Good afternoon, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the APEI Reports First Quarter 2019 Results call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, you may press the pound key. With that, I would now like to turn the call over to Chris Symanoskie, Vice President of Investor Relations. Please go ahead.
Great. Thank you, Julie. Good evening, welcome to American Public Education's discussion of financial and operating results for the first quarter of 2019. Materials that accompany today's conference call are available in the events and presentations 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 quarterly report on Form 10-Q, filed with the SEC earlier today, as well as factors described in the company's other SEC filings. The company undertakes no obligation to update publicly any forward-looking statements for any reason unless required 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, Rick Sunderland, our Executive Vice President and Chief Financial Officer, now I'll turn the call over to Dr. Boston.
Thank you, Chris. Good afternoon, everyone. I will begin our call today by discussing our recent operating results for the first quarter of 2019. Our CFO, Rick Sunderland, will then discuss APEI's financial results and our outlook for the second quarter of 2019. In the first quarter of 2019, APUS reported a year-over-year increase in both new and total net course registrations of 8% and 1% respectively. 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. The increase was driven by a 25.7% year-over-year increase in net course registrations by new students utilizing Military Tuition Assistance, or TA, as well as by a 3.1% increase in net course registrations by new students utilizing cash or other sources.
We believe these increases are a reflection of our focus on most likely to persist communities where student quality and advertising costs are more compatible with APUS's low tuition model. That said, the increase in net course registrations at APUS was partially offset by a 9.3% decline in net course registrations by new students utilizing Federal Student Aid, or FSA, and a 6.8% decline in net course registrations by new students utilizing Veterans Benefits, or VA. While net course registrations by students utilizing FSA continued to decline, the first course pass and completion rate, a measure of student persistence and quality for APUS undergraduate students utilizing FSA remains at historically high levels. For the three months ended March 31st, 2019, total enrollment at Hondros College of Nursing, or HCN, declined 15% year-over-year, and new student enrollment decreased 32% compared to the prior year period.
We believe some of the changes we have made to our admissions and academic achievement requirements have negatively affected student enrollment at HCN. However, we believe these changes are ultimately beneficial to students and will result in a better educational experience and improved testing pass rates in the future. Furthermore, we remain committed to serving the higher education needs of nurses and healthcare professionals more broadly as we see continued strong demand for education in these professions. We believe our continued focus on academic quality, attracting students with greater college readiness, and on recent upgrades to our enrollment management processes has produced outstanding results, including but not limited to significantly better student persistence, improved conversion rates, and a more stable student population at APUS.
The improvement in our quality mix of students is reflected in part by APUS's fiscal year 2016 draft cohort default rate, which improved to 18.5% compared to the fiscal year 2015 official cohort default rate of 23.8%. The quality of APUS is also reflected by referral rates and student satisfaction. Thus far in 2019, 50% of new students responding to our new student surveys indicated that they were referred by others, and 95% of respondents to our 2018 alumni survey indicated that they would recommend APUS to a friend or colleague. In short, we believe APUS offers a better student experience at an affordable price and exhibits improved student persistence than just a few years ago.
Although building a durable higher education institution requires time and patience, the initiatives to stabilize APUS enrollment and enroll students whose educational objectives align with completion give us confidence in the future of our overall enterprise. As a result, I am pleased to announce that the APEI Board of Directors has authorized a $35 million stock repurchase program that effectively returns a portion of our excess cash to shareholders. Now, I will turn the call over to our CFO, Rick Sunderland. Rick?
Thank you, Wally. American Public Education's first quarter 2019 consolidated revenue decreased by 2% to $73.4 million, compared to $75.0 million in the prior period. The revenue decrease was due to a $1.6 million, or 16.7% revenue decrease in our Hondros segment. Revenue in our APEI segment was $65.7 million in each of the three-month periods ended March 31, 2019 and 2018. While APUS total net course registrations increased approximately 1% period-over-period, revenue per net course registration was lower compared to the prior year period. Costs and expenses were $72.1 million for the three months ended March 31, 2019, compared to $68.8 million in the prior year. Costs and expenses in the current year period include a $5.9 million pretax non-cash impairment of goodwill in our Hondros segment.
Consolidated instructional costs and services expenses decreased approximately $1.8 million to $27.9 million, and as a percentage of revenue, decreased to 38.0% compared to 39.6% in the prior year period. The decrease in instructional costs and services expenses was primarily driven by a decrease in employee compensation costs and instructional materials costs in both our APEI and Hondros segments. In the prior period, employee compensation costs include approximately $0.8 million of pretax expenses from the voluntary reduction in force program in our APEI segment. The decrease in instructional costs and services expenses as a percentage of revenue was a result of instructional cost and services expenses decreasing at a rate greater than consolidated revenue. Selling and promotional expenses decreased approximately $0.6 million to $15.0 million, and as a percentage of revenue, decreased to 20.5% of revenue compared to 20.8% in the prior period.
The decrease in selling promotional expenses was primarily driven by a decrease in employee compensation costs in our APEI segment, partially offset by an increase in advertising costs in our APEI segment. In the prior period, employee compensation costs include approximately $0.5 million of pretax expenses from the voluntary reduction in force program in our APEI segment. The decrease in selling and promotional expenses as a percentage of revenue was a result of selling and promotional expenses decreasing at a rate greater than consolidated revenue. General and administrative expenses increased approximately $0.2 million to $19.1 million, and as a percentage of revenue, increased to 26.0% from 25.2% in the prior year period. The increase in general and administrative expenses was primarily the result of an increase in professional fees in our APEI segment, partially offset by a decrease in employee compensation costs in our APEI segment.
During the quarter, we incurred approximately $1.3 million in pretax professional fees related to the evaluation of an acquisition. In the prior period, employee compensation costs include approximately $0.4 million of pretax expenses from the voluntary reduction in force program in our APEI segment. The increase in general and administrative expenses as a percentage of revenue was a result of general and administrative expenses increasing during a period when consolidated revenue decreased. Consolidated bad debt expense for the quarter was $1.0 million, or 1.4% of revenue, compared to $1.1 million or 1.5% of revenue in the prior year period. The company recorded a pretax non-cash charge of $5.9 million to reduce the carrying value of its goodwill in our Hondros segment. Depreciation and amortization expenses decreased approximately $0.4 million to $4.1 million, and as a percentage of revenue, decreased to 5.5% of revenue from 6.0% in the prior year period.
Due to the loss in our Hondros segment, our effective tax rate during the first quarter of 2019 was a benefit at approximately 6.6%, compared to expense of 28.9% in the prior year period. APEI segment income from operations before interest income and income taxes, driven by improved performance at APUS, increased approximately 47% to $7.5 million, or 11.4% of revenue, compared to $5.1 million, or 7.8% of revenue in the first quarter of 2018. Hondros segment loss from operations before interest income and income taxes was $6.1 million during the three months ended March 31, 2019, compared to income of $1.0 million in the same period of 2018. The decline is primarily a result of the $5.9 million goodwill impairment charge and a decrease in revenue due to lower enrollments during the three months ended March 31, 2019.
Consolidated net income for the quarter was $1.0 million, or $0.06 per diluted share, compared to net income of $4.6 million, or $0.28 per diluted share in the prior year period. Adjusted net income for the first quarter of 2019 was $5.3 million, or $0.32 per diluted share. Adjusted net income for the first quarter of 2019 excludes the pre-tax non-cash expense of $5.9 million associated with the reduction in the carrying value of goodwill for the company's Hondros segment, as well as the applicable tax effect of the adjustment. For additional information regarding adjusted net income, a non-GAAP measure, please refer to GAAP to adjusted net income reconciliation in the financial tables of our first quarter 2019 press release. Total cash and cash equivalents at March 31, 2019, were approximately $215.9 million, compared to $212.1 million as of December 31, 2018.
Capital expenditures were approximately $1.6 million for the three months ended March 31, 2019, compared to $1.7 million in the prior period. Finally, as Wally mentioned, the APEI board of directors has authorized a $35 million stock repurchase program. Going on to the second quarter 2019 outlook. Our outlook for the second quarter of 2019 is as follows. At APUS, the change in total net course registrations is expected to be between a 3% decrease and a 2% increase year-over-year, and the change in net course registrations by new students is expected to be between a 4% decrease and a 1% increase year-over-year. At Hondros, for the spring quarter, which is the three months ending June 30, 2019, total student enrollment declined by 24% year-over-year, and new student enrollment decreased by 35% year-over-year.
As Wally noted, enrollments at Hondros were adversely impacted by changes in admissions processes and course retake policies, among other factors. Hondros is taking action by further modifying certain admissions requirements and focusing on growth initiatives, which we believe will mitigate the impact of these reductions in enrollments. In the second quarter of 2019, we expect consolidated revenue to decline between 6% and 2% year-over-year. Net income for the second quarter of 2019 is expected to be in the range of $0.25-$0.30 per fully diluted share. The change in operating margin indicated by our second quarter guidance is influenced in part by enrollment declines at Hondros that have a significant impact on that unit's operating margin. We anticipate a year-over-year decline in Hondros segment operating income of approximately $1.7 million in the second quarter of 2019 compared to the second quarter of 2018.
Although our path to overall enrollment growth may not be a straight line, I am pleased by the continued and sustained improvement in many of our quality metrics, as well as by the impact of our cost management at APUS. APEI segment operating income increased from $5.1 million in the first quarter of 2018 to $7.5 million in the first quarter of 2019, an increase of approximately 47%, driven by improved performance at APUS. The year-over-year operating margin improvement in our APEI segment was primarily driven by good expense management overall, and is particularly evidenced by lower compensation costs from the voluntary reduction in force during the first quarter of 2018, lower textbook and course materials costs, and lower bad debt expense.
Along with our continued focus on quality and affordability, we believe the continued improvements we are making to our enrollment management processes, along with adjustments to our marketing strategy, which emphasizes outreach to military, corporations, and other most likely to persist communities, is what ultimately builds the durable and respected higher education institutions that our students and other key stakeholders expect. We would like to take questions from the audience. Operator, please open the line for questions.
Thank you. As a reminder, if you have a question, please press star followed by the number one on your telephone keypad. If you wish to be removed from the queue, you may press the pound key. Once again, that's star followed by the number one. Peter Appert from Piper Jaffray. Please go ahead. Your line is open.
Hi, guys. This is Kevin Estok in for Peter Appert.
Yeah.
Great start numbers. Hey, great start numbers this quarter at APUS. I guess I was wondering, so in 2Q, you guided towards a slightly lower number, so there's a little bit of a deceleration. I guess I was wondering if you could point to any reasons why and maybe what the long-term start growth we should expect going forward.
You want me to answer? Okay. Thank you. This is Rick. The first quarter enrollment numbers were driven primarily by the military. We were up close to 26% in military start new student registrations. We're not seeing that level of strength in the second quarter, but we're still seeing strength in the military. We're expecting it'll be up year-over-year. As it relates to the guidance, in the military, they can only register one month in advance. It's a little more challenging as we sit here on May 7th giving guidance when we have a couple of months in the quarter where we don't have actual registrations, which is different than what we had when we gave our year-end numbers and our first quarter guidance, given the timing of the 10-K versus the timing of the 10-Q. Good strength in the military in the first quarter.
That appears to be enduring, but not necessarily at the level that we saw in the first quarter, and we feel good about our trend line in the military.
Sure. Great. Okay, thanks. That makes sense. My second question is just about Hondros. I know you explained why the starts were weak. I guess I'm just wondering, what kind of maybe growth opportunities you guys were looking at, like maybe additional campuses in new states or new programs?
Sure. Fair question. We have stated that our intention after we finish our first year of accreditation under ABHES is to organically add facilities. ABHES has a rule that you can only add one facility a year organically. We have received approval from the state of Indiana to add a campus. At the same time, we have to receive approval from our accrediting body before that approval is final, as well as the Department of Education. It's our intention in June to notify ABHES that we're going to add a campus. We go through the process back to Indiana again, to get inspections and a lease and that sort of thing. Our plan would be to open that campus by spring of 2020.
At the same time, assuming that's going as well as our Toledo campus did, we would probably submit again in June, because it's based on our anniversary date with ABHES, for another campus at a location yet to be identified or approved for that matter. One a year is the current rule and regulation for ABHES, and that works within our existing operating infrastructure.
Okay, great. Thank you very much.
Greg Pendy with Sidoti, please go ahead. Your line is open.
Hey, guys. Thanks for taking my questions.
Sure.
Just the first one, just given the tax benefit in the quarter, is there anything we should be thinking big picture on the quarterly cadence on how the taxes might fall with the next three quarters?
Yeah, Greg, I think that was a discrete event. I think you're going to see it return to a more normalized level. Of course, the overall provision for the year is going to be impacted by that amount that occurred in the first quarter. I think you can model in something close to normal levels going forward, understanding that the year-to-date is obviously affected by the first quarter discrete event.
Okay. Can you just talk about the revenue per student? Is there anything that sticks out on the year-over-year decline?
Yeah, sure. For APUS, the year-over-year decline primarily results to one undergrad course that we had in our general studies program that was a two credit hour course. That course was revamped and is now a three credit hour course, not effective until the 1st of April. It'll take time to phase in because some people signed up for the old course, in advance of April when the new course was available. By the end of the year, that switch should be made.
Rick, anything else to add?
Well, yeah. I would add, so that's the primary driver. The other driver is tuition for our military students is 8% lower than tuition for non-military. As you read the Qs going back in the K and most recent Q, you'll see the change in mix between military and non-military. It has an effect on revenue per student. Wally's right, the main driver there is the introduction of the two credit course, which happened in April of last year, followed by the replacement with a three credit course, which happened in April of this year. The lag, given the fact that our students can register up to five months in advance.
Great. Okay. That's helpful. Thanks a lot.
Sure. Thank you.
We have no further questions at this time. I will turn the call back over to you, Chris.
Great. Thank you, operator. That will conclude our call for today. We wish to thank you for your participation and for your interest in American Public Education. Have a great evening.
This concludes today's conference call. Thank you again for your participation, and you may now disconnect.