Legacy Education Inc. (LGCY) Earnings Call Transcript

Good day, and welcome to Legacy Education, Inc. First Quarter Fiscal 2027 Earnings Conference Call. Today's call is being recorded and broadcast live. It will also be archived on the Legacy Education website for future reference. To kick off the call, I will turn it over to Nicole Joseph, Senior Vice President of Legacy Education, Inc. Thank you. You may begin.

Thank you, and hello, everyone. Legacy Education has issued a news release reporting its financial results and corporate developments for the first quarter of fiscal 2027 ended September 30, 2026. The release is available in the Investor Relations section of the corporate website at legacyed.com. With us today on the call are LeeAnn Rohmann, Chief Executive Officer; and Brandon Pope, Chief Financial Officer. On today's earnings call, statements made by Legacy's management regarding the company's business, which are not historical facts, may be forward-looking statements as identified in federal securities laws. The words may, will, expect, believe, anticipate, project, plan, intend, estimate and continue as well as similar expressions are intended to identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance. The company cautions you that these statements reflect current expectations about the company's future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond the company's control that may influence the accuracy of the statements and projection upon which the statements are based. Factors that may affect the company's results include, but are not limited to, the risks and uncertainties discussed in the Risk Factors section of the annual report on Form 10-K filed with the Securities and Exchange Commission. Forward-looking statements are based on the information available at the time those statements are made and management's good faith belief as of the time with respect to future events. All forward-looking statements are qualified in their entirety by this cautionary statement, and Legacy undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise after the date thereof. I will now hand the call over to LeeAnn Rohmann, CEO of Legacy Education. LeeAnn, over to you.

Thank you, Nicole, and good afternoon, everyone. We began fiscal 2027 with a record student population and continued revenue growth. As I've mentioned on our last call and as projected, we also increased spending over $1 million on faculty and staff, facilities and program development. Additionally, we had our first quarter annual audit fees and legal expenses, which increased by $400,000. Those costs, including an estimated legal settlement of $687,500, which was not projected, contributed to the lower earnings compared to the prior year quarter. Today, I want to talk about what we saw across our campuses, where we invested and how we intend to use that capacity over the rest of the year and beyond. I'll organize my remarks around four themes: the first, enrollment and student outcomes, the second is the timing of our investments, the third is progress against the growth priorities we outlined last quarter, and the fourth is the financial position supporting those plans. We ended September with a record 3,684 students, up 5.4% from a year ago and 9.1% from June 30. That's 307 additional students since the end of the last quarter. Revenue grew 3.1% to $20 million. We classify our starts in two categories: Title IV programs and cash pay programs. Our Title IV programs generate $24,000 in annual revenue per start on average. Our cash pay programs run less than 12 weeks and generate an average of $3,000 per start over the full program. Cash pay programs is nonmaterial. It represented 1.3% of first quarter revenue, but yet accounted for over half of the year-over-year decline in total starts. That's why we look at Title IV starts alongside the overall total starts when assessing what enrollment trends may mean for future revenue. Our total starts declined by 9.9% in the first quarter. while the Title IV starts only declined 5.6%. This is important because had the 105 MRI and cardiac sonography starts that shifted into the second quarter occurred in the first quarter, Title IV starts would have increased approximately 5.5% year-over-year. We saw the similar difference in the fourth quarter in fiscal 2026 when the total starts declined by 3.6%, while the Title IV starts increased 5.8%. This quarter, we had 1,006 new student starts. Of those, 897 were in Title IV programs. We continue to see the growth in the other parts of the portfolio. Ultrasound technician, sterile processing and surgical technology generated 338 new starts, nearly double the 172 a year ago. And in MRI, we had 99 more active students than a year ago despite fewer first quarter cohorts. Those are two measures we watch closely as the programs grow and we execute. In vocational nursing, some health care employers have been looking to develop more nursing talent in-house, which is changing how they recruit from schools. We've been proactively responding to those changes. Two years ago, we updated the curriculum to better prepare students for the NCLEX-PN, to strengthen the student engagement and improve student retention, so more students stay in the program. In November 2025, I shared with you that we also introduced a new entrance exam to help us identify applicants with the academic foundation to succeed in a rigorous program. By taking this action over the past three quarters, our starts were 264 below our original expectations. However, over the past 18 months, our vocational nursing attrition rate improved by 42% as we made these changes. In the 12 months ended September 30, 144 of the 168 first-time NCLEX-PN candidates passed for a rate of 85.7% across Legacy. In July through September quarter, the first-time pass rate was 88.5%. Lancaster, our largest vocational nursing program, achieved 92.3% first-time pass rate over the same 12-month period. The enrollment, completion and licensure outcomes continue to progress as students admitted under the new standard moved through the program. With these changes, the vocational nursing program remains one of Legacy's top 5 programs. Across all our programs, our attrition rate was 1.5% per month. We tracked retention and progression by program, so we can see where students need more support. And in October, 200 students graduated, our highest monthly total since May. Moving to investing ahead of revenue. Wildomar is a good example of how the timing works. We began paying occupancy costs for the second phase on July 1. City permits and approval delayed our use of the space. So we carried occupancy costs in the first quarter before we could use it for instruction. We had budgeted for those costs, although we had hoped to limit them by phasing in the lease. Phase 2 gives us additional instructional space in the Temecula market. As more cohorts use that space, we expect to spread those occupancy costs across more students. Beyond Wildomar, we invested in faculty, instructional materials and externship support as we prepare to serve more students, we need staff, instructors in place, materials ready, the labs and the clinical placements lined up. Some of those costs begin before the students they are intended to support start class. The same timing applies as we prepare for new programs at Contra Costa and work towards opening our Houston campus. Staffing plans, instructional space and regulatory preparation all take work in advance. We're pacing those commitments against enrollment, operating readiness and the timing of approvals. We're also investing in the systems and leadership we need to manage a larger organization. Legacy's business intelligence gives our teams a clearer view of enrollment, retention and program performance across campuses. Our new compliance and career services leaders help us manage the regulatory work that comes with expansion and build the clinical and employer partnerships our students rely on. As we look at how we're progressing on our growth priorities, on our last call, I described the three ways that we intend to grow Legacy. The first is expanding programs at the campuses we already operate. We're doing that. The growth that we're seeing in sterile processing, ultrasound technician and surgical technology is a good example of the opportunity inside our existing footprint. Second, adding the programs, campus capacity and new markets at Contra Costa Medical Career College, we've already received the U.S. Department of Education approved our change of ownership and control in November. They issued a fully executed provisional program participation agreement through September of 29, and that is with no letter of credit and no growth restrictions. Contra Costa has also already received approvals from our accreditor asset and the State of California, the Bureau for Private Postsecondary Education for the Associate of Applied Science programs in cardiac sonography and MRI and for Veterinary assistance. We plan to launch all three of those programs second half of fiscal 2027. In Houston, Central Coast College signed a lease in September for approximately 28,200 square feet for what will be our first campus outside of California. The Texas Workforce Commission and our accreditor ACCET have completed their visits. We expect to receive the related approvals by the end of November. And subject to receiving those approvals, we anticipate opening the campus before the calendar year-end. In Houston, we'll be eligible to launch 10 programs, 7 are planned for the opening, medical assisting, MRI-AAS, cardiac sonography AAS, sterile processing, surgical technology, AAS, ultrasound technician AAS and the medical billing and coding, dental assisting and veterinary assistant, we've also submitted our nursing program application to the Board of Nursing in Texas. Our third priority is to pursue selective acquisitions and strengthen the operations that support a larger organization. We have identified our next acquisition target, and we are deep in due diligence. We continue to build out Legacy BI so that our teams can see how the organization is performing and make more timely decisions. We also added two senior seasoned leaders to sustain the growth we're seeing across Legacy. Mary Margaret Coughlin, our Senior Vice President of Compliance, has 14 years of experience and has advised Legacy on accreditation and regulatory compliance since 2020. She previously served as Manager of Programs at the Accrediting Bureau of Health Education Schools, she will oversee compliance across our institutions, including accreditation, state authorizations and the regulatory work required to launch the new programs and expand into new markets. Anthony Romo, our Senior Vice President of Career Services and Strategic Partnerships, has 16 years of experience and joins us from Carrington College, where he led enrollment, financial services, career services and strategic partnerships across 26 campuses in 7 Western states. He brings experience building relationships with employers, community partners and workforce organizations. At Legacy, he will use that experience to expand clinical and externship opportunities and help more graduates connect with employers as we grow. Moving to the financial strength and investment discipline. We ended the quarter with $21.7 million in cash and approximately $34 million in working capital. That gives us flexibility to continue investing while we weigh new commitments against the enrollment, cash generation and the timing of approvals. We're focused on growing starts while maintaining our admission standards, launching approved programs and putting the capacity we've added to work. With that, I'll turn the call over to Brandon for a detailed review of our first quarter financial results. Brandon?

Thank you, LeeAnn, and good afternoon, everyone. I'll start with the first quarter results, then cover principal expense drivers, cash flow and our balance sheet. Beginning with the first quarter of fiscal 2027 results, revenue for the 3 months ended September 30, 2026, increased 3.1% to $20 million from $19.4 million in the prior year quarter, an increase of $602,000. We ended the quarter with 3,684 students, up 5.4% year-over-year. Operating income was $0.9 million compared to $2.7 million in the prior year quarter. This quarter's operating income reflects the planned investment in personnel, occupancy and program development costs of $1 million as well as first quarter seasonal investments in annual audit and related legal fees, which increased $400,000 and the unprojected $687,500 estimated legal settlement. Excluding the estimated legal settlement, our operating income would have been $1.6 million and in line with our expectations. Excluding the estimated legal settlement, our operating margin is 7.8% compared to 13.9% a year ago, again, in line with expectations. EBITDA was $1.1 million compared to $2.8 million last year. Again, excluding the $687,500 estimated legal settlement, EBITDA was approximately $1.7 million. In line with expectations, adjusted EBITDA was $2.1 million compared with $3.1 million and adjusted EBITDA margin was 10.4% compared with 15.9% last year. Net income was $0.9 million in the quarter. However, excluding the estimated legal settlement, net income is $1.4 million compared to $2.2 million last year. Diluted earnings per share was $0.06. However, excluding the estimated legal settlement, diluted EPS was $0.10 compared to 16% -- $0.16 last year, in line with expectations. Now turning to operating expenses. Educational services expense was $11.7 million, up from $10.3 million in the prior year. As a percentage of revenue, educational services expense increased to 58.4% from 53.3% last year. As mentioned earlier, the increase primarily reflects a $387,000 increase in higher faculty and staffing, $507,000 in higher occupancy costs, including the second phase of Wildomar, $163,000 in externship fees and $68,000 in higher share-based compensation. General and administrative expense was $7.2 million, up from $6.1 million last year. As previously mentioned, the increase included the $687,500 estimated legal settlement, a $415,000 increase in professional fees related to the annual audit and legal work, $144,000 in higher computer support costs and $68,000 in higher business insurance costs. We did experience a $400,000 reduction in advertising expense, which partly offset these increases. Turning to cash flow and balance sheet. Operating activities used $900,000 of cash compared with $1.1 million a year ago. The change primarily reflected lower net income and the timing of Title IV disbursements and income tax payments. Capital expenditures were $200,000 in each period. Turning to the balance sheet. We ended September with $21.7 million in cash and cash equivalents. Current assets were $47.8 million and current liabilities were $13.8 million. And as we had mentioned, working capital was approximately $34 million. Total assets were $86.9 million, stockholders' equity was $54 million and debt was minimal. The strong balance sheet gives us flexibility to support ongoing operations and the investments LeeAnn described. With that, I'll turn it back over to LeeAnn. LeeAnn?

Thank you, Brandon. As we look ahead, we remain confident in the opportunities of the sector that we serve and that we outlined at the start of the year. We can grow within the campuses we already operate, bring new programs and markets online and pursue selective acquisitions where they make sense for Legacy. For the rest of fiscal 2027, our priorities are to grow new student starts while maintaining the admission standard, execute on launching the approved programs, build the space we've added and keep spending aligned with enrollment and cash generation. We're also monitoring the federal policy developments that could affect students access and aid or anything related to regulatory obligations. We remain strong in all of those areas, and I want to just continue to thank our students, our graduates, our faculty and our employees, clinical employer partners and shareholders for your continued support. Operator, I'm ready for questions.

[Operator Instructions] Our first question is from Mike Grondahl with Northland Securities.

LeeAnn, with the Houston branch in Texas, could you talk a little bit about expectations for enrollment ramping up there over the next 12 or 18 months?

Sure. I don't -- as far as -- I mentioned the 10 programs that we have that we are already approved for that we're launching the 7. I can tell you like in the first year or the first 6 months, our starts are gauged for -- it's the back half of the year, 300. And then as we continue to progress from there, then we're going to look at how we can double that because it's really only over the first half -- our second half of the year.

And so the September quarter and the December quarter, by July 1, you would expect 300 enrolled. Is that the right way to think about it?

Yes. Yes. That's a great way to look at it in terms of by July 1. Bear in mind that we get these approvals at the end of November. The campus is ready to go. It's sitting there. We've had the accreditors there to visit and everything is lined up. It's just allowing us to be able to turn on the marketing and to start meeting with students. And so we believe that we can see something by the end of December, but it's going to be tough depending on the timing of when we get to fully open this because of the timing of the full approvals.

Got it. No, that's fair. That's fair. You need that at the end of the November to kind of start to close.

Yes.

And then the 105 MRI and cardiac students, they shifted out of September into October. Is that the way to understand that? And what kind of caused that?

So it was a great question. And yes, they shifted into October and November. So you're seeing them in the second quarter. And what caused it was with regard to the calendar for how we start -- these are degree granting programs. And so when we had the delay in terms of the approvals, we had a calendar that was -- that had started and that calendar then did not open up for us to be able to move any of what we would have expected to be first quarter because of those delays in the approval from the accreditor and the state.

Got it. For the programs themselves, is that what you're saying?