on a 12 percent enrollment decline, with a pronounced shift from higher-priced campus-based nursing programs to lower-priced online and non-nursing offerings. This mix shift, combined with fixed campus costs, drove Rasmussen’s margin from +7 percent to -14 percent, prompting a $64 million impairment charge. Graduate School USA, though seasonally strong, remains a minor contributor but posted a notable 70 percent revenue increase in the quarter.

• Enrollment Divergence: APUS and Hondros sustained double-digit growth, while Rasmussen’s campus nursing enrollment declined 25 percent year over year in Q3 actuals.
• Cost Action Intensifies: APEI initiated $12.4 million in annualized expense reductions, including labor and non-labor cuts, to right-size operations.
• Liquidity Remains Robust: $113 million in unrestricted cash and zero net debt provide a cushion for ongoing transformation.

APEI’s consolidated adjusted EBITDA margin narrowed to 6 percent, reflecting Rasmussen’s drag, but the company’s core units are positioned for continued margin expansion as cost actions take hold and enrollment momentum persists outside of Rasmussen’s campus nursing programs.

Executive Commentary

Strategic Positioning

1. APUS Margin and Channel Strategy

APUS, APEI’s flagship online division, is leveraging its cost advantage and channel diversity. Modest tuition increases for non-military and veteran students, combined with efficient marketing, are driving margin gains and registration growth. Military and veteran channels remain dominant, with 65 percent of new students self-identifying as active duty, but management is pursuing non-military growth through employer reimbursement and international initiatives to diversify revenue and address 90/10 compliance risk (a federal funding ratio threshold for for-profit educators).

2. Rasmussen Turnaround and Program Diversification

Rasmussen’s recovery hinges on shifting enrollment away from underperforming campus ADN (Associate Degree in Nursing) programs toward online and non-ADN offerings, where year-over-year growth has resumed. Improved NCLEX pass rates, driven by targeted remediation and faculty investment, are critical for regulatory compliance and reputational repair. Cost containment and leadership stabilization are underway, but the timeline for a full campus nursing rebound remains unclear.

3. Hondros Growth and Market Expansion

Hondros continues to execute a “laddered” nursing curriculum strategy, expanding practical nursing (PN) and ADN programs into new markets like Michigan and Indiana. Low marketing costs and strong grassroots demand have supported rapid enrollment gains, though management expects spending to normalize as new markets mature. Improved pass rates and tuition increases are supporting margin expansion.

4. Cost Structure Realignment

APEI is aggressively rightsizing its cost base, targeting $12.4 million in annualized savings through workforce reductions, non-labor cuts, and board governance streamlining. Early benefits are expected in 2023, with further impact in 2024 as expense reductions are fully realized.

5. Regulatory and Accreditation Focus

APEI faces ongoing scrutiny around federal funding ratios and campus accreditation. Management is actively engaging with regulators, particularly in Minnesota, to address ADN program issues and maintain compliance. Initiatives to boost “10” revenue (non-federal sources) are underway to ensure APUS remains below the 90 percent threshold under revised rules.

Key Considerations

APEI’s Q2 results underscore the complexity of managing a multi-brand education portfolio amid shifting student demand, regulatory pressure, and cost inflation. The following considerations are critical for investors:

• Rasmussen’s Impairment Reflects Realism: The $64 million charge signals management’s willingness to reset expectations and focus on segments with clearer paths to profitability.
• Margin Expansion at Core Units Is Sustainable: APUS and Hondros are executing on pricing, enrollment, and cost levers, supporting consolidated margin recovery even as Rasmussen drags near-term results.
• Enrollment Mix Is a Double-Edged Sword: Shifting away from campus ADN programs helps reduce risk but pressures average tuition and margin, requiring continued cost discipline to offset lost revenue leverage.
• Regulatory and Accreditation Risks Remain Material: Ongoing compliance with 90/10 rules and state nursing board standards will be an ongoing management focus and investor watchpoint.

Risks

APEI’s outlook remains clouded by several material risks. Most prominent is the uncertain pace of stabilization in Rasmussen’s campus nursing enrollment, which remains under regulatory scrutiny and faces enrollment caps in key markets. Regulatory changes to federal funding thresholds (90/10 rule) and accreditation reviews, especially in Minnesota, could further constrain growth or trigger program closures. Cost savings execution risk is nontrivial, as fixed campus costs are difficult to flex in line with demand, and further enrollment declines could outpace expense reductions.

Forward Outlook

For Q3 2023, APEI guided to:

• APUS net course registrations up 6 to 8 percent year over year
• Consolidated revenue between $148.3 million and $150.3 million
• Adjusted EBITDA of $8.4 million to $10.4 million
• Net loss per share of $0.32 to $0.24

For full-year 2023, management did not provide explicit guidance but emphasized:

• Continued margin expansion at APUS and Hondros
• Stabilization and improvement initiatives at Rasmussen, though campus nursing recovery remains an open question

Management highlighted cost discipline and enrollment momentum outside Rasmussen campus nursing as key drivers for the remainder of the year.

Takeaways

APEI’s Q2 revealed a business in transition, with core units demonstrating resilience and profitability while Rasmussen’s campus-based nursing remains a significant headwind.

• Portfolio Strength: APUS and Hondros are delivering on growth and margin, providing ballast as Rasmussen undergoes restructuring.
• Execution on Cost and Enrollment Mix: Realignment efforts are necessary but not yet sufficient; ongoing improvement in NCLEX scores and non-ADN program growth are positive signals but need to be sustained.
• Watch for Regulatory and Enrollment Inflection: Resolution of accreditation issues and further progress on cost containment will be decisive for the timing and magnitude of a broader recovery.

Conclusion

APEI’s Q2 demonstrates both the resilience of its online and nursing education core and the operational drag of its campus-based nursing portfolio. While cost actions and enrollment shifts are underway, investors should expect continued volatility until Rasmussen’s turnaround gains firmer footing and regulatory risks subside.

Industry Read-Through

APEI’s results echo broader themes in for-profit and postsecondary education: online and non-traditional channels are outpacing legacy campus-based programs, while regulatory scrutiny and cost structures remain key differentiators. Institutions with flexible delivery models and diversified revenue streams are better positioned to weather enrollment volatility and compliance risk. Rasmussen’s struggles highlight the risk of fixed-cost campus operations in a shifting demand environment, a cautionary signal for peers with heavy physical footprints in regulated fields like nursing and allied health. Margin expansion through pricing and efficiency is possible, but only where enrollment trends and regulatory compliance are aligned.

APEI Consumer Discretionary Education Online Learning Nursing Cost Cutting Enrollment Regulation