Zovio Inc
Q1 2021 Earnings Call Transcript

Published: 12 May 2021

[Operator:]

Good day. And thank you for standing by. Welcome to the Zovio Q1 2021 Earnings Call. I would now like to hand the conference over to your speaker today, Ms. Alanna Vitucci. Thank you. Please go ahead.

[Alanna Vitucci:]

Thank you and good afternoon. Zovio’s first quarter 2021 earnings release was issued earlier today and is posted on the company's website at www.zovio.com.

[George Pernsteiner:]

Thank you, Alanna. And welcome to our first quarter 2021 earnings call. As you likely saw in late March, we announced a leadership transition at Zovio. The company is entering a new era and the Board felt this presented an opportunity to make a shift at the CEO level. Andrew Clark had founded Zovio and been with the company for almost 18 years. During his tenure, he developed a solid foundation for Zovio to transform from operating a single university into an education technology services company serving many clients and all of their students.

[Chris Spohn:]

Thank you, George. Let me begin by introducing myself. After having been away from the company for a number of years, I rejoined Zovio in early 2020, and I've been tasked with providing strategic leadership and direction for student engagement, student success, financial services, and Zovio employer services. I have over 20 years of experience in online higher education and technology service industries.

[Kevin Royal:]

Thank you, Chris. Before I begin, as a reminder, our business model period-over-period has shifted significantly as a result of our transition to an education technology services company, where the divestiture of Ashford University. As such for comparability purposes in addition to providing the GAAP results for the first quarter of 2020, I will be highlighting certain related pro forma amounts. Revenue and other revenue for the first quarter of 2021 was $76.9 million, compared to $97.9 million for the same period in the prior year. On a pro forma basis, revenues for the first quarter of 2020 were estimated to be $75.9 million. The decrease on a GAAP basis is primarily related to the divestiture of Ashford University and the shift to an ed tech business model partially offset by an increase in the growth segment revenues. For the first quarter of 2021, technology and academic services were $19.1 million or 24.9% of revenue, compared to $18.5 million or 18.9% of revenue for the first quarter of the prior year. On a pro forma basis, the technology and academic services for the first quarter of 2020, we're estimated to be $17.3 million or 22.8% of revenue. The costs on a GAAP basis as a percentage of revenue increased year-over-year, it was primarily driven by increased labor costs and license fees partially offset by decreases in outside services and facilities costs. Counseling services and support for the first quarter of 2021 were $25.3 million or 32.9% of revenue compared to $23.3 million or 23.8% of revenue for the comparable prior period. On a pro forma basis, counseling services and support for the first quarter of 2020 were estimated to be $22.4 million or 29.6% of revenue. These costs on a GAAP basis as a percentage of revenue increased primarily due to employee costs, partially offset by a decrease in facilities costs. Marketing and communication expenses for the first quarter of 2021 were $25.8 million or 33.6% of revenue compared to $25.1 million or 25.6% of revenue for the prior year. On a pro forma basis, marketing and communication expenses for the first quarter of 2020 were estimated to be $24.9 million or 32.9% of revenue. These costs on a GAAP basis as a percentage of revenue increase due to advertising costs and increased employee costs. General and administrative expenses for the first quarter of 2021 were $15.9 million or 20.8% of revenue, compared to $13.4 million or 13.7% of revenue for the comparable prior period. On a pro forma basis, general and administrative expenses for the first quarter of 2020 were estimated to be $10 million or 13.1% of revenue. These expenses on a GAAP basis as a percentage of revenue increased due to the severance costs of $4.6 million for our recent leadership change, increased employee costs and other administrative costs. We did not have any university related expenses for the first quarter of 2021 as compared to $25.3 million or 25.9% of revenue for the prior period. On a pro forma basis, these costs would not have existed in the prior year. These expenses on a GAAP basis represent costs related to the university prior to the sale in December, 2020. We did not have any restructuring and impairment charges for the first quarter of 2021 as compared to $2.8 million or 2.8% of revenue for the prior period. During the first quarter of 2021, we recorded an income tax expense of $0.1 million. Our effective tax rate before discrete items for the first 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 first quarter of 2021 was $9.5 million or net loss of $0.29 per diluted share. This is compared to net income of $2 million or net income of $0.06 per diluted share for the first quarter of the prior year. Our non-GAAP net loss for the first quarter of 2021 was $3.3 million or a loss of $0.10 per diluted share compared to the non-GAAP net loss of $3.2 million or loss of $0.10 per diluted share for the first quarter of the prior year. The non-GAAP net loss for the first quarter of 2021 excludes separation and conversion costs of $0.8 million, acquisition costs of $0.8 million and severance costs of $4.6 million for the recent leadership transition. As of March 31, 2021, we had combined unrestricted cash and cash equivalents of $35.1 million, compared to $35.5 million as of December 31, 2020. In addition, we had restricted cash for $20 million at both March 31, 2021 and December 31, 2020 respectively. As we fully transitioned to an education technology services company, the requirements that had previously restricted the majority of these funds will no longer be relevant. We expect that approximately $8 million of the restricted cash amount will become unrestricted during 2021. And we'll move to unrestricted cash and cash equivalents. We generated $0.8 million of cash from operating activities during the year-to-date period ended March 31, 2021. By comparison, we use $6.2 million of cash in 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 changes in the working capital accounts, partially offset by the decrease in earnings. The net accounts receivable was $6.8 million as of March 31, 2021, compared to $7.2 million as of December 31, 2020. The decrease balance is consistent with our business cycles. Capital expenditures for the year-to-date period ended March 31, 2021 were $0.2 million as compared to $1.2 million for the same period last year. Turning to our outlook for 2021, our Zovio Growth from a revenue perspective, we still anticipate the segments revenue to grow approximately 30% year-over-year and anticipate generating an EBITDA loss between $6 million to $8 million. This plan investment will decrease consolidated EBITDA margins in the near term. Longer term, we expect this segment to grow 30 plus percent through 2025 and be profitable beginning in 2023. On a consolidated basis, as Chris alluded to many higher education institutions have already announced reduced guidance due to headwinds in student recruitment, as the economy begins to emerge from the effects of the COVID-19 pandemic. And Zovio has experienced these headwinds, as well as the more specific issues with launching a new online brand for UAGC. As a result, for 2021, we now expect total Zovio revenues to be in the range of $265 million to $275 million, and non-GAAP EBITDA to be break even to a slight loss. We recognize this was a substantial reduction in our anticipated revenues for 2021. And as George mentioned, we have taken proactive and deliberate actions to reduce our cost structure to more appropriately align it with our revised revenue expectations. To that end, as of today, we have identified and implemented approximately $40 million of annualized cost reductions. For 2021, we expect to realize $30 million of savings due to some savings in 2021 that will not reoccur in 2022. While these costs actions were broad-based across the organization to drive overall efficiencies, they were centered primarily on administrative, non-student facing functions to ensure we are able to maintain the necessary resources to support enrollment for our university partners. We know these revised expectations are disappointing, but believe we are making the necessary changes to support the long-term opportunity ahead of Zovio in Fullstack, TutorMe and our University Partner Group, in addition to enhancing the engagement with all of our stakeholders. 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.

[Alex Paris:]

Hi guys. Thanks for taking my question. Today, I wanted to dive first into obviously guidance and your cost reduction initiatives just to make sure I have that clear. So, total Zovio revenues of $270 million at the mid-point down from your previous guidance of $310 million or $40 million reduction and adjusted EBITDA of breakeven, versus our previous expectation of mid-single digit emerging. Can you – is this cost reduction what you’re that you alluded to in the 10-K, in the 10-Q also, 65 employees expected to be completed by June 30, is that what we're talking about?

[Kevin Royal:]

Yes, that's correct.

[Alex Paris:]

Okay. So that's expected to yield $40 million in cost savings, and there'll be a $2.3 million charge in the second quarter. Are there any other charges or expenses associated with that reduction in force?

[Kevin Royal:]

There are no other charges currently contemplated associated with the reduction. Just to clarify the reductions that we'll experience in calendar 2021 are about $31 million. When you take items that won’t recur in 2022, but then you analyze a portion of those costs reduction and portion of that $31 million, in 2022, the cost reductions will be $40 million if that makes sense.

[Alex Paris:]

Okay. Yes, sure I understand it. You will reap $31 million in cost savings in 2021, and then you will have the full $40 million savings. So, a pickup of about $9 million in savings year-over-year in 2022 versus 2021.

[Kevin Royal:]

That's correct.

[Alex Paris:]

Okay. You had still EBITDA is getting reduced from guidance from say $17 million to zero, despite the fact that you're going to have $30 million in savings. Am I understanding that correctly?

[Kevin Royal:]

Yes, that is correct.

[Alex Paris:]

Okay. All right, and I'll follow-up with you Kevin offline you know, to kind of discuss more granular details there. I'm interested in the, a new university partner that you announced with University Partner group, which is exciting news and faster than expected. I gathered by your prepared comments that you're not at liberty to say who yet, but perhaps you can tell us what does it entail? I think the small and medium size partnerships are usually is this consistent with that expectation?

[Kevin Royal:]

Yes, that is correct. Smaller and medium are less than $1 million and would be completed within the year.

[Alex Paris:]

Okay. And then I was going to ask while revenues were where we expected them to be and the first two lines of expense communications and counseling or sorry, technology and counseling were actually less than I expected. Marketing communication in general administrative were more than I expected. Part of that is the severance of $4.6 million. What, does that come in on the G&A line, Kevin?

[Kevin Royal:]

Yes, all of the severance associated with the leadership transition will flow through or has flown through the general and administrative classification.

[Alex Paris:]

Okay. And then the CEO search, I'm glad to see that that has commenced. How long do you think this process will take? You said you are looking at both inside and outside the company. What are the characteristics you are looking for in the next leader of the company?

[Kevin Royal:]

Yes, why don't we ask George, who is not with us in this room, George Pernsteiner to talk about the CEO search.

[Alex Paris:]

Thank you.

[George Pernsteiner:]

Thank you, Kevin. And thank you Mr. Alex, for the question. We have charged the committee to develop the characteristics that we will be seeking. And they are working with Russell Reynolds Associates to refine those right now. We, we're looking for really a blend of vision and of operational experience. And the question really, they have to have industry experience, they have to have operational experience, but they also have to have, in my view, and I think on the committee's view, a real customer service focus because we are transitioning from being the provider, sole provider running a university to now wanting to engage with a broader range of customers, including UAGC. And that will require then almost a different way of thinking than perhaps we required in the past. So that's part of what we're looking at in the next CEO, for the next CEO.

[Alex Paris:]

That’s helpful I appreciate that additional color. Back to guidance, and then I'll get back in the queue. So, what explains the delta in adjusted EBITDA expectations, is it primarily revenue or are marketing expenses expected to increase significantly?

[Chris Spohn:]

It's primarily revenue Alex.

[Alex Paris:]

All right. And because Zovio growth guidance is unchanged, this is all in the university partners’ segment. So, after that strong start in December, as you had said, it slowed down in the first quarter, and you attribute that to the headwinds that every Wednesday in the industry, as well as in military, I guess, in brand recognition and just building the brand for UAGC.

[George Pernsteiner:]

Yes, that's true Alex, it's primarily brand and marketing, and certainly we have ongoing COVID challenges as well.

[Alex Paris:]

Okay, great. Thank you for the additional color. And I'll get back in the queue.

[Operator:]

Our next question comes from Thierry Wuilloud from Water Tower Research.

[Thierry Wuilloud:]

Yes, good afternoon. And thanks for taking my questions. Alex covered quite a bit of ground, but maybe if you could just – little hustled questions on the financials, the breakeven EBITDA, does that include the severance expenses or is the severance to be on the pro forma basis?

[Kevin Royal:]

Yes, so Thierry, the guidance that we provided on EBITDA for the year is actually adjusted, or we refer to it as non-GAAP EBITDA. So, that would be without that charge included.

[Thierry Wuilloud:]

Okay. Okay, thank you. I was curious on the brand issue, and so on, what are you seeing with university with UAGC? Where are you having maybe a new mix of students, or are you starting to see that, or is it still bit early?

[George Pernsteiner:]

Yes, there has been, again as we mentioned, some challenges with the new brand, a lot of that stems from really refining our value proposition and how that resonates with our prospective students. And as mentioned on our script here, that we have a little bit of a geographic shift in the mix of the students that are looking at the new brand.

[Thierry Wuilloud:]

Okay. I mean, are you seeing new pockets or only some reductions here and there?

[George Pernsteiner:]

We're seeing some new pockets, not necessarily reductions per se, but we're seeing some geographic shifts of students that are looking at the new brand that we haven't seen before when we had the Ashford brand.

[Thierry Wuilloud:]

Okay. Any impact on the corporate partners?

[George Pernsteiner:]

For the most part that's remained fairly steady. So, we have not seen much if any impact on the corporate brand.

[Thierry Wuilloud:]

Okay. On the new partner that you announced on one hand you said these are fairly small engagement and they last less than a year, but then on the other hand, I think, you made some commentary that would indicate you think it's going to be a longer-term relationship. I want you to add some color one way or another there?

[George Pernsteiner:]

Yes, the initial focus, as I mentioned, is primarily in our student response center and enrollment, but as with any type of new partner, building that relationship is going to be very critical at the very beginning. So, again, certainly it's our hope to build a strong partnership that would yield the longer term. So, we're in the early stages, but we'll start on a very narrow basis and hope to build from there.

[Thierry Wuilloud:]

Okay. In terms of Zovio growth are you seeing growth in existing contracts in utilization, or is it mostly new contracts that are being layered on?

[George Pernsteiner:]

I think we're seeing growth in both areas with our existing accounts that we have. I think there's opportunities that we're seeing to expand growth there. And as we mentioned in both of the subsidiaries Fullstack and TutorMe, we're seeing opportunities for new partnerships as well.

[Thierry Wuilloud:]

Okay, great. Well, that does it for me. Thank you very much.

[Chris Spohn:]

Thank you, Thierry.

[George Pernsteiner:]

Thanks, Thierry.

[Operator:]

Your next question comes from Greg Gibas with Northland Securities.

[Greg Gibas:]

Hey George, Chris, and Kevin. Thanks for taking the questions and the commentary as well. I guess, first now that we have a full quarter after the sale of Ashford, I was just kind of wondering if you could comment, I guess, on the changes that you are seeing with respect to either web searches, or inquiries, or leads since that sale and brand name change? And then I guess, along with that kind of how much did enrollment decline, I guess in the quarter?

[George Pernsteiner:]

Maybe, I'll speak to the first part right on the web traffic. As you are sort of aware, the Ashford brand name had quite a bit of equity over the years. So, when you're looking at both organic search and trade name, you had a very strong lead or inquiry generation with the new brand, we've seen some degradation on that traffic that's coming from search trade name and also from organic. So, we'll need to, – it's going to take time to build that brand in the market. So, you see the benefit. So consequently, we've shifted some of our marketing strategies into other channels. So, the total inquiry volume has remained fairly constant. You're looking at a shift in terms of the media mix in terms of what we typically would experience.

[Chris Spohn:]

And then Greg, real quickly related to the enrollment, that's really information, that is data that is owned by the university proprietary to them. And as we mentioned on the call a couple months ago, when we talked about year-end results, that information we won't be providing moving forward.

[Greg Gibas:]

Okay. Fair enough. And if I could follow-up, I guess, on the CEO search, thanks for the color on the type of candidate that you're looking for there. But did you, sorry if I missed this, but did you kind of say anything with regards to when you expect that process to be completed?

[George Pernsteiner:]

Well, it's just getting under way now. And our hope is that it will be completed certainly within just a few months. But I can't predict that really. I can hope it though.

[Greg Gibas:]

Okay, yes. No problem. I guess, I think, it's fair that maybe you don't disclose the enrollment or anything, but would you maybe be able to discuss kind of enrollment assumptions that you're using for the full year guidance?

[George Pernsteiner:]

Sorry about that, Greg, that's just information that we're just not able to talk through at this point or provide.

[Greg Gibas:]

Okay, got it. With respect to, you said, discussions underway with several other institutions in the UPG segment, I was just wondering kind of what stage those discussions are in and maybe how those discussions were initiated?

[Chris Spohn:]

So, to your first question, we've got potential partners at different stages. And as we said we're looking at potential one to three additional, so they are just at different stages. They all come in different shapes and sizes, if you will, in terms of the types of services that they are looking for. So, we have some interest in and they've come from a variety of different ways in terms of how they reached to us and contacted us.

[Greg Gibas:]

Okay. Sounds good. Thanks guys.

[Operator:]

That was our last question at this time, I will turn the call back over to the presenters.

[George Pernsteiner:]

Okay, well, thank you. That concludes our question-and-answer session. I will now just sort of thank the group for being part of our earnings call here today. And we look for additional follow-up meetings here later on. Thank you.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.