Description

Executive Summary
Aspen Group (ASPU) presents the opportunity to invest in an underappreciated yet high-quality microcap trading OTC with significant secular tailwinds that should lead to substantial upside over the next few years. Several key points stemming from our research inform our bullish view: 

·         ASPU is a disruptive business model in the controversial for-profit education space. The “secret sauce” to the business is a management team with its roots in internet marketing, which is critical to the company’s ability to acquire customers at a dramatically lower cost than competitors and grow revenue rapidly at higher incremental margins in an industry maligned for poor unit economics.

·         The drivers of ASPU’s top-line growth to date, a pay-as-you-go student debt-free payment model and an industry-leading nursing program, have significant room for continued increases given strong underlying demand trends in higher education enrollment and the supply/demand demographic mismatch in nursing today.

·         The key revenue drivers in ASPU’s business model are also its sources of competitive advantage. ASPU has built a defensible moat around its business as a low-cost leader with superior unit economics focused on a specialized niche through its nursing school. These attributes could prove attractive for strategic acquirers who lack the same focus in degree programs and are hungry for growth.

·         ASPU’s management team is not only comprised of experts in their field but are passionate about providing a superior quality offering at a reasonable price to the student, a customer-centric approach to for-profit education that contrasts with the industry status quo. Insiders own 19% of the company and have earned the confidence of legendary investor Leon Cooperman, who has personally provided both an equity investment and a line of credit to the business.

·         Given the lack of bulge bracket sell-side coverage, we believe investors do not accurately model the business and therefore underestimate the model’s true earnings power. Our estimates for top-line growth and profitability are significantly ahead of the small cap brokers who cover the stock, as we believe we have conducted more detailed, bottom-up research.

·         ASPU’s valuation is reasonable on both a relative basis versus peers and an absolute basis given a differentiated model and growth rates substantially in excess of competitors. We believe ASPU is worth at least $5.30 based on our firm’s proprietary estimates, applying a 3.0x EV/Sales multiple on our estimate of FY ’18 sales of $22.6mm, which implies 11.3x EV/EBITDA on our FY ’18 EBITDA estimate of $5.6mm, representing 47% upside from today’s price.

·         The company’s ambition to uplist its equity to Nasdaq in the next few months will provide a catalyst to unlock value for shareholders. The increased accessibility and transparency for more institutional investors from this event will also serve to enhance liquidity in the stock and raise the company’s profile with the sell-side, thereby solidifying ASPU’s profile in the sector as a legitimate player with a sustainable long-term business model.

Business
Company Background
ASPU was founded in Colorado in 1987 under the name International School of Information Management. In 2004, it changed its name to Aspen University, and in 2012, the business was recapitalized in a reverse merger. The company was established with the same motivation as many for-profit education platforms: to offer anyone determined to attend college the opportunity to receive the equivalent education in the form of a distance-learning solution at a reasonable price. Importantly, ASPU’s faculty is highly distinguished, with 57% of adjunct professors holding doctorate degrees. The university’s active degree-seeking student body consisted of 3,726 students as of the most recent fiscal quarter reported (Q2 ’17; period ending 10/31/17), representing 54% y/y growth; of this number, 2,538 students (68%) were pursuing nursing degree programs. 

ASPU began trading on the OTC bulletin board in early 2013. The company announced a 1:12 reverse stock split on January 9, 2017, a move which will facilitate the company’s goal of uplisting to the Nasdaq in 2017. Current CEO and Chairman Michael Mathews joined ASPU in May 2011, prior to which he was CEO of Interclick, an internet marketing company acquired by Yahoo! in 2011, as well as holding several leadership positions in other internet businesses. Mathews’ background in the internet space has been critical to the development of ASPU’s customer acquisition model since he joined the company, and his prior experience in uplisting Interclick to Nasdaq and garnering wider shareholder interest in that business serves as an encouraging signpost, in our view, for the future direction of ASPU in the public markets. We believe the combination of a highly incentivized management team, with whom we have spent a significant amount of time, and the presence of a prominent investor in largest shareholder Leon Cooperman (who owns a personal equity stake as well as having provided the company with a $3mm line of credit in September 2016) will also help the company attract new investors. Insiders currently own 19% of the equity.

Business Model
The for-profit education sector is notorious for producing some of the most vigorous bull/bear debate around underlying business quality. ASPU notably differs from competitors in that its management believes in placing an equal emphasis on both customer success and profit motives, and the foundation for this view relies on a model that does not require a student to carry a crippling debt load in order to enroll at Aspen University. ASPU allows students to pay for their education over a fixed period of months based on a $250, $325 or $375 payment per month depending on whether they are pursuing a Bachelor/Associate, Master, or Doctoral degree program. It also offers students the flexibility to complete their academic programs in a timeframe of their choice, regardless of the duration of their monthly payment plan. Students on a monthly payment plan can withdraw from their course of study at any time, and ASPU will cease billing on a monthly recurring basis immediately. In this way, ASPU offers a classic pay-as-you-go plan to students, enabling affordability and reduces the perceived risk by students that a substantial investment (which traditionally may require them to take on meaningful debt personally) may not yield the desired return upon completion of a degree. Management estimates that over the long term, the number of students on the monthly payment model can grow to at least two-thirds of the total enrollment volume of Aspen; as of October 2016, this metric stood at 59% of total new class starts. The monthly payment plan requires that students take only one course at a time during each 10-week term, with two weeks off between each term. Internal studies have shown that course completion rates have risen with this schedule and students have been able to complete a degree program by the end of a 36-month total payment period. Our research suggests the affordability and flexibility of the monthly payment plan also helps ASPU in being able to boast of graduation rates for its students in excess of 62%, which contrasts with legacy peers, who we believe have graduation rates in the 30%s.

The crux of making this model economically viable lies in ASPU’s acumen with customer acquisition, which has yielded significant savings on a cost per lead basis relative to peers in the space. ASPU’s management team has been vocally critical of its competitors who have traditionally relied on purchasing non-branded, non-exclusive marketing leads from internet marketing companies, as this process has resulted in enrollment costs in the range of $4,000 to $5,000. Such high costs have necessitated legacy online for-profit entities to charge around $2,000 per course, which is effectively in parity with the rates charged by traditional non-profit public universities and is a key driver of students being saddled with debt in order to pursue their studies. ASPU management contends that the legacy for-profit model is therefore not a sustainable competitive alternative over the long term. By contrast, ASPU leverages the knowledge of its management team in sourcing leads from internet-based and analytically targeted Aspen University branded advertising campaign that, essentially vertically integrating the lead generation function in-house as opposed to purchasing expensive data from third parties. This has allowed ASPU to achieve a cost per enrollment (CPE) in the $800s over the last several quarters; management believes this number can sustainably remain in the $800-850 range for the foreseeable future. In Q2 ’17, ASPU reported a y/y decline in CPE at $847 despite substantially increasing the rate of ad spend, evidencing the significant operating leverage inherent in a model that focuses on minimizing unit cost per lead. Meanwhile, the average tuition price quoted on a per new class start basis in Q2 ’17 was $819, evidencing that on a nominal dollar basis, the cost to acquire a new customer is almost made up entirely by one new class start; this highlights the “flywheel” nature of ASPU’s model, which our research suggests is a key differentiator of the business versus any competitor in the space. Finally, another important distinction in customer acquisition in recent quarters has been the growing significance of organic referrals. In Q2, over 30% of new students were organic, meaning ASPU did not have to spend on marketing to attract these candidates; rather, organic leads originate as prospects who hear about ASPU’s payment plan from an employer or colleague and go to the website or make an inbound call to the company’s call center on their own. We believe this is indicative of the superior brand reputation and value proposition of Aspen in student circles, particularly with the nursing population. A continued growth in the proportion of organic leads would further bolster ASPU’s margins, which we think is one of the underappreciated levers the company has as it continues to penetrate the market. 

Nursing Program
The strongest part of Aspen University’s offering is its School of Nursing, in particular its focus on the registered nurse (RN) population. In fact, across the university, another core differentiator (also contributing to higher reported graduation rates) is the focus on enrolling working professionals who desire an advanced degree as opposed to undergraduate students. Nursing has gotten a great deal of coverage over the last few years for being an area of study that has great end-market demand for its services yet is facing a supply shortage in terms of graduates. We believe this market backdrop allows ASPU to carve out significant share as a low-cost alternative for prospective nursing students to gain their degrees and enter the field. Starting in November 2014, ASPU launched a new marketing program focused on enrolling new students into its BSN degree program to aggressively grow its penetration of this market. As of the latest fiscal quarter, 68% of the entire active degree-seeking population (2,538 students) was enrolled in nursing degree programs, up from 57% in the comparable prior year period; this represented 89% of the total y/y growth in the active degree-seeking student body. Nearly 1,500 of the active nursing students are currently pursuing the RN-to-BSN program, while the remainder are enrolled in the MSN program or the RN-to-MSN bridge program. Management estimates that the BSN program is on pace to increase on an annualized basis by a net 900 students, or about 75 per month. All nursing courses are priced at $975 per course. As of October 2016, 71% of ASPU’s total revenue originated from the School of Nursing. Going forward, management intends to continue the focus on nursing and is currently exploring ways in which to offer programs beyond just the BSN and MSN programs. As part of this effort, ASPU will begin spending approximately $360k per month on marketing heading into its next fiscal year, which management anticipates will allow the company to add 250-350 new nursing enrollments per month. We think this is a meaningful development, particularly as it strengthens the ability of ASPU to capture more white space in the nursing addressable market; as it stands, the company averages 1,000 BSN program starts per year, representing approximately 2% of that market, which can ultimately grow to 5%. Therefore, a concerted effort to add more nursing capacity is a net positive, despite temporarily driving up marketing investments, as it can expand share gain and revenue growth opportunities well into the future. 

Key Thesis Points
Share Winner with Differentiated Niche Offering and Disruptive Pricing Model
Our research leads us to conclude that ASPU is a one-of-a-kind operator in an industry otherwise crowded with low-quality offerings. Based on discussions with management, in terms of public company peers, we have identified six comparable businesses in the for-profit sector: Apollo Education (APOL; acquired as of 2/1/17), American Public Education (APEI), DeVry (DV), Grand Canyon Education (LOPE), Capella Education (CPLA), and Bridgepoint Education (BPI). APEI and CPLA are wholly online offerings, and APOL, which owns the University of Phoenix, is the market leader. We believe the majority of this peer group is losing market share or merely holding their share stable, which we find may not allow these businesses to remain going concerns looking to the future. 

More notable than just the high-level market share discussion, however, are our points regarding ASPU’s strong emphasis on the nursing segment and its pay-as-you-go pricing model. We believe that ASPU’s unit economics are orders of magnitude better than its peer group given the uniqueness of its model, which in turn makes the business competitively defensible. Management has pointed investors to what it terms a “marketing efficiency ratio” in order to quantify the effectiveness of its customer acquisition and pricing mechanisms. This framework measures the revenue per enrollment (RPE) and divides this figure by cost per enrollment (CPE). RPE takes each quarterly cohort of new degree-seeking student enrollments and measures the amount of revenue earned (tuition plus any miscellaneous fees to calculate the average RPE for each cohort. CPE simply measures the marketing spend in a given quarter divided by the number of new student enrollments achieved in that given quarter. Therefore, the marketing efficiency ratio effectively mirrors the lifetime customer value versus customer acquisition cost calculation frequently done for companies with subscription models.

Management estimates the total RPE, or lifetime value of a customer, is about $7,000 over around four years, at which point a student will have completed eight courses. The marketing efficiency ratio achieved on a student by that point relative to the marketing spend associated to acquire him/her produces a value of 9.7x. Management believes that third-party managed services companies in the higher education industry that manage the enrollment and marketing investments for universities average 3-4x return on their spend levels, which our independent research corroborates. Therefore, ASPU is producing more than double the ROI on marketing spend than comparable businesses, validating our view that its model is a flywheel with real network effects that allows for strong operating leverage and enhanced profitability versus peers.

Key Financial and Operating Metrics Continue Exhibiting Strong Trends
We believe now is an optimal time to invest in ASPU based on continuing positive trends in reported numbers and the sustainable backdrop of secular tailwinds in the nursing market we touched on earlier. Fiscal Q2 ’17 saw ASPU report a very strong set of numbers, with 81% y/y revenue growth, record high adjusted gross margins of 64.4% (aided by a y/y decline in CPE of -2.3%), adjusted EBIT margins of 9.5%, and positive GAAP net income. Aside from the marketing-related unit economics we have already discussed, we believe the company’s migration of many of its faculty to full-time status from adjunct has also helped drive profitability, as instructional costs and services will continue to flatten out over time from this move. From a student outcomes perspective, this is also an encouraging initiative, as our research suggests quality of instruction, course completion rates, and graduation rates will all benefit into the future.

At present, management has provided FY ’17 guidance to investors of at least 50% y/y revenue growth, at least 12% adjusted EBITDA margins, and positive GAAP net income by year-end. Clearly, management achieved its stated target of being net income positive by the end of its fiscal 2017 two quarters ahead of target, but it still did not raise full year guidance. We believe this guidance is therefore very conservative, particularly given that H1 metrics are all tracking ahead of full year targets; despite tougher y/y growth comparisons in H2, we believe that absent a dramatic slowdown for the balance of the year, FY guidance will get a substantial raise post Q3 results, as management has indicated that an update to the guide will be issued at that time. Though management has already guided to an uptick in marketing spend heading into the next fiscal year, we believe this is a positive investment factor as ultimately, accelerated spend should help drive higher enrollment numbers and the current base of profitable revenue generation should serve as adequate buffer while the company enters its next leg of meaningful student additions.

Visionary CEO Focused on Shareholder Value Creation
We have spent a substantial amount of time with CEO Michael Mathews and believe him to be an exceptionally gifted executive, technologist, and internet marketer. Mathews’ sale of Interclick to Yahoo! in 2011 serves as a case study to us on his dedication to delivering shareholder value, and we have been impressed with the leveraging of his digital advertising background with Interclick to apply it to an entirely different industry in for-profit education. Based on his positioning of Interclick after his leadership there, we think ASPU could therefore ultimately be a candidate for acquisition by a strategic player in the education space, and that uplisting to Nasdaq in the next year would serve as merely a first step in order to garner interest from such players in the asset. Further, ASPU management collectively owns 19% of the company’s outstanding equity, which we believe is a major positive factor to our thesis given the significance of this “skin in the game”. Mathews is also personally passionate about reforming the higher education space, in particular wanting to provide consumers with more debt-free alternatives; while this attribute occasionally makes him promotional, we believe the drive he exhibits is an overall positive in terms of making the business more accessible to new investors.

Bear Case
Bears will argue that ASPU will follow in the footsteps of other for-profit education businesses, and that ultimately its growth and profitability is unsustainable. As the law of large numbers sets in on enrollments, particularly given the outsized focus on the niche market of nursing, incremental growth is more difficult to achieve. In a low-cost model, slower growth could structurally reduce future profitability and therefore result in unforeseen hiccups to management’s long-term plan of improving operating margins and generating significant earnings growth.

Financial Model
We believe the company will report numbers comfortably ahead of management’s current guidance for FY 2017, which we detailed earlier in this memo. The key drivers of our variance in both the near and long term are a belief in the white space opportunity for ASPU to increase market share in nursing over the next few years and the appreciation of the company’s model at adding a sticky revenue base with new student enrollments at increasingly greater incremental margins. We believe the company could achieve adjusted EBITDA margins over the long term of close to 40% based on the significant cost savings offered by its unit economic model.

Our key estimates are as follows:
- Active Students of 4,701 in 2017, 6,676 in 2018, and 8.851 in 2019
- Revenue Per Average Active Student of $3,899 in 2017, $4,000 in 2018, and $4,000 in 2019
- Revenues of $14.6mm in 2017 (73% y/y), $22.6mm in 2018 (55% y/y), and $30.9mm in 2019 (37% y/y)
- Gross Margin (non-GAAP) of 68% in 2017, 69% in 2018, and 79% in 2019 (2019 represents the year in which marketing and promotional costs, which are part of COGS and not SG&A for ASPU, tick down sharply)
- EBITDA Margin (non-GAAP) of 19% in 2017, 25% in 2018, and 38% in 2019

Valuation
ASPU trades at a premium to its industry peers. However, even despite the fact that it is a microcap and it focuses largely on one academic discipline, we believe the premium is justified. Given the varying leverage levels across the peer group, we believe EV/Sales and EV/EBITDA multiples are the most appropriate basis for relative valuation. We believe ASPU deserves to trade at a premium on both of these metrics given business quality powered by proprietary technology and growth prospects that vastly outshine every other business in the peer group. Consensus projects y/y sales growth for FY ’17-’18 of just 3% and y/y EBITDA growth of 6% for the comp universe (APOL, APEI, DV, LOPE, CPLA, and BPI). By contrast, ASPU will realistically achieve revenue growth of at least 30% y/y by its fiscal 2019 and even faster EBITDA growth.

We note that on a December calendarized basis, ASPU trades at a little more than 3.0x sales on calendar 2017 consensus numbers. Our estimates are considerably ahead of consensus, but we believe 3.0x sales is fair on our fiscal 2018 revenue estimate of ~$23mm given the fact that this represents nearly 55% y/y growth off of our FY 2017 estimate (which we project will produce 73% y/y growth). A 3.0x multiple for this growth trajectory is a deep discount to similar businesses in internet and software that exhibit similar top-line growth; however, we believe this discount is warranted given the relative illiquidity and a smaller realistic TAM for ASPU than most other online businesses, as well as the structurally inferior quality of the education space relative to other tech-enabled verticals. These assumptions produce a stock worth $5.30 (implying 11.3x EV/EBITDA), or 47% upside, as our base case valuation. If we are wrong, we assume that the consensus sales estimate of $13.5mm for FY 2017 is correct, to which we apply a 2.5x EV/sales multiple to arrive at a stock price of $2.50, representing 31% downside from today’s price. Therefore, our risk/reward skews positive at 1.5x between our base case and downside case valuations. In a “blue sky” case, we assume that a strategic pays a premium multiple of 3.5x on our FY 2019 sales estimate of ~$31mm, producing an $8.60 stock price, or 139% upside. The acquisition of APOL by an investor consortium for a 44% premium and ~30x forward P/E over its unaffected valuation gives us some directional comfort that differentiated assets (APOL owns the online market leader, the University of Phoenix) are prized by acquirors. For conservatism, we do not underwrite an acquisition and therefore do not include it in our risk/reward assessment, but based on our research, we believe that management could very well position the company to sell itself during the course of our contemplated holding period.

Risks
Emerging Competition
Though ASPU’s particularly strong offering with a focus on the nursing student population and a business model boasting superior unit economics are differentiated assets in our view, we believe that the company is not immune from the risk of competition from start-ups that may wish to enter the space. The Aspen brand has clearly helped ASPU in deriving a greater proportion of organic leads over time; however, education is increasingly a hot area of investment for VCs in Silicon Valley, and we leave room for the possibility that superior technology could be used to target prospective students and attempt to take share from ASPU. This could result in a deceleration in new student enrollment growth as well as a spike in customer acquisition costs, which would put ASPU’s highly profitable economic model at risk. 

Nasdaq Uplisting
Our catalyst for investing in ASPU is the successful uplisting of the company’s equity to Nasdaq from the OTC BB. If there is a delay in successfully doing this either due to execution mishaps by management or any external factors, it could be perceived negatively by investors and the stock will not work. 

Accreditation Renewal
ASPU is accredited by the DEAC and CCNE. The RN to BSN program has CCNE accreditation through December 31, 2019, while the MSN program is accredited through December 30, 2021. Successful renewals of accreditation are necessary for ASPU’s debtless student payment model, so a lack of renewal would effectively jeopardize the ability of the business to operate. 

New Political Administration
President Trump’s Secretary of Education, Betsy DeVos, presides over the DOE and therefore is the most powerful person to oversee matters such as accreditation of for-profit education programs (the CCNE is recognized as an accreditation entity through the DOE). Based on our assessment of DeVos’ Senate confirmation hearings and all other data in the public domain, we find her lack of significant prior experience and demonstrated deficiency to date on key issues as a “wild card” risk in making any investment in the education sector. Any sudden changes to legislation under a new Secretary of Education could therefore impact ASPU’s stock negatively.

Catalyst

Quarterly earnings

Uplisting to Nasdaq