Zovio Inc
Q3 2021 Earnings Call Transcript

Published: 27 Oct 2021

[Operator:]

Good afternoon, again, and welcome to Zovio's Third Quarter 2021 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Vickie Schray, Executive Vice President, Chief External Affairs Officer. Please go ahead.

[Vickie Schray:]

Thank you, and good afternoon. Zovio's third quarter 2021 earnings release was issued earlier today and is posted on the company's website at www.zovio.com. Joining me on the call today are George Pernsteiner, Interim CEO, Office of the CEO and Board Chair; Chris Spohn, Executive Vice President of Operations and Office of the CEO; and Kevin Royal, Executive Vice President, Chief Financial Officer. We would like to remind you that some of the statements we make today may be considered forward-looking, including statements regarding university partners and other programs and services, our ability to grow through acquisition or otherwise, our ability to successfully integrate and leverage acquired company, future revenue growth, EBITDA, financial and related guidance, and commentary regarding the remainder of fiscal year 2021 and later. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Please note that these forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. On the call today, we will also discuss certain non-GAAP financial measures. In our earnings release, you will find additional disclosures regarding these measures, including reconciliations of these measures with U.S. GAAP. Note that these non-GAAP financial measures are intended to supplement GAAP financial information. It should not be considered as a substitute for our GAAP results. Please refer to our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2020, as well as our quarterly report on Form 10-Q for the quarter ended September 30, 2021, which we filed with the SEC earlier today for a more detailed description of the risk factors that may affect our results. You may obtain copies from the SEC or by visiting the Investor Relations section of our website. At this time, it is my pleasure to introduce our Interim CEO, George Pernsteiner.

[George Pernsteiner:]

Thank you, Vickie, and welcome, everyone, to our Third Quarter 2021 Earnings Call. Starting with our results for the third quarter 2021, we had revenue and other revenue of $62.2 million and incurred a net loss of $5.2 million or a loss of $0.16 per diluted share. Excluding non-GAAP items, our non-GAAP net loss for the third quarter of 2021 was $4 million or a loss of $0.12 per diluted share, which was impacted by higher-than-expected legal and marketing costs. While revenues were in-line with our expectations overall, we are striving to achieve improved performance as we move forward. That said, we believe our guidance remains intact for the full year, which Kevin will discuss in more detail shortly. During the third quarter, new enrollment at the University of Arizona Global Campus remained challenging. However, as a result of a number of initiatives we put into place we saw student retention stabilize. As we mentioned, last quarter, we brought the leaders of Zovio and UAGC together for a two-day in person Summit to develop and approve initiatives, to increase enrollment and support strong student outcomes. That event was successful as together, as partners, we outlined a clear path to enhance new enrollment and improve student outcomes. Our plan is centered on three primary areas

[Christopher Spohn:]

Thank you, George. Our Zovio Growth segment, which includes our subsidiaries, Fullstack and TutorMe, has continued to perform well. In the third quarter of 2021, Zovio Growth delivered revenues of $7 million, growing 14% for the quarter year-over-year. The services that Fullstack and TutorMe provide enhanced Zovio's ecosystem to support learners' education and career aspirations by building on existing capabilities to meaningfully serve higher education institutions, bridge the education to employment gap, and help enterprises upskill and educate their employees. Further demonstrating the strength of our Zovio Growth segment, TutorMe was named one of the winners of the Tech & Learning 2021 Best Tools for Back-to-School. Tech & Learning launched their new Awards of Excellence program to identify the most impressive products and solutions for all learning environments, to help students, parents and teachers. We are thrilled to have TutorMe recognized in this capacity as it underscores the strength of our offering. In addition, during the third quarter of 2021, TutorMe continued to execute new partnership agreements from universities to corporations to school districts, bringing their total partnership count to over 300, an increase of over 70% year-over-year. In the third quarter, total customer partner hours usage increased over 27% year-over-year, maintaining the strong momentum we have seen in recent quarters. Fullstack also added new partners during the quarter and leveraged new partnerships that came online. In the third quarter, Fullstack added Utah State University to bring tech training boot camps, specializing in coding, cybersecurity, data analytics and DevOps to the State. The live online Utah State tech boot camps will equip students with the skills needed to fill well paying, in-demand tech jobs in the region. We are excited about the opportunities these universities have to offer. As of the end of the third quarter, this brings Fullstack to 17 new partnerships. Additionally, in early September, Fullstack announced a partnership with Security Advisory Alliance to create the Fullstack Cyber Advisory Board, which is focused on advancing Fullstack's cybersecurity curriculum to uniquely qualified graduates for entry-level cybersecurity jobs, building the technical and soft skills that cyber employers seek in today's evolving landscape. At the start of the year, we had outlined our expectations for new partnerships for both TutorMe and Fullstack. In total, year-to-date, through the end of the third quarter for TutorMe, we added over 100 new partners and Fullstack, we added 5 new partners. Our outlook for Zovio Growth remains strong, with the pipeline for both groups continuing to grow. Turning to our University Partners segment. As George mentioned, UAGC enrollment in the third quarter remained challenged, but in-line with what we had anticipated. That said, our retention has improved year-over-year, which tells us that students that are finding UAGC are those students we believe will be most successful. Our relationship with UAGC continues to mature, with leaders of both organizations focused on the initiatives that will drive enrollment, advance programs and support strong student outcomes. We believe we have a strong action plan and common goals to advance that relationship. Zovio remains well positioned as we bring a clearly differentiated offering to our clients. We have a robust platform of technology and services that institutions, corporations and learners clearly value, and we will set the stage for diversified growth. We continue to build an attractive pipeline of opportunities with institutions as many are seeing the value to enhance in student engagement and prove the likelihood of student success through our services. Now, I will turn the call over to Kevin Royal to review our financial and operating results.

[Kevin Royal:]

Thank you, Chris. Looking at the results of the quarter, revenue and other revenue for the third quarter of 2021 was $62.2 million compared to $102.2 million for the same period in the prior year. The decrease on a GAAP basis is primarily related to the divestiture of Ashford University and the shift to the Edtech business model as well as lower average enrollment, partially offset by an increase in the Zovio Growth segment revenues. As a reminder, our business model shifted significantly as a result of the UAGC sale in December 2020. As such, for comparability purposes, in addition to providing the GAAP results to the prior year, I will be highlighting certain related pro forma amounts for the period. On a pro forma basis, revenues for the third quarter of 2020 were estimated to be $80.2 million. For the third quarter of 2021, technology and academic services were $16.5 million or 26.5% of revenue compared to $19.1 million or 18.7% of revenue for the comparable quarter of the prior year. Expenses in this category as well as for the other main income statement line items discussed below are lower overall on an absolute basis, due to cost reduction efforts and lower related activity levels, but higher as a percentage of revenues due to the lower revenues as compared to the corresponding period in the prior year. On a pro forma basis, these expenses for the third quarter of 2020 were estimated to be $18.2 million or 22.7% of revenue. Counseling services and support for the third quarter of 2021 were $20.4 million or 32.8% of revenue compared to $24.7 million or 24.1% of revenue for the comparable prior period. On a pro forma basis, these expenses for the third quarter of 2020 were estimated to be $23.8 million or 29.7% of revenue. Marketing and communication expenses for the third quarter of 2021 were $21.1 million or 33.9% of revenue compared to $23.3 million or 22.8% of revenue for the prior year. On a pro forma basis, these expenses for the third quarter of 2020 were estimated to be $22.9 million or 28.6% of revenue. General and administrative expenses for the third quarter of 2021 were $9 million or 14.5% of revenue compared to $11.4 million or 11.2% of revenue for the comparable prior period. On a pro forma basis, these expenses for the third quarter of 2020 were estimated to be $10.6 million or 13.3% of revenue. We did not have any university related expenses for the third quarter of 2021 as compared to $22.9 million or 22.4% of revenue for the prior year period. These expenses represent costs related to the university prior to the sale in December 2020. Restructuring and impairment charges for the third quarter of 2021 were $0.3 million or 0.5% of revenue as compared to $0.2 million or 0.2% of revenue for the prior year period. During the third quarter of 2021, we recorded an income tax expense of $59,000. Our effective tax rate before discrete items for the third quarter of 2021 was low single-digits, and we anticipate this trend to continue for the remainder of the year. As a result, net loss for the third quarter of 2021 was $5.2 million or net loss of $0.16 per diluted share. This is compared to net income of $1.1 million or net income of $0.03 per diluted share for the third quarter of the prior year. Our non-GAAP net loss for the third quarter of 2021 was $4 million or a loss of $0.12 per diluted share compared to the non-GAAP net income of $2.9 million or income of $0.09 per diluted share for the third quarter of the prior year. The non-GAAP net loss for the third quarter of 2021 excludes restructuring and impairment of $0.3 million, separation and conversion costs of $0.1 million, acquisition costs of $0.5 million and other non-GAAP costs of $0.4 million. As of September 30, 2021, we had unrestricted cash and cash equivalents of $31.6 million as compared to $35.5 million as of December 31, 2020. In addition, we had restricted cash of $9.8 million at September 30, 2021, as compared to $20 million at December 31, 2020. We expect that approximately $2 million of the restricted cash amount will become unrestricted during the remainder of 2021. There was $11.6 million of cash used in operating activities during the year-to-date period ended September 30, 2021. By comparison, we had $20.1 million of cash provided by operating activities during the same period in the prior year. The year-over-year change in the cash provided by operating activities was primarily driven by the decrease in earnings, partially offset by changes in the working capital accounts. Capital expenditures for the year-to-date period ended September 30, 2021, were $1.2 million as compared to $2.6 million for the same period last year. For Zovio Growth in 2021 from a revenue perspective, we anticipate the segment's revenues to grow approximately 30% year-over-year and anticipate generating an EBITDA loss of between $6 million to $8 million in 2021. This planned investment will decrease consolidated EBITDA margins in the near-term. Longer term, we expect this segment to grow at least 30% annually through 2025 and be profitable beginning in 2023. Throughout the year, we took actions to reduce our cost structure to more appropriately align it with both our revenue expectations and the nature of our new business. Our total year-to-date cost reduction efforts will yield approximately $60 million in annualized savings going forward when compared to original plan spending levels. For 2021, we continue to expect total consolidated Zovio revenues to be in the range of $265 million to $275 million and non-GAAP EBITDA to be breakeven to slight loss. At this time, I will ask our operator to open the phone lines for your questions.

[Operator:]

. Your first question comes from Alex Paris from Barrington Research.

[Alexander Paris:]

Couple of follow-up questions based on what you said in your prepared comments. I'm glad to see retention improve at UAGC. I'd like to dive a little bit more into new enrollment. You said it was challenged. I'm wondering what color you can offer beyond that? For example, was there a sequential improvement in the year-over-year decline? And when might it inflect positive?

[Christopher Spohn:]

To answer the latter part, Alex, that -- again, we've talked about this before on prior calls. We're seeing incremental gains on new enrollment. If you go back and look at the prior three quarters and compare each of the quarters, we're seeing improvements on the downstream effect, the conversions and those things that we measure and we monitor and look at to gauge performance continually to improve. They're not where we quite need them to be, but there's -- again, there's a stronger momentum that builds a little level of confidence as we look out in the next quarter.

[Alexander Paris:]

Got you. Just to be clear, the greatest decline was earlier in the year, and there was sequential improvement in the year-over-year decline in Q2 and Q3?

[Christopher Spohn:]

Yes.

[Alexander Paris:]

Great. And then, that other question, which is begging for guidance. When do you think -- based on your Summit meeting, based on some of the things that you put into place, when do you think that we will start seeing new student enrollment growth? I know this takes some time. I wouldn't expect it before mid next year, but I was wondering if you could offer any color on that?

[Christopher Spohn:]

Yes. Alex, as you said, we have not -- we've provided guidance in our remarks. In our remarks, George alluded to the fact that we're seeing good progress on the CEO search, and we would like to have the new CEO on board before we provide guidance for 2022.

[Alexander Paris:]

Okay. Great. And that kind of leads me to my next question. Andrew, Clark, the former CEO left the company in late March. It's been six, seven months since then. I would assume that we're getting close to the end, which is what you suggested in your overview comments. Do you think we'll have a new CEO named before year-end?

[George Pernsteiner:]

That is my hope. I know that the committee has narrowed the focus to a very few candidates, and we're very pleased with the quality and caliber of those individuals, but as in any personnel action until it's done, it's not done. So I'm very hopeful, but that's as much as I could say.

[Alexander Paris:]

Great. That's fine. I appreciate that. And then, back on new student enrollment or just enrollment in general at UAGC. Military has been a historic strength of Ashford University. And obviously, the brand change had some impact on that workflow, I suppose. What's going on with the military now? And secondarily, have you had any negative impact from the challenges that the Army has had with their Tuition Assistance portal? Other companies in the space have talked about that.

[Christopher Spohn:]

Yes. I'll take the latter first, Alex. Our experience of the Army impact has probably been about the same as the other institutions have experienced. With respect to the military, and you mentioned that at one point with the Ashford brand we had a very strong relationship and a very strong brand in connection with the military. We had started now providing marketing where we haven't done that and prior to begin to reach out to that particular channel. And we're starting to see a little bit of resurgence in that line with the military. There's a couple of things that are, I think, preventing us to go a little more -- a little stronger. I think we're hoping to get those resolved just as you go through some of the compliance stuff. But we're seeing a re-engagement with -- as a result of some of the steps that we've taken. We've had some additional resources from the recruitment side to help facilitate that new volume that's coming in. And we anticipate that growing stronger in the coming quarters.

[Alexander Paris:]

That's great. And then final question for me. Given the fact that you produced positive cash flow in the third quarter, as you would expect seasonally. And given that you expect another couple of million to come out of restricted cash into cash and equivalents by year-end. Is your year-end comfort level still about $40 million in cash and cash equivalents?

[Kevin Royal:]

Yes, Alex, we're still comfortable with that level.

[Operator:]

Your next question comes from the line of Thierry Wuilloud coming from Water Tower Research.

[Thierry Wuilloud:]

Kevin and Chris and George, Alex went over some of the questions I had, but maybe to round it up. Is there some -- is there seasonality on Zovio Growth maybe a little bit different or can you give us any color there? You are on track for the 30% growth you guided to, but that particular quarter growth was a little bit lower than that. Again, any seasonality or is it just a growth business that is not always completely even?

[Christopher Spohn:]

Yes, Thierry, so there is seasonality in the growth business. In particular, as you can imagine, with TutorMe, the summer months tend to be slower. So we are on track for our growth projections and they will have a very strong Q4.

[Thierry Wuilloud:]

Okay. That's good to hear. Over the last 18 months or so, we've talked about the impact of COVID on your business, on students and so on. With vaccination this year and a bit more experience in this new environment, I was just wondering if you had any general color you could give to us in terms of how it's affecting enrollment and students interest or appetite for enrolling and so on? Just some more thoughts on the impact of COVID on your business?

[Christopher Spohn:]

Looking at it from a staffing standpoint, we are pretty much in the same cadence, Thierry, that we've been for some time. We have a hybrid work environment where we have staff coming in, taking advantage of the office, especially here in Arizona. With respect to new student enrollment and retention, we've seen about the same level of engagement as a result of COVID. I think we saw a little softening with students and parents challenge going back-to-school. But I think that was just a week or two of people getting to a regular routine. But as we've said, we've seen a slight uptick in student retention and that's been great. And we've also seen a little bit of an uptick on re-entry, those students that have dropped that have decided to come back to re-engage and work toward completing their degree. So we'll continue to monitor, as everybody is the -- how pandemic's affecting business operations, how it's affecting prospective students in making decisions.

[Thierry Wuilloud:]

Okay. And then finally, you gave us a bit of color on re-engaging with the military, any other initiatives? We talked earlier this year about some geographical challenges and so on. If you -- if we go beyond military, are there any other elements that you've learned, that you're doing different, that are positively impacting enrollment going forward?

[Christopher Spohn:]

Yes, there is one we just rolled out. So we've done some work with the military. One of the ones that we've done to put us more competitory with the graduate level militaries. We've reduced the cost per credit. And I think that is -- and that's just recently happened here, and that has put us, I think, in a more competitive light in terms of the other institutions that work with the military. So we're -- it's early. We're about three weeks in, give or take, here with that, but we anticipate that's going to bode well for the military, those looking to get an advanced degree beyond their bachelor's degree.

[Operator:]

Your next question comes from Greg Gibas from Northland Securities.

[Gregory Gibas:]

First, wondering if you're still seeing any changes or shifts in geographic interest based on region or if that's stabilized or if there's any new trends on that front?

[Christopher Spohn:]

Greg, good question. We've talked to that a little bit. As we've said, we've seen geographic shift from prospective students in the West, Arizona, which would certainly make sense because of our -- the new name. A little bit in California, Nevada and some in Texas. So there's -- that shift that we've seen is about in a steady state. We haven't seen it spike beyond the initial spike that we had when we launched the new brand. So we're -- we'll continue to monitor that, make sure as we look at the -- how people go about making decisions of where they want to go to school, make sure that we're aligned with students geographically. So we're addressing their needs and things that are important to them.

[Gregory Gibas:]

Great. And if I could follow-up on the retention comments with UAGC in particular. I think you said it stabilized and then it sounds like it was improved sequentially. And then, you also talked about it improving year-over-year. Just trying to, I guess, understand the degree of that improvement? And is it pretty notable sequentially or year-over-year?

[Christopher Spohn:]

Just from a strategic standpoint, in our working with our partner, UAGC, they have taken some steps with, I think, some of their faculty to, again, meet students where they are, especially those that might be struggling and at risk. And I think there are some initiatives that they've -- that I know they've deployed that have been very helpful. We've -- in our academic services, we look at a contact strategy that we tweak and adjust now and then to continue to identify students that are at risk, at most risk. The fact is that we can't get to all of them. And we've made some adjustments on that over this past quarter, and that's helped with our drop percentage. So we've seen an improvement on that. So we're retaining more students. And then we've done some calibration as well on the re-entry side that I alluded to a little earlier that looking at students and when they've stepped out of the program, when's the best time and how should we re-engage with them to get them back on track working toward their degree. So I think the combination of those three things have served our students well. And consequently, that has spoke to a better retention effort.

[Gregory Gibas:]

Okay. Great. Last one for me on the Zovio Growth business. Just wondering if you're seeing any positive or negative changes in interest or demand there for either Fullstack or TutorMe? It seems like an acceleration of new partners with TutorMe? I think you had 250 at the end of last quarter and now you're over 300. So is that -- just confirming the acceleration and any comments on demand or interest?

[Christopher Spohn:]

I think we continue to have, I think, a very good pipeline in both of those areas. And so, I think we're going to close out the quarter meeting what we had -- we stated previously. And I think as we roll into '22, I think we've got some good momentum to build on that. So we've had success in those areas and I think we expect to continue to have the same success.

[Operator:]

That concludes today's call. I will now turn the call over to the presenters for any closing remarks.

[Christopher Spohn:]

Well, we'd like to thank all of today's callers for their interest in Zovio and for your participation in today's call. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.