American Public Education (APEI) Q4 2018 Earnings Conference Call Transcript

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American Public Education (NASDAQ: APEI) Q4 2018 Earnings Conference CallMarch 12, 2019 5:00 p.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to APEI's fourth-quarter and full-year 2018 conference call. [Operator instructions] Thank you.

Chris Symanoskie, vice president of investor relations, please go ahead.

Christopher Symanoskie -- Vice President of Investor Relations

Thank you, operator. Good evening and welcome to American Public Education's discussion of financial and operating results for the fourth-quarter and full-year 2018. Materials that accompany today's conference call are available in the events and presentation section of our website and are included as an exhibit to our current report on Form 8-K furnished with the SEC earlier today. Please note that statements made in this conference call and in the accompanying presentation materials regarding American Public Education or its subsidiaries that are not historical facts may be forward-looking statements based on current expectations, assumptions, estimates and projections about American Public Education and the industry.

These forward-looking statements are subject to risks and uncertainties that could cause actual future events or results to differ materially from such statements. Forward-looking statements can be identified by words such as anticipate, believe, seek, could, estimate, expect, intend, may, should, will and would. These forward-looking statements include, without limitation, statements regarding expected growth; expected registrations and enrollments; expected revenues; expected earnings; and plans with respect to recent, current and future initiatives, investments and partnerships. Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described in the risk factors section and elsewhere in the company's most recent annual report on Form 10-K filed with the SEC and the company's other SEC filings.

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The company undertakes no obligation to update publicly any forward-looking statements for any reason unless required to by law, even if new information becomes available or other events occur in the future. This evening, it's my pleasure to introduce Dr. Wallace Boston, our president and CEO; and Rick Sunderland, our executive vice president and chief financial officer. Now, I'll turn the call over to Dr.

Boston.

Wally Boston -- President and Chief Executive Officer

Thanks, Chris. Starting with Page 2. I'll begin our call today by discussing APEI's recent operational successes, including robust growth of net course registrations by new students at APUS in the first quarter of 2019. Our CFO, Rick Sunderland, then will discuss APEI's fourth-quarter and full-year financial results as well as our outlook for the first quarter of 2019.

In the fourth quarter of 2018, net course registrations by new students utilizing Military Tuition Assistance or TA increased by 11% compared to the prior year period. Total net course registrations or net course registrations by new students at APUS each declined by approximately 1% year over year. The strong increase in new students utilizing TA was offset by a 4.5% decline in net course registrations by new students utilizing cash and other sources, an 8.3% decrease in course -- net course registrations by new students utilizing veterans benefits or VA as well as an 11.5% decrease in net course registrations by new students utilizing Federal Student Aid or FSA. Our net course registrations by students utilizing FSA declined.

The first course pass and completion rate, a measure of student persistence for APUS undergraduate students utilizing FSA, increased by 8.4% for the three months ended November 30, 2018 compared to the same period last year. Tuition Assistance or TA continues to be the largest pay type category at APUS, representing approximately 48% of new registrations in the fourth quarter of 2018. We believe the strong increase in net course registrations by new students utilizing TA was due in part to extended student advising and admission hours and outreach effectiveness. For the three months ended December 31, 2018 or the fall term of 2018, total enrollment at Hondros College of Nursing or HCN was flat year over year and new student enrollment decreased 4% compared to the prior-year period.

As previously discussed, HCN has implemented multiple changes to its curriculum, course-retake policies and admissions requirements in order to improve the overall first-time NCLEX pass rates for graduates of its ADN program. We believe certain changes had an adverse impact on student enrollment, particularly in the January or winter 2019 term. Beginning with the April or spring 2019 term, HCN has moved an ADN entrance exam requirement used for benchmarking the academic status of the incoming student class to a first-course requirement. As HCN works to identify the appropriate balance of admissions requirements and attracting college-ready students, there may continue to be a negative impact on their enrollments.

We anticipate HCN revenues will be approximately 10% of APEI's consolidated revenues in the first quarter of 2019. In addition to addressing these important matters, the management team at HCN continues to focus on its growth initiatives, including the successful launch of its new Medical Laboratory Technology or MLT program, the implementation of a new branding campaign and preparation for a new campus, which we expect to open in 2020. Because today's earnings call is being conducted after the last ad drop date of the March start, APEI is able to provide actual net course registration results for APUS and HCN, not estimates, in our first-quarter 2019 outlook. I'm very pleased to report that total net course registrations at APUS increased by 1% in the first quarter of 2019 compared to the prior-year period.

The growth was driven by an 8% year-over-year increase in net course registrations by new students. This year-over-year growth in net course registrations is certainly welcome news. The increase in net course registration by new students was largely driven by double-digit year-over-year increase in net course registrations by new active duty military students. We also observed a strengthening of net course registrations by new civilian students despite headwinds from the partial government shutdown in February.

In fact, the year-over-year growth in net course registrations by new students was particularly strong in the months of January and March. This exciting result represents the first year-over-year quarterly increase in net course registrations by new students at APUS since the third quarter of 2012. We believe the improvement in net course registrations at APUS is largely a result of recent upgrades to our enrollment-management processes and improved marketing efficiency as well as a result of offering expanded student services hours. We believe it is also a result of our multiyear effort to stabilize enrollment at APUS through product and process enhancements implemented throughout the entire enterprise.

As we discussed last quarter, our marketing team has been adjusting advertising spend in favor of our most productive channels, with an even greater emphasis on military veteran and other most likely to persist communities. To become more productive, we have utilized new lead scoring methodologies, enhanced geographic recruiting focus and deployed new lead-nurturing strategies to increase engagement and enhance the prospective student's decision process. In addition, we have worked very hard to create a more seamless and personalized onboarding experience for students that we believe has led to improved conversion rates. This, combined with our multiyear effort to create a more engaging classroom experience and attract students with greater academic intent and college readiness, has led to higher student persistence rates, especially among undergraduate students utilizing FSA.

I believe our first-quarter outlook for a year-over-year increase in net course registrations at APUS validates our approach to utilize and leverage our unique core strengths without drastic changes to our business model. As we move forward, we will continue to embrace quality, affordability and flexibility as we serve military veteran and public-service communities with distinction. Now, I will turn the call over to our CFO, Rick Sunderland. Rick?

Rick Sunderland -- Executive Vice President and Chief Financial Officer

Thank you, Wally. Going on to Page 3, financial results. American Public Education's fourth-quarter 2018 consolidated revenue decreased by 1% to $76.9 million, compared to $78.1 million in the prior-year period. The revenue decrease was due to a $1.1 million or 1.6% revenue decrease in our APEI segment and a $0.1 million or 0.8% decrease in revenue in our Hondros segment.

Cost of expenses were $65.5 million for each of the three months ended December 31, 2018 and 2017. Consolidated instructional costs and services expense as a percentage of revenue increased to 37% of revenue, compared to 36.7% in the prior-year period. The increase in instructional costs and services expense as a percent of revenue is primarily driven by increased compensation costs in our Hondros segment, partially offset by a decrease in instructional materials costs in our APEI segment. Selling and promotional expense as a percentage of revenue decreased to 18.2% of revenue, compared to 18.3% in the prior-year period.

The decrease in selling and promotional expense was primarily the result of a decrease in employee compensation costs in our APEI segment, partially offset by an increase in advertising costs in our APEI and Hondros segments. General and administrative expense as a percentage of revenue increased to 24.3% of revenue, compared to 22.3% in the prior-year period. The increase in general and administrative expense is primarily related to increased compensation costs in our APEI and Hondros segments. Consolidated bad debt expense for the quarter was $1.3 million or 1.7% of revenue, compared to $1.1 million or 1.4% of revenue in the prior-year period.

Depreciation and amortization expense as a percentage of revenue decreased to 5.6% of revenue from 5.9% in the prior-year period. Our effective tax rate during the fourth quarter of 2018 was approximately 26.5%, compared to 14.3% in the prior-year period. In the fourth quarter of 2017, we recorded a $3.7 million reduction in income-tax expense related to the revaluation of net deferred tax liabilities resulting from the 2017 Tax Cuts and Jobs Act. Our net income for the quarter was $9.1 million or $0.55 per diluted share, compared to net income of $8.4 million or $0.51 per diluted share in the prior-year period.

Total cash and cash equivalents at December 31, 2018 increased 18.4% to $212.1 million, compared to $179.2 million as of December 31, 2017. For the 12 months ended December 31, 2018, total consolidated revenue was approximately $297.7 million, compared to $299.2 million in the prior-year period. Net income for the 12 months ended December 31, 2018 was $25.6 million or $1.54 per diluted share, compared to net income of $21.1 million or $1.29 per diluted share in the prior-year period. As a reminder, during the full-year 2018, we recorded the following: No.

1, approximately $1.7 million in pre-tax expenses associated with the voluntary reduction in force program announced in March as well as the applicable tax effect of the adjustment. No. 2, approximately $0.7 million pre-tax in professional fees related to an acquisition that the company is no longer pursuing. And No.

3, approximately $1.0 million pre-tax in costs related to the civil investigative demand from the Attorney General of Massachusetts, an inquiry that has since been resolved. Capital expenditures for the year were approximately $9.4 million, compared to $14.8 million in the prior-year period. Decline was primarily related to lower investments in program and software-development costs at APUS. Prior-year program development costs included costs related to doctoral and competency-based education or CBE programs.

Depreciation and amortization for the year was $17.5 million, compared to $18.8 million in the prior-year period. Going on to Page 4, first-quarter 2019 outlook. Our outlook for the first quarter of 2019 is as follows: APUS net course registrations by new students increased approximately 8% year over year. Total net course registrations increased by approximately 1%, compared to the prior-year period.

For the three months ended March 31, 2019, total student enrollment at Hondros declined 15% year over year and new student enrollment decreased by 30% year over year. As Wally noted earlier, enrollments at Hondros were adversely impacted by changes in admissions processes and course-retake policies among other factors. Hondros is taking action which we believe will mitigate the future impact of these changes on enrollment by modifying certain requirements and focusing on growth initiatives. In the first quarter of 2019, we expect a change in consolidated revenue of between 5% decrease and flat year over year.

Net income for the first quarter of 2019 is expected to be in the range of $0.29 to $0.34 per fully diluted share. The change in operating margin indicated by our first-quarter guidance is influenced by seasonality and impacted by two things. No. 1, the guidance includes approximately $1.5 million pre-tax in professional fees associated with an acquisition the company is currently evaluating.

Second and importantly, the enrollment declines at Hondros have a significant impact on that unit's operating margin. We anticipate a year-over-year decline in Hondros segment-operating income of approximately $1.3 million in the first quarter of 2019, compared to the first quarter of 2018. As we mentioned last quarter, APUS continues to adjust its outreach to prospective students by focusing on the military and on the areas of the civilian market, where student quality and advertising costs are more compatible with APUS's low-tuition model. This includes a focus on certain degree programs, professional fields and geographic areas where we've enrolled students that are, on average, more likely to persist.

The results appeared to have been generally favorable, particularly given the double-digit year-over-year increase in net course registrations by new active duty military students, despite the headwinds from the partial government shutdown and the strengthening of net course registrations by new civilian students. In closing, we are pleased by the improved outlook for net course registrations at APUS as well as by the gains we have made with respect to student persistence, particularly among undergraduate students, civilian students utilizing Federal Student Aid. Our team has put forth great effort over many years to improve our enrollment management processes, increase our marketing efficiency and enhance the student learning experience to attract and retain more college-ready students. APEI continues to generate strong free cash flow and it possesses a strong balance sheet with no long-term debt.

Overall, I believe 2018 was a good year for APEI. Now, we'd like to take questions from the audience. Operator, please open the line for questions.

Questions and Answers:

Operator

[Operator instructions] Your first question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Jeff Silber -- BMO Capital Markets -- Analsyt

Thanks so much. You alluded a couple of times to the government shutdown. I just was wondering if we can get a little bit more detail on the impact you saw. And also, where there any delays in any of the federal funding streams, whether it was Title IV, Department of Defense Tuition Assistance or VA benefits? Thanks.

Wally Boston -- President and Chief Executive Officer

Sure, Jeff. Fortunately, Congress had taken care of DoD, so DoD was funded and all of our main branches of the military had Tuition Assistance funding during the period. VA was also funded, although VA did have some computer problems that weren't related to the shutdown that, we believe, that impacted particularly new VA students, less returning students, but if you were getting your paperwork processed for the first time, it was taking some time. But the Coast Guard is part of the Department of Homeland Security and so the Coast Guard was impacted.

They shut down for the month of February. We didn't get our Coast Guard registrations for that month. And there were some other -- we have some relationships with other agencies like TSA and they were unfunded as well during that time period. So while it wasn't significant, there was an impact on the month of February, but we did have two strong months in both January and March.

Rick Sunderland -- Executive Vice President and Chief Financial Officer

Yeah. This is Rick. I'd like to add to that. So I don't know that we can quantify the impact, but this is where the business model is important.

The shutdown occurred in February with our monthly starts. I believe we were able to recover many of those students, particularly Air Force and -- I'm sorry, Coast Guard and TSA. So for the quarter, we are looking at some pretty significant year-over-year growth in Military Tuition Assistance.

Jeff Silber -- BMO Capital Markets -- Analsyt

OK, that's very helpful. In your discussion on Hondros, I believe you mentioned a new campus essentially opening in 2020. I just was wondering if we can get a little bit more color on that.

Wally Boston -- President and Chief Executive Officer

Yeah, we have approval to open a new campus from a state. I'm not sure if we've given that state out yet. We'll just -- we'll do it when it's the right time. But you may recall, when we had to switch from ACICS as our accrediting body, in last year in June, we got approved by ABHES and they're our new primary accrediting body.

Their rules and regulations say that you have to wait one year to get permission to add a campus. We've already informed ABHES that when our year is up on June 11, we'll submit to them an application to open a new campus. We believe the build-out on that as well as the preparation for signing up students will mean that that campus should open in the spring or roughly the 1st of April for 2020.

Jeff Silber -- BMO Capital Markets -- Analsyt

OK, great. That's very helpful as well. And you gave some color on the expected change year over year for Hondros' operating loss. Can you give us some similar color what you were expecting for APUS in terms of the year-over-year difference on operating income?

Wally Boston -- President and Chief Executive Officer

Well, we're certainly not expecting it to go down, Jeff, but we don't have that quantified. We thought it was helpful in the first quarter, because we know what the change in new student enrollments as well as returning students are to be able to give that for Hondros. But APUS, from a new-student perspective and even overall returning-student perspective, is up in the first quarter.

Rick Sunderland -- Executive Vice President and Chief Financial Officer

If you go back to your modeling historically, I think, you can see the variation across the quarters in terms of margin. Q1 does tend to be a lower-margin quarter, given the start of the tax year.

Jeff Silber -- BMO Capital Markets -- Analsyt

All right. Great. And one more numbers question, if you don't mind. What kind of tax rates you would be using or what's embedded in your guidance for first-quarter EPS? And also, what kind of tax rate would go into the tax effect of transaction costs that you called out, what should we be using as well? Thanks.

Rick Sunderland -- Executive Vice President and Chief Financial Officer

Right. So I might say a good rate going forward is 26.5%. We're going to see a number slightly lower than that in the fourth quarter. We have a small benefit that we're going to take back through expense in that period.

Jeff Silber -- BMO Capital Markets -- Analsyt

But we can view the 26 -- I'm sorry, but we should use that 26.5% also for the transactional costs to kind of tax effect that as well?

Rick Sunderland -- Executive Vice President and Chief Financial Officer

Yes. I would use a slightly lower number than that in the first quarter as we are going to pull in the benefit, small benefit in the first quarter. But that's just the first quarter.

Jeff Silber -- BMO Capital Markets -- Analsyt

OK, great. Got it. I understand. Thank you for clarifying that.

I appreciate it. Thanks.

Rick Sunderland -- Executive Vice President and Chief Financial Officer

Sure.

Operator

Your next question comes from Peter Appert with Piper Jaffray. Your line is open.

Peter Appert -- Piper Jaffray -- Analyst

Thanks. Good afternoon. So Wally, I'm wondering if given the inflection you've seen at APUS here in the current quarter of the changes you have made, if you've got -- your level of confidence basically in terms of the sustainability of positive new course registrations going forward.

Wally Boston -- President and Chief Executive Officer

We feel pretty good. We've made a lot of changes. We've been very patient, particularly in line with trying to make sure we were recruiting quality students in our FSA segment. And it's taken us a lot of time to put processes in place that, Peter, that would make sure that we didn't throw out the baby with the bathwater, but that we were recruiting a student whose interest in college and interest in persisting was much higher than where we were before.

And I think that, along with the fact that we are continuing to emphasize our distinctive ability to meet the needs of our service members and our public-service students is serving us well. And we feel pretty good about it other than later in the year if there's another shutdown, all bets are off. But right now we're feeling pretty good.

Rick Sunderland -- Executive Vice President and Chief Financial Officer

Yeah, I'd like -- so let me add to that. So we've been challenged in returning student numbers, because of the declines in the new-student numbers. So it's really important that we see that growth in the new-student number in the first quarter, because they're only a new student one time and then they become returning students. So if it's a leading indicator, I think, that's a positive, just to see that 8% increase in new students.

Peter Appert -- Piper Jaffray -- Analyst

Sure. How about though the -- just the differential between TA students versus non-TA students, right? The strength is -- if I seem to heard you correctly, the strength is coming primarily from the TA segment. And I'm not sure how to interpret that in terms of -- does that suggest the programmatic offerings are not quite as compelling for the non-TA students? How do you...

Wally Boston -- President and Chief Executive Officer

No, I think one of the things that we talked about last quarter, Peter, was that where we have strengths, we were going to shift our marketing spend to focus on that, so not just in our military programs, but in some of our programs that focus on unique agencies like intel and public, the TSA. At the same time, we talked -- I talked about early on that we've seen some success in geographic focus. So the civilian population in all areas of the country is not the same. And I think, that whether it's a private college or a public college, they'll tell you that.

And so somewhat naively years ago when we got into the -- got approved for FSA, it was advertised equally for all across the board and we found out over time that, quite frankly, in certain areas, people weren't as motivated or as qualified to be college students. And so as we've put processes in, we've also said, you know what, we don't -- we won't advertise in this area, because it meets the profile of the student that we find to be successful and we just won't advertise in this area. We've also been very focused on adding STEM programs and technology programs and have quite a variety. And in the civilian segments that we're recruiting for as well as our military segments, those are proving to be pretty popular.

Peter Appert -- Piper Jaffray -- Analyst

OK, great. Thank you. And then, Wally, the $1.5 million professional fee set, it sounds like a reasonably large number, which might imply a reasonably large transaction. Any color in terms of the kinds of things you're interested in looking at, probability that this goes forward, just anything you could help us with on that?

Wally Boston -- President and Chief Executive Officer

Well, I wish I could give you a high probability. We're certainly hopeful of that, but we've been pretty open about saying that we're looking for healthcare acquisitions. Nursing is our big priority and we'll look at other healthcare options as long as they are going to be able to meet gainful employment requirements, which are still in place, so that's our big focus.

Rick Sunderland -- Executive Vice President and Chief Financial Officer

Yeah. And the other focus would be for non-Title IV and to employment skills gap type companies. So broadly speaking, it's in the area of healthcare and non-Title IV, call it training...

Peter Appert -- Piper Jaffray -- Analyst

But not -- but to be clear, not non-Title IV, exclusively. You're looking at...

Rick Sunderland -- Executive Vice President and Chief Financial Officer

Correct, correct. I mean, the nursing and healthcare would Title IV.

Wally Boston -- President and Chief Executive Officer

Correct.

Peter Appert -- Piper Jaffray -- Analyst

Got it. And presumably, would these be campus-based or are you looking for online assets?

Wally Boston -- President and Chief Executive Officer

Well, online assets would be extremely limited and also an interesting fold-in with APUS, because APUS does have online nursing programs, online-only. So I guess they're out there, but there aren't that many of them, but we continue to want to expand Hondros. I mean, we've said originally when we acquired Hondros that the four original locations, now five, you've got a certain level of overhead and you can run a certain number of facilities with the same number of overhead. So we continue to look for campus expansions and I think we said we'd look to do them organically as well as fold-in acquisitions.

Peter Appert -- Piper Jaffray -- Analyst

Right. Yeah, I would think that given the presence that Hondros gives you, right -- would it not make more sense just to drive expansion through that brand rather than buying another asset?

Wally Boston -- President and Chief Executive Officer

Well, the issue is that with -- it's a creditor. You can only add one location a year, Peter, so that's pretty very slow.

Peter Appert -- Piper Jaffray -- Analyst

OK. OK, got it. All right. Great.

I think I'm covered. Thank you.

Rick Sunderland -- Executive Vice President and Chief Financial Officer

Thank you.

Wally Boston -- President and Chief Executive Officer

Thank you, Peter.

Operator

Your next question comes from Corey Greendale with First Analysis. Your line is open.

Corey Greendale -- First Analysis -- Analyst

Hey. Good afternoon. So first, on the TA side, can you just -- I just kind of lost track of what is permissible and not permissible at this point in terms of marketing tactic. Do you like -- do you have full access to bases at this point? Or is that changing at all?

Wally Boston -- President and Chief Executive Officer

I wish it was changing. We've been working on it since the new administration was in there, but we still have the same MOU from 2014 that only gives guaranteed access to institutions that actually teach on base. So we participate in quarterly office hours or whatever the base's commander has deemed everyone else should participate in, even though there's some bases where we -- our students comprise a substantial majority of all the students using TA. So I think we've done this, Corey, by expanding office hours of our teams, both in advising and student services and admissions, as well as finding ways to, through the process, legitimately to have off-campus events with our outreach people, and that's been effective.

Corey Greendale -- First Analysis -- Analyst

OK. And then, well, you mentioned specifically focusing or not focusing on specific geographic areas, so I had a question around that. There is some talk of changing laws at the state level to try to do some of the things that the prior admiration was going to do at the federal level. So I was just interested if -- I don't know if you've ever kind of given this information -- if there's specific states where you're particularly concentrated or not concentrated.

I'm interested in California and New York since those are two of the higher profile ones that's being discussed. And is that something like that word to be put in place and how would you manage it?

Wally Boston -- President and Chief Executive Officer

Well, we -- before SARA came out, we were licensed in every state that said we had to be licensed there, even though we were online-only. So we've -- I think, we've established good relationships with states, even though many of those states we were able to roll back our licensure, because of SARA. And we are approved for California, even though they're not -- they're the last state that's not a SARA state. So we look at this, Corey, and we hold our record out there that we try to operate above line, in every aspect, try to be transparent.

And so far, it's held us in good stead. And when I talk about some states that we won't advertise in, it's really related to the college preparedness of the students and the income band that we think are attractive at our price point.

Rick Sunderland -- Executive Vice President and Chief Financial Officer

Hey, Corey. It's Rick. So on the military side, the business model is strong in terms of our outreach, the relevance of our programs, our tuition at the TA reimbursement rate. One of the differences is the change in, let's call it, level of service with extended hours in the admissions group and other areas.

So I don't think we can equate a cause and effect, but I think, the overall reengineering of the onboarding process, combined with a redirection of some of our marketing dollars, is producing good results in both the military and the nonmilitary, but you asked about the military.

Corey Greendale -- First Analysis -- Analyst

Yep. Great, that helps. And then on Hondros, it sounds like some of the decline was -- or maybe all of the decline was because of some changes that you made in -- for good motivation, I think, to try to make sure people were prepared. If you -- I just want to make sure I understood that if you shift the timing of that exam to when people already -- to a requirement of the first course, I mean, intuitively what we think will happen is your new student to go up and then your dropout rate will spike, but is that not likely?

Wally Boston -- President and Chief Executive Officer

No. So just talking about that one exam, we are trying to improve our ADN first-time NCLEX pass rates. And so one of the things that we looked at in benchmarking other schools was that, in addition to having a HESI exam, that we require some schools use the ACCUPLACER and believe that's much more indicative of the NCLEX pass rate. And so we put the ACCUPLACER in place for the January term as a required preadmission test and what we found were that some of our prospective students went to other schools that don't have that requirement.

They're just test-averse. And so the idea was not to use the test to weed people out, because I think our benchmark that we're pretty comfortable with is HESI, but just use that test as a benchmark for predicting success and seeing where we could get remedial assistance from an instructional perspective in both Math and English for students. And so with a resistance to take this test before admission, we're building it in and it's not going to be a penalty at all. It's really where are our students when they enter and we can ask them to take that test once they're admitted and then as they go through the program, we can see how they progress.

And ideally, we bring up the first-time NCLEX pass rates, we'll know based on those benchmarks of entering students with the ACCUPLACER as to how far we brought them along.

Corey Greendale -- First Analysis -- Analyst

OK. And last one for me and I'll turn it over. Through this whole period, you've continued to generate good free cash flow. So the first quick one is for Rick.

Just -- can you give us any sense of what capex you'd expect in 2019? And then for either of you, in terms of uses of free cash, I know you're working on acquisitions. Do you think of that as the primary use of cash or what's your capital allocation thinking in 20 -- or free cash capital allocation thinking in 2019?

Rick Sunderland -- Executive Vice President and Chief Financial Officer

Right. So I think the dip we observed in capex in '18 was just that. You'll see capex return to something more along the lines of '17. And in terms of capital allocation, we're seeing opportunities out there.

I mentioned in my portion of the talk about professional fees earlier in '18 related to a potential acquisition as well as fees we're incurring now in the first quarter of '19. So I think, that gives you some sense of our focus here in terms of capital deployment.

Corey Greendale -- First Analysis -- Analyst

All right. Thanks very much.

Operator

[Operator instructions] Your next question comes from Greg Pendy with Sidoti. Your line is open.

Greg Pendy -- Sidoti and Company -- Analyst

Hey, guys. Just, I guess, along those lines as we think about the cash-flow statement, can you just kind of remind us why the receivables spiked in 3Q and that continued in 4Q and when that might normalize, I guess, as we look out to 2019?

Rick Sunderland -- Executive Vice President and Chief Financial Officer

Yeah, the answer is simple, delays in payment in both TA and VA. The largest piece of that is the Air Force. At the end of '17, due to the billing cycle and their payment cycle, literally, there were no months outstanding. And at the end of the third quarter of '18 and repeated at the end of the year '18, there were two months outstanding.

Now, from a collectability standpoint, those are good collectable dollars. The timing of the payment has shifted. So that's the majority of the increase. The remainder, if you really put TA with VA together, you get the vast majority of the increase.

There's just been a slowdown in payments at the Veterans Administration. Again, those are good collectable dollars. They're just being paid more slowly than we have historically experienced. When we talked about that in the third-quarter 10-Q, we talked about the delays, and I think I was purposeful to not say that it was transitory or one-time, because we have no evidence that they're going to return to a prior payment schedule.

Clearly, that would be our goal, but we don't control that. So it's in the -- it's in both the active duty and the veterans.

Greg Pendy -- Sidoti and Company -- Analyst

So it's fair to say you'll hit a payment cycle at least at some point in 2019 to normalize a bit?

Rick Sunderland -- Executive Vice President and Chief Financial Officer

Yes. The point is it will normalize, right? I don't have any expectation that it will get worse and I don't have any expectation that it will get better. And if you have both of those expectations, then it just normalizes.

Greg Pendy -- Sidoti and Company -- Analyst

OK, thanks a lot.

Operator

Your next question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Jeff Silber -- BMO Capital Markets -- Analsyt

Thanks so much. Sorry, just a quick follow-up. I think, you had mentioned that your first-quarter revenue guidance assumes about 10% of that being a contribution from Hondros. That would imply a pretty sizable year-over-year decline.

Obviously, we've seen some pressure on enrollments as well. But from a revenue-per-student perspective, what should we be modeling in for Hondros?

Rick Sunderland -- Executive Vice President and Chief Financial Officer

I don't know that we've ever talked about that.

Wally Boston -- President and Chief Executive Officer

Yeah, that's a great question. Yeah, we don't look at it that way, Jeff, but let's see if we can.

Rick Sunderland -- Executive Vice President and Chief Financial Officer

We'll take that one offline and one of us will follow-up with you.

Jeff Silber -- BMO Capital Markets -- Analsyt

OK, that will be really helpful. Thanks so much. Well, actually let me -- I'm sorry, let's go on. Let me ask the question another way.

The decline you're expecting year over year, I'm assuming that's mostly enrollment-related?

Wally Boston -- President and Chief Executive Officer

At Hondros?

Jeff Silber -- BMO Capital Markets -- Analsyt

Yes.

Wally Boston -- President and Chief Executive Officer

Yeah. And the first-quarter number for new students is going to flow through the rest of the year in returning students, but at the same time, they're hopeful that these changes they made to not quite be as extreme as the first quarter will help them bounce back in subsequent quarters. So they've given us a projection that we're shooting for, for the rest of the year.

Jeff Silber -- BMO Capital Markets -- Analsyt

OK. Thank you so much.

Operator

There are no further questions at this time. I'll turn the call back to Chris Symanoskie.

Christopher Symanoskie -- Vice President of Investor Relations

Great. Thank you. That will conclude our call for today. We wish to thank you for listening and for your interest in American Public Education.

Have a great evening.

Duration: 40 minutes

Call Participants:

Christopher Symanoskie -- Vice President of Investor Relations

Wally Boston -- President and Chief Executive Officer

Rick Sunderland -- Executive Vice President and Chief Financial Officer

Jeff Silber -- BMO Capital Markets -- Analsyt

Peter Appert -- Piper Jaffray -- Analyst

Corey Greendale -- First Analysis -- Analyst

Greg Pendy -- Sidoti and Company -- Analyst

More APEI analysis

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