Zovio Inc
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Zovio Q4 2020 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Alanna Vitucci, VP of Corporate Communications.

[Alanna Vitucci:]

Thank you and good afternoon. Zovio’s fourth quarter and full year 2020 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 Andrew Clark, Founder, President and Chief Executive Officer; and Kevin Royal, Chief Financial Officer.

[Andrew Clark:]

Thank you, Alanna. And welcome to Zovio’s fourth quarter and full year 2020 earnings call. On the call today, Kevin and I will discuss our results, as well as other business developments. After our remarks, we will open the call to your questions. We had a strong end to our fiscal 2020. For the fourth quarter of 2020, we reported revenue of $93.1 million and non-GAAP diluted income per share of $0.03, which exceeded expectations. Today marks our first earnings call since completing the sale of the University to the University of Arizona Global Campus or UAGC. This was a key inflection point for Zovio as a world class education technology services company. Given the sale of the University, our reporting structure has changed, both from a segment and key metrics standpoint, which I will outline in a bit more detail shortly. That said, during the fourth quarter, we are pleased to report that new enrollment grew more in the fourth quarter of 2020 than the third quarter and we saw the best one year cohort retention metric in the fourth quarter in our recent history of tracking this metric. In addition, inquiries, new enrollment, and total enrollment exceeded our expectations for December, the first month following the close of the transaction.

[Kevin Royal:]

Thank you, Andrew. As Andrew mentioned, this is our first earnings call post sale of the University. As a result, our fourth quarter 2020 results include two months that included the University results, and one month as a standalone education technology services company. For comparative purposes, we have reclassified 2019 revenues and expenses to be consistent with the 2020 presentation and classification for the discussion. For the fourth quarter of 2020, revenue was $93.1 million, compared to $96.3 million for the same period in the prior year. The decrease is primarily due to lower average weekly enrollment year-over-year.

[Andrew Clark:]

Thank you, Kevin. Zovio is in an enviable position as we embark on this new chapter as a leading education technology services business, leveraging our 17 plus years providing technology services that fuels student success. We have the opportunity to be a premier player in a large, evolving and growing industry. Our track record of innovation, driven by advanced data and analytics will allow us to offer services to our University Partners that span the student journey and support the best possible outcomes. Additionally, our strong culture and shared vision across our organization will continue to support the more than 200 institutional customers in the Zovio ecosystem. As we enter 2021, we remain poised for long-term growth and value creation, as we capture the rapid changes in education to empower all learners. At this time, I’ll ask our operator to open the phone lines for your question.

[Operator:]

Certainly. Your first question comes from the line of Alex Paris from Barrington Research. Your line is open.

[Alex Paris:]

Hi, guys. Thanks for taking my call. Congratulations on the earnings beat and good year. Most significantly, UAGC transaction completed during the quarter.

[Andrew Clark:]

Thanks, Alex.

[Alex Paris:]

A quick question. You beat me by a wide margin on adjusted EBITDA and non-GAAP EPS. Revenues were a little light versus my published estimates. But my published estimate was not guided and it was pre the University of Arizona Global Campus sale. Do you know, Kevin, what revenues would have been for the fourth quarter had you -- you had then status quo, had you not sold the university?

[Kevin Royal:]

I don’t know. I don’t have that with me, Alex.

[Alex Paris:]

Okay. That’s all right. We can follow up on that one also. And then -- I’m sorry.

[Kevin Royal:]

That’s fine. I think that explains why your revenue number was a little lighter.

[Alex Paris:]

Yeah. Exactly. Because you had two months of owning the University, one month of not owning the University, and that one month was subject to the master services agreement, under which you hit 19.5% of revenue and then reimbursement of direct costs. I would think that would account for the fall and more of it?

[Kevin Royal:]

Yeah.

[Alex Paris:]

Quick question on new enrollments, you said the growth accelerated from the third quarter. Is that how you’re going to leave it? I think you were low-single digits in the third quarter. You sort of guided to mid-single digits in the fourth quarter. Did you hit that?

[Andrew Clark:]

Yeah. I think we’re going to leave it at what we said earlier, that we exceeded our third quarter results. I’ll just say we’re really pleased with how the transition is gone with UAGC. Alex, I mean, I think the most relevant example out there for us has been -- and a lot of people have used this example, Purdue, Kaplan. And UAGC is certainly, in our opinion, performing much better at the beginning of rebranding the institutions than Purdue was when they first got out of the gates. And I think UAGC benefited, probably from witnessing some of the pitfalls they experienced. And as a result, I think as partners, we’ve done a really good job jointly of avoiding some of the challenges that Purdue had.

[Alex Paris:]

Great. And then just moving to, rather than getting into the details of the rearview there, under a different business model, I wanted to talk more about growth going forward and the various segments. You said in 2021, you expect to add one to three small- to medium-sized University Partnerships within the University Partnerships segment. These could be enterprise or a la carte. I’m assuming, whereas what you are projecting is that they’d be more of a la carte variety in 2021, given the small and medium size as opposed to enterprise or large?

[Andrew Clark:]

Yeah. Exactly. Alex, we are projecting these will be small- and medium-sized clients. So generally under a $1 million of revenue on an annualized basis, and probably, a year less in terms of their length. And we just looked at the University Partnership Group in ‘20 was really just a foundational year where I’m confident they’ll take on, as we said, one to three new partners. UAGC will continue to move forward and is off to fantastic start. But I think Zovio Growth is really going to be -- that group is going to be the highlight for Zovio throughout ‘21. We’ve seen tremendous performance out of that group in 2020 and have a lot of confidence in what ‘21 for them and what that’ll mean to the overall Zovio story.

[Alex Paris:]

Great. And then without a doubt, Zovio Growth will be the bigger driver of growth in the near-term as you have a foundational year for the University Partner segment. You’ll add one, two, three University Partners, small- and mid-sized in the coming year. And then I presume we should expect bigger and more in ‘22 and beyond?

[Andrew Clark:]

Absolutely. I mean, University Partners, we expect a lot more in ‘22 and beyond. Our key strategic focus, really, for the University Partner Group, over the longer term is going to be client partner diversification. So I think, we’ve got an excellent leader running that group. Have hired a leader of business development and we’re in active conversations with a variety of University Partners as we speak.

[Alex Paris:]

Great. Can you characterize that activity? I would assume you have a lot of inbound activity for a couple of reasons, one, COVID, and then two, the high profile transaction you’d do with the University of Arizona. Are you actually reaching out? Is the University Partners team led by Matt Hilman, reaching out, refreshing old relationships? How would you characterize the pipeline, I guess, is what I am asking?

[Andrew Clark:]

Yeah. No. I would characterize that Matt and Jim are not bored. They are very busy. They -- we’ve got a strong combination of institutions that have reached out to us. You’re absolutely, right, UAGC did put Zovio on the radar of a lot of institutions, as well as just going and reaching back out to a variety of different clients through our network and not just the gentleman at University Partners, but really the network that many of the leaders and even directors of Zovio have out there in higher education. So it’s a combination of both and those gentlemen are quite busy right now.

[Alex Paris:]

Good. Glad to hear. This is a question I get a lot. I’d like to hear your answer. Why can’t big public land grant institutions like the University of Arizona or in the case of Purdue, Kaplan, why can’t they do this themselves? What is the challenge and why do they generally seek ed tech partners like Zovio to help them do that?

[Andrew Clark:]

Yeah. It’s a great question. I think, while it’s not rocket science, a lot of people underestimate really the complexity of, especially a large online initiative. So if you are establishing and want to -- the institution has goals and objectives to grow their online presence, both undergraduate and graduate to 10,000, 15,000, 20,000 students. There’s a lot of complexity, a lot of expertise that’s required to accomplish that. I think what we do see institutions doing more today than they used to, is really looking for a partner like Zovio, to provide some of the services, not necessarily the full enterprise suite of services. Now it’s very situational. It depends on the institution. And some, absolutely, would take you up on the enterprise solution. I don’t think that’s in the cards for Zovio till probably ‘22, maybe even ‘23 to have a big enterprise client. But it’s -- there’s a skill set here that we spent almost 18 years developing and building this technology that we’ve built. There’s data analytics and an incredible investment we have around that, that supports what we do. That -- it’s just difficult for any institution and land grant institutions are no exception to try to make a go of that from a standstill start. It takes a lot of investment and a lot of expertise. And I think there’s an element out there where these large public universities are realizing then, to remain competitive, they need to have a very strong presence from an online perspective. It needs to be part of their overall strategy and vision as an institution. And they might already be a little bit behind as it is, as you look at some of the very successful large state universities with online presence today. And so they’re better off reaching out to a company like Zovio, who can get them and their plans and their strategy accelerated much more quickly than they can otherwise do on their own.

[Alex Paris:]

Great. Thanks. And then, Kevin, you increased guidance from a range of $290 million to $310 million or a midpoint of $300 million to a midpoint of $310 million for 2021 total revenue. Where is that outperformance coming from this? Is it the Zovio Growth side or is it the better than expected launch with UAGC…

[Kevin Royal:]

Yeah. I would say that…

[Alex Paris:]

Or both?

[Kevin Royal:]

Yeah. I would say it’s really coming from both, Alex, probably, from an absolute dollar standpoint, a little bit more from Zovio. But those segments are contributing to that outperformance.

[Alex Paris:]

Okay. Great. And then target for adjusted EBITDA margins in 2021, you’re saying mid-single digits. I think you’ve previously said, mid-to-high single-digits. What’s the delta there?

[Andrew Clark:]

Yeah. So let me take that one, Alex. So one of the things we’ve tried to do for UN ambassadors is separate out the two business groups here at Zovio. So if you look at University Partners today, that margin is in the high-single digits on a standalone basis. If you look at our Zovio Growth and what we’re investing towards the revenue growth, that Fullstack and TutorMe are generating. As I said earlier, it’s about $68 million loss. So you shave a few points off of the margin in reinvestment really in the Zovio Growth business. And in that business, we’re seeing tremendous acceleration. As I commented earlier, today our partners are well over 200, not just universities, but corporations in K-12 districts. I think we’re going to be at least at 280 by the end of ‘21, close to 300, perhaps. So you see a little bit of our margin being reinvested. However, because our revenue guidance is up, the effective out of profitability that I think you were thinking of or at least kind of forecasting out is -- for ‘21 is kind of relatively unchanged.

[Alex Paris:]

No. I agree with that. I just was wondering ordinary. So that’s understandable, growth investments on the Zovio Growth side, the primary reason for the slightly lower adjusted EBITDA margin expectation, although adjusted EBITDA dollars are not as dramatically changed.

[Andrew Clark:]

Yes. That’s correct.

[Alex Paris:]

Given the higher level of expectation?

[Andrew Clark:]

That’s a good precise summary of what I just said.

[Alex Paris:]

That’s all I was doing, just to make sure I had it straight. All right.

[Andrew Clark:]

Yeah.

[Alex Paris:]

Great, guys. Thank you very much. And I will follow up with you after the call for some modeling related questions. Thanks.

[Operator:]

Your next question comes from the line of Terry View from Large Research . Your line is open.

[Unidentified Analyst:]

Thank you. Greetings, Andrew and Kevin. Alex covered a lot of ground. So I just had maybe two or three additional questions. On the UAGC front, any major or any notable changes that the new owner has made to the way University functions or have they been able to maybe tap a new group of potential students or any commentary around that?

[Andrew Clark:]

Yeah. Terry, first, thanks for calling in today and for your questions. I would say it’s too early, yeah, to describe any kind of new changes. As you know, they became the owners of UAGC on December 1st. So we’re kind of the better part of almost 90 days into them owning the institution. I’m sure and confident that UAGC will make changes throughout ‘21 and beyond, as they codify their vision and their strategy for the institution. I think the thing to really emphasize with you today and with investors is that, we’ve gotten off to a really nice start with UAGC. December was surprisingly much better than even we had anticipated. And we had taken into consideration that there is an effort in rebranding the institution and that effort would take time and that there would be an impact to some extent, in prospective new students, at least initially. There was an impact, but it just was not as great as we’d anticipated for a variety of reasons. I think the partnership is off to a really good start and good beginning. And we’re just having a lot of fun supporting the institution right now and helping them to achieve their objectives and goals for the long-term.

[Unidentified Analyst:]

No. That good to hear. Excited to see how other business evolves. A quick question on Fullstack, I think one of the campuses was closed part of last year. Can you give us an update there in terms of the two physical campuses?

[Andrew Clark:]

Yeah. Certainly. So there were just two physical kind of retail locations where students would do in-class learning before the pandemic and that was in New York and Chicago. Of course, the New York line has been closed since the pandemic. Those students have been taking their curriculum online. And then the one in Chicago, they took -- we took a similar approach with online, but then also decided to close that Chicago location, because University of Illinois, Chicago is one of our new clients, so it made sense for us to -- for Fullstack to consolidate their offerings around UIC.

[Unidentified Analyst:]

Okay. So the way forward for foster kids, new partners not continue opening a new location, like you had in Chicago and in New York?

[Andrew Clark:]

Absolutely. I mean, the entire business model and the reason, Terry, we acquired Fullstack. Going back in time, they had one university partner relationship with Cal Poly, but had plans to partner with many more institutions. They exceeded our expectations. We hoped they’d be at six by the end of ‘20 and they were at 12, and just have some fantastic institutions and brand names that they support. We see them continuing to be successful there. I would expect that they would add, probably, at least, probably two new university partners a quarter, one to two. I think, overall, our guidance today was seven to 10 more partners for Fullstack. And that’s where a majority of the growth is going to be generated from and really the entire plan there, business plan is around supporting additional University Partner clients.

[Unidentified Analyst:]

Okay. And then, finally, maybe an accounting question for Kevin. The guidance, obviously, I would think implies some type of revenue share from UACG -- UAGC, I am sorry. Is it something you will estimate on a quarterly basis or is it something that happens in the fourth quarter?

[Kevin Royal:]

Yeah. No. That would take place on a quarterly basis. We would be in communication to understand what they’re forecasting and planning and then we would record our share of the actual revenues for the quarter.

[Unidentified Analyst:]

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

[Andrew Clark:]

Thanks, Terry.

[Operator:]

There are no further questions. I’ll turn the call back over to you for closing remarks.

[Andrew Clark:]

Thank you. We’d like to thank all of today’s callers for your interest in Zovio and for your participation on the call today.

[Operator:]

That concludes today’s conference call. You may now disconnect.