Summary • Aspen Group operates a business with multiple competitive advantages that won’t likely be

encroached upon in the near future • The Chairman/CEO has significant skin in the game both financially and personally as the

founder of a big part of Aspen’s business • Aspen shares potentially have 100% upside • There is a significant runway for Aspen to deploy incremental capital and earn returns

exceeding 200% Aspen Group is the kind of company you could only discover by doing bottom-up due diligence. It operates in an industry that has been very challenging for participants to offer any significant value to their customers. And, it screens quite poorly given some of its segments are early-stage and cash-flow negative, dragging down overall performance. However, Aspen has many of the characteristics of a wonderful business.

Hidden in an Awful Industry… The for-profit university business has not been a great one. For-profits aggressively competed for students with non-profit universities, and, due to a boom in degree-seeking students (among other reasons), the number of for-profit schools grew through the mid to late 1900s. However, since 2010, roughly 40% of US for-profit schools have closed their doors.i This could be due to overall dissatisfaction with the cost of higher education in the US or fraudulent offerings coming to light. But the most likely cause of the closures is the realization that most for-profit schools simply did not provide enough value to students for the cost of attendance. A 2012 Senate committee report uncovered that 96% of students at for-profit universities take financial aid compared to just 48% at four-year public universities.ii More importantly, in 2014, a non-profit research organization reported that students who attended for-profit schools were over three times as likely to default on student loan debt than those who attended four-year public universities and almost four times as likely as those who attended community colleges.iii Simply put, students graduating from for-profit universities were paying tuition that required substantial financial aid, but they were not equipped after graduating to find well-paying jobs. For-profit universities have been fighting an uphill battle against highly advantaged non-profit competition. In any business, if your competition has the permanent advantage of not having to pay taxes, you’re not going to be in business for long. However, non-profits’ advantages go far beyond taxes. Name-brand public universities have generally been around for many decades

and have fortified their positions using their reputations, well-compensated and highly-qualified faculty, and strong employer relations. This entrenchment has increased their students’ chances of a strong job after graduation. With that higher ROI for a student, it has provided the institutions with further pricing power, allowing non-profits to raise the price of tuition year after year.

…Is a Wonderful Business It’s clear that if there was going to be a successful for-profit university, especially one focused on online education, it would likely need a niche to focus on instead of the general undergrad student market, and it would need to be a low-cost provider to drive real value per tuition dollar. Aspen is succeeding by checking both boxes. Aspen Group operates multiple businesses: two online universities and a new in-person/online hybrid campus. All the schools focus in various ways on the nursing profession. According to the National League for Nursing, in 2016, 33% of qualified applicants to BSN programs were turned away due to lack of capacity. This amounted to over 73,000 nursing students. Similarly, 21% of qualified MSN applicants were turned away, amounting to over 32,000 students.iv Not only does Aspen Group have the opportunity to take market share from competitors, but the education sector actually needs more providers in the nursing field to address the student supply. Aspen University online (AU) and US University (USU), the company’s two online universities, both offer general courses, but most of their student body is engaged in nursing programs. Aspen offers already-licensed nurses bachelor’s, master’s, and doctorate in nursing degree programs. Generally, these courses are attended by nurses looking to further their careers and receive the pay increase that accompanies the degree. Since these courses are directed at existing RNs, there is no need for clinical placement. As of Jan ’19, nursing programs accounted for 77% of Aspen University’s total student body. USU offers an RN to BSN program as well, but its bread and butter is the MSN – Family Nurse Practitioner (FNP) program, meant to bridge the gap between a nurse and a family physician. USU was acquired in Dec ’17 because management had respect for the opportunity in USU’s MSN – FNP program but also because the university was small enough to expand Aspen’s payment plan model. If the target was any larger, the financial ramifications of offering a payment plan option would be too large. Lastly, Aspen’s new hybrid online/in-person campus offers a BSN program for pre-licensure nursing students. This brings Aspen into its largest addressable market: undergraduate students looking to achieve a BSN and RN all in one program. This program as well as USU’s MSN – FNP program require clinicals to complete.

Aspen Group offers all these courses at prices that are substantially less than their competition. For instance, their most popular program, the RN to BSN program at Aspen University is 30% to 40% cheaper than the same program at the online extensions of public schools and even more affordable compared to for-profit competitors (see below).

Since ASPU’s tuition rates are so affordable, the ROI for a nursing student to take one of their courses is enormous. For their primary nursing programs, the average increase in a nurse’s salary is greater than the cost of the degree itself. This means that on average, the degrees pay for themselves within one year.

ASPU further solidifies this strong value proposition for students by offering a no-interest monthly payment plan, amortizing the total cost of tuition over a period of years. For example, a student could attend the 2- year Aspen RN to BSN program for just $250/mo. for 39 months,

not an especially burdensome expense for an employed nurse. Aspen Group’s low-cost programs coupled with their payment plan has led to an industry-low rate of financial aid usage. In fact, only 16% of AU graduates in 2017 and 2018 used a federal loan to help them pay for their degree. Aspen’s position as the low-cost provider is very challenging for their competitors to recreate. First, the company has an in-house technology stack. Generally, an online educator uses three types of programs: a CRM for prospective students, a student information system to manage the student body, and a learning management system to handle the online coursework. Most (if not all) of ASPU’s competitors pay substantial licensing fees to major providers of these different systems. Aspen brought these systems in-house and is now reaping the benefits. If a competitor were to evaluate building and transitioning to comparable software, they would see significant costs and execution risk associated. Second, Aspen implements a very targeted marketing effort, call it a sniper strategy versus competitors’ shotgun approach. Most of ASPU’s competitors purchase expensive leads from third party providers to drive enrollment. Aspen, on the other hand, has in-house internet marketing, which should come as no surprise given CEO Mike Mathew’s background (discussed below). Aspen’s internet marketing is complemented by an excellent algorithmic CRM that determines the leads with the highest possibility for conversion. This has led to a marketing cost per enrollment of just $1,300 compared to $3,000 - $4,000 for many of their competitors. Lastly, but most importantly, Aspen solidified its position as the low-cost provider with the use of the no-interest payment plan. This is something that none of its competitors utilize, yet it has created significant value for its students. As of Jan ’19, just over 70% of AU and USU’s combined student body utilized the payment plan. In order for a competitor to implement this, they would sacrifice an enormous portion of their revenue for the several years it takes to get the payment plans to a run-rate, similar to software companies transitioning to SaaS models. As Mike Mathews told me, any CEO of a for-profit competitor who brought the idea to their board would be asked for their badge.

Management Aspen is led by its Chairman and CEO, Mike Mathews, who might be considered the company’s co-founder in a way. Aspen University has been in operation for a few decades, but it wasn’t until 2011 that it really began to take off. That year, Aspen acquired Education Growth Corporation (EGC), an ed-tech company founded and run by Mathews. EGC’s technology is now a crucial part of Aspen’s in-house tech stack and low-cost structure. When the transaction completed, Patrick Spada, Aspen’s founder, retired, and Mathews was named Chairman and

CEO. Since 2011, Aspen Group has grown enrollment from roughly 1,500 students to over 8,300 as of Jan ’19 or an outstanding ~28% per year compounded. Prior to founding EGC, Mathews served in various marketing roles including CEO of Interclick, an internet marketing company, up until its sale to Yahoo. Since Mike Mathews came on board, he has communicated openly and honestly with shareholders. It’s quite difficult to find comparable examples in any industry of such specific unit economics like Aspen’s marketing and instructional costs per enrollment. Mathews has significant skin in the game as far as ownership is concerned, with a position in Aspen’s shares worth many multiples of his yearly salary. But more importantly, he is invested in the purpose of the company: to lower the outlandish costs of education in the US. Though his prior position involved overseeing a sale, I came away from our conversation with an understanding that a sale is unlikely at Aspen (despite existing interest). In his words, he’ll probably retire here. Mathews is joined by CFO, Joseph Sevely, who came to Aspen in September 2018. Formerly CFO of Cutwater Asset Management, he oversaw the firm’s sale to BNY Mellon. Sevely has taught graduate risk management and finance courses at Columbia and NYU Stern and is well-qualified for his post at Aspen. Management is compensated with reasonable salaries for the size of the company as well as bonuses based on adjusted EBITDA. The highest bonus threshold seems quite ambitious, and, though there is a discretionary portion, the compensation plan overall aligns well with shareholder’s interests.

What It’s Worth In order to determine a fair price for Aspen, it’s best to break down the cash generative abilities of each of their businesses. It’s important to note that Aspen has a lot of qualities similar to SaaS companies. Not only does revenue need to be calculated as a run-rate given the payment plan many students use, but the business has very little CapEx to speak of. Capital being deployed for growth is instead used in incremental variable cost and expensed i.e. additional enrollment advisors or faculty. Therefore, both Aspen’s cash flow and earnings are artificially low due to management plowing capital back into the business. However, with the returns that they earn (see below), it’s exactly what they should be doing.

Aspen earns a whopping 200%+ return on their incremental capital spent for marketing the Aspen online BSN and MSN programs (as measured by operating income per marketing dollar). For the more expensive doctorate program or USU’s MSN-FNP program, that return on marketing capital bumps up to 300% or 600%, respectively. Of course, the law of diminishing returns will come into play at some point in the future. However, until Aspen sees that begin to materially affect these returns, it is in shareholders best interest for the company to reinvest its capital as opposed to offering any dividend or share buyback. Turning back to cash generation, firstly, Aspen’s new pre-licensure campus in Phoenix has enrolled 210 students over just the past three quarters. Management believes the capacity for the university is north of 720 students. At that point, run-rate annual revenues for the single campus would be roughly $14mm. The company is targeting a 30% operating margin, and given the significantly higher LTV of pre-licensure enrollments and the heavy usage of online courses, it’s likely they achieve it. Extrapolating the recent average performance of 82 enrollments per quarter would mean they would reach run rate within 2 years. A 3-year timeframe is a more conservative estimate. With $4.2mm in operating income and a 25% effective tax rate, the campus will have roughly $3.15mm in after-tax cash flow when it reaches capacity. Discounting this back at 10%, the value of the campus is approximately $23.7mm.

Second, Aspen online is generating annual revenue of $25.1mm if you extrapolate the business’ current-quarter results. However, the school has enrolled, on average, 965 students in the BSN and MSN programs and 122 students in the doctorate program per quarter over the past year. What’s more, the revenue from these students has not yet been reflected. This pace is likely to stay steady, leading to a more accurate current run-rate annual revenue of $34.5mm. Management is targeting 20% operating margins for both Aspen online and USU, but Aspen has only achieved 10% margins thus far. At a 10% operating margin and 25% tax rate, the business should generate roughly $2.6mm of after-tax cash. Importantly, this ignores the natural margin improvement that will happen as more students graduate but continue paying their monthly fees. These fees will drop immediately to the bottom line. The Aspen online nursing student body has grown 30% in the past year, consistent with its compounded annual growth over the past 8 years. It’s reasonable to expect that the school’s cash flow will grow similarly. We estimate growth over the next 5 years between 20% (bear case), 30% (base case) and 40% (bull case) and perpetuity growth at 3%. This gives Aspen online a value between $75.8mm, $109.8mm and $155.5mm. Third, US University is generating just $7.14mm of annual revenue after extrapolating the most recent quarter. Currently, it is cash-flow-negative due to the weight of G&A and instructional costs amounting to 117% of revenue in the most recent quarter. Though USU has not reached scale yet, it has added an impressive average of 230 students per quarter over the past 4 quarters. Similar to Aspen online, the revenue from these students has not yet flowed through completely, but it is expected to continue. In fact, USU’s student body has grown 115% over the past year. Management’s enrollment target for the MSN – FNP program was 150 students enrolled every other month. USU has now hit that for two consecutive enrollment periods, and Mike Mathews mentioned on the Q3 call that they expect this pace to continue. At 230 students per quarter, USU’s run-rate revenue should reach $16.4mm. At the end of next fiscal year, USU will likely have achieved operating margins going forward similar to Aspen online (currently 10%) and will generate roughly $1.2mm in after-tax cash at run-rate. It’s important to note that the positive margin effect of student payments continuing post-graduation is likely to be stronger at USU with the longer payment plan length. With similar bear, base, and bull growth assumptions to Aspen online, and with USU being cash flow

negative for the coming fiscal year (likely to be roughly -$2mm) turning positive at the start of fiscal 2021, the business’ fair value would be in the range of $27.9mm, $41.2mm, and $59.1mm. Lastly, to come to a fair valuation, ASPU’s annual corporate overhead of roughly $6.4mm ($4.8mm tax-adjusted) must be removed. This is likely to grow alongside the growth in their businesses. However, it has increased by 70% since F2018 with the hiring of CFO Joseph Sevely and other corporate staff. That increase will likely cover the company well for the immediate future. We account for this overhead growing at the same perpetuity rate as the business leading to a subtraction in the overall valuation of $70.6mm.

This leads to a valuation range between $56.7mm and $167.6mm ($3.07/sh - $9.07/sh) with a base-case valuation of $104mm ($5.63/sh), 25% above the current market price. More likely than not, our bear case is far too bearish given its very conservative assumptions. However, its purpose is to show the potential valuation of a materially lower or altogether missed execution by management. A valuation between the base-case and the bull-case is likely fair. There are several additional levers to note that may add significant value to Aspen. First, as mentioned, management is targeting 20% operating margins for the Aspen online and USU businesses. Though Aspen has only achieved 10% operating margins up to this point (and we assumed no change going forward), margins are likely to increase towards management’s target given the flood of students that will start graduating but still paying monthly fees for their program. These are 100% net dollars. Second, Aspen has seen success thus far with the opening of its first hybrid online/in-person pre-licensure BSN campus, and management has plans to continue opening these campuses at a pace of two per year. Another campus in Phoenix will be beginning its first semester this coming September. These future campuses are difficult to account for in a valuation given the unpredictable timing and associated cash flows/margins. However, if the campuses have similar economics to the first one, they will likely add tremendous value to the business quite rapidly.

Risks Aspen is quite anti-cyclical and shouldn’t see much of a deterioration in its operations in the event of an economic downturn. Perhaps there may be a small decrease in their more-expensive programs as nurses may hold off on their doctorate or FNP degree. But, this may just as well be accompanied by an increase in market share as students opt for Aspen’s more affordable programs vs higher-priced competitors. Regardless, healthcare is generally anti-cyclical, and the demand for nurses is unlikely to change based on fluctuations in the state of the economy. Aspen’s most evident risk is an execution miss. This could come in several different forms, but the most important is the risk that enrollment numbers start to stagnate or fall. Given Aspen’s fairly small market share and position as the low-cost provider, this seems quite unlikely. However, pressure on enrollments could come from current competitors materially lowering their pricing or from a new entrant that is also targeting the low-cost provider position. Lastly, critical to Aspen’s programs is their accreditation status. Should their programs lose their accredited status, Aspen’s value proposition would be severely compromised.

Conclusion Aspen Group has the makings of a compounding machine with its very high returns on capital employed to drive enrollment to its schools, multiple avenues for significant growth such as opening additional BSN pre-licensure campuses, and excellent leadership. The business has competitive advantages that have substantial positive effects on its value proposition to students but that are also quite difficult for competitors to replicate. Fortunately for investors, the market is currently offering Aspen shares at an attractive price considering the cash-generating abilities of its schools. It’s likely that this opportunity exists due to a few reasons. First, with an $85mm market cap, Aspen Group is “out of bounds” for most institutional investors. Second, and likely more importantly, the true economics of the business are available to investors willing to read but they have not shown up yet in the business’ financial results. This means that even savvy investors using financial screens will never come across Aspen due to its negative earnings and cash flow. Overall, shares are undervalued by as much as 50% and provide an attractive entry point to investing in a business that should compound capital for a long time to come.

Disclosures I am/we are long ASPU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

This article does not constitute a recommendation to buy or sell any security nor does it contain every piece of relevant information regarding the topic discussed. Any reader should make his/her own decision regarding their investments after examining all available information.

i https://theintercept.com/2019/04/12/betsy-devos-for-profit-colleges/ ii https://www.nytimes.com/2012/07/30/education/harkin-report-condemns-for-profit-colleges.html?pagewanted=all&_r=0 iii https://ticas.org/sites/default/files/pub_files/CDR_2014_NR_0.pdf iv http://www.nln.org/docs/default-source/newsroom/nursing-education-statistics/percentage-of-qualified-applications-turned-away-by-program-type-2016-(pdf).pdf?sfvrsn=0