Zovio Inc
Q4 2019 Earnings Call Transcript

Published: 21 Feb 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Zovio Q4 2019 Earnings Conference Call. [Operator Instructions]I would now like to hand the conference over to your speaker today Alanna Vitucci, Vice President of Corporate Communications. Thank you. Please go ahead madam.

[Alanna Vitucci:]

Thank you and good afternoon. Zovio's fourth quarter and full year 2019 earnings release was issued earlier today and is posted on the company's Web site 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.We would like to remind you that some of the statements we make today may be considered forward-looking, including statements regarding new enrollment growth, student retention, education partnerships and other programs and services, our ability to meet all required conditions and obtain all required approvals to close on the planned separation and conversion of Ashford University and its timing and impact, our ability to transition to become an education technology services company, our ability to grow through acquisitions, our ability to successfully integrate and leverage acquired companies, future revenue growth, EBITDA, financial and related guidance, and commentary regarding fiscal year 2020 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 and 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, 2019, 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 Web site.At this time, it is my pleasure to introduce Zovio's Founder, President and CEO, Andrew Clark.

[Andrew Clark:]

Thank you, Alanna, and welcome to Zovio's fourth quarter and full year 2019 earnings call. On the call today, Kevin and I will discuss our 2019 results as well as other business developments. After our remarks, we will open the call to your questions.As we have said many times, 2019 was a transitional year for Zovio as we made progress on the conversion of Ashford to a not for profit entity and repositions Zovio for the long-term as an education technology services company. In January, we announced a significant milestone in which we entered into a non-binding letter of intent with Ashford University's not for profit entity or AUNFP on December 30, 2019.We very much believe that conversion and separation is the right path to accomplish our objectives to serve all of our stakeholders and puts in place long-term protections for students to make the choices they view most appropriate for themselves as they embark on a path to higher education.In addition to pursuing the planned conversion of Ashford, we are optimizing the profitability of our core business, which included executing a number of actions in the second half of 2019 that will deliver substantial cost savings. These actions were focused on three primary areas.First, implementing new processes to improve our overall operational efficiency at both Zovio and Ashford, which resulted in the need for fewer resources internally. Second, maintaining a very disciplined tight control on marketing and general and administrative expenses. And third, significantly improving back debt expense through a combination of enhanced collection efforts and a more favorable mix of full tuition grants students were collection efforts are more consistent.As such, we continue to expect the cumulative savings for 2020 from these actions will total 60 million to 65 million. Long-term, our strategy to reposition the business as an education technology services company continues to be centered on three main pillars.First, deliver education services that meet the diverse and large-scale needs of educational institutions and corporate enterprises. Second, capitalize on middle market opportunities through enhanced programs and services and building our capabilities. And third, expand our skills to employment offerings to empower learners to better connect with in-demand jobs.During 2019, we made substantial progress on these pillars by partnering with higher education institutions and employers to deliver innovative personalized solutions to help learners achieve their aspirations. In addition, Fullstack and TutorMe are key contributors to the strategy. With regard to Fullstack, we added several new partnerships during 2019 including the University of North Florida, the University of San Diego, Division of Professional and Continuing Education and most recently we've partnered with Louisiana State University to offer cybersecurity and web development certificates through the University' Digital and Continuing Education Division.Further, our partnership with the University of San Diego launched a new full time and part time web development program earlier this month with an expected official cohort launch in the second quarter. We are pleased with the development of Fullstack's institutional pipeline and remain optimistic as we enter 2020.With more than 70 partners schools TutorMe continues to be a welcomed addition to our ecosystem. In the fourth quarter, we added two new institutional partnerships, Oregon State University and St. Mary's College of California. We are also gaining traction with Learn at Forbes. As a reminder, Learn at Forbes is a technology platform that has self paced skills-based content for the consumer. It's platform offers more than 800 courses across categories like business, finance, marketing, personal development, leadership, social media, strategy, just to name a few.Currently we have a total of 12 corporate clients and over 2000 individuals who have subscribed since we launched our subscription program in August. While this growth has been built off of the small base, we're encouraged by the traction thus far as it underscores the strength of the offering.With that, let me quickly run through our fourth quarter 2019 results. For the fourth quarter of 2019, we reported revenue of $96.3 million a net of loss of $23 million and a resulting diluted loss per share of $0.76. Excluding fourth quarter restructuring and impairment charges of $13.6 million separation transaction costs of $0.9 million and acquisition costs of $2.4 million as well as related tax effect, our non-GAAP diluted loss per share was $0.15.Early this week, we announced Ashford University received approval from the Department of Veteran Affairs serving as the California State Approving Agency on their application to the State of California where the retroactive effective date of July 1, 2019. The VA approval includes the majority of Ashford's current programs and includes four new STEM programs. The 20 programs that were not approved by the VA did not represent a significant number of students and will not result in a material impact to Ashford's total enrollment. We are working closely with the VA to complete the final administrative steps in the approval process to include a review of the effective programs and the veteran students currently enrolled.For the fourth quarter of 2019, the decline in new enrollment was less than expected and was down as a percentage by low single digits when compared to the same quarter prior year. As of December 31, 2019 Ashford's annual cohort retention increased 150 basis points over the prior year to reach 60.4%. Our education partnership programs continue to flourish as well. As of December 31, 2019, the enrollment in the education partnership programs represented approximately 32% of total enrollments compared to approximately 22% of total enrollments as of one year ago.New enrollments in the education partnership program represented approximately 31% of new enrollment in the fourth quarter of 2019. Further, new enrollment in the Forbes business schools specifically grew nearly 7% with total enrollment in the Forbes business school as of December 31, approximately 44% versus 42% in the prior year period. The support and sponsorship of their employees by our corporate partners is a testament to the strength and quality of the programs offered through Ashford University.The growth in our education partnership programs continues to outperform our expectations and has resulted in improvements in our cash revenues from non-title Forbes sources. These programs can provide debt-free education to the employees of our corporate partner companies. During the year ended December 31, 2019, Ashford University derived 72.4% of its cash revenues from Title IV program funds respectively. While there is growing debate over the appropriate amount and institution derives federal funds, if we were to add all of the GI bill and TA benefits to the calculation as some lawmakers are now calling for, Ashford's rate would still be below the proposed 85.15 range.From a Zovio financial standpoint, as a reminder an increase in this education partnership student population as a percentage of the total student population, lowers net revenue, which is the dynamic we will continue to experience as this program grows. We are in a great position as we enter the year as we have streamlined our core business, invested in the right technologies and the face of an evolving education technology landscape and have made great strides in laying a strong foundation for Ashford University as we pursue its conversion to non-profit status. As a result, we believe there is significant value to be created for our stakeholders.Now I will turn the call over to Kevin Royal to review our financial and operating results.

[Kevin Royal:]

Thank you, Andrew.For the fourth quarter of 2019 revenue was $96.3 million compared to $94.7 million for the same period in the prior year. The increase is primarily due to the additional revenue days and tuition increase, partially offset by higher FTG scholarships due to a higher mix of FTG students and more courses being taken by these students as well as lower average weekly enrollment year-over-year.As of December 31, 2019, total student enrollment was 34,722 compared to 38,153 as of December 31, 2018. For the fourth quarter of 2019, instructional costs and services were $51.3 million or 53.3% of revenue compared to $51.6 million or 54.5% of revenue for the comparable prior year period. The slight decrease in the fourth quarter as a percentage of revenue was primarily due to lower head count.Bad debt expense for the fourth quarter of 2019 was $5.7 million or 6% of revenue compared to $3.5 million or 3.7% of revenue for the comparable prior period. The increase in bad debt expense in the fourth quarter was primarily due to operational issues which have been addressed.Admissions, advisory and marketing expenses for the fourth quarter of 2019 were $36.1 million or 37.5% of revenue compared to $38.8 million or 40.9% of revenue for the comparable period. These costs decreased as a percentage of revenue due to lower head count and lower advertising spend.General and administrative expenses for the fourth quarter of 2019 were $16.6 million or 17.2% of revenue compared to $14 million or 14.7% of revenue for the comparable period. The increase in dollars and as a percentage of revenue was primarily driven by additional cost associated with the Ashford conversion and separation as well as higher professional fees.We recorded $13.6 million of restructuring and impairment charges in the fourth quarter of 2019 as compared to $4 million in the fourth quarter of the prior year. The restructuring and impairment charges in the fourth quarter of 2019 related primarily to severance, goodwill, impairment and relocation expense.Net loss for the fourth quarter of 2019 was $23 million or a loss of $0.76 per diluted share compared with net loss of $13.4 million or a loss of $0.49 per diluted share for the same period in the prior year.The non-GAAP net loss for the fourth quarter of 2019 was $4.5 million or a loss of $0.15 per diluted share compared to a non-GAAP net loss of $6.2 million or a loss of $0.23 per diluted share for the same period in the prior year.Regarding the full year results, revenue for the full year ended December 31, 2019, was $417.8 million compared with revenue of $443.4 million for the year ended December 31, 2018. Similar to the quarter, the decrease is primarily due to lower average weekly enrollment year-over-year.Net loss for the full-year ended December 31, 2019, was $54.8 million or diluted loss per share $1.86 compared with net income of $4.6 million or diluted net income per share of $0.17 for the year ended December 31, 2018. Non-GAAP net loss for the year ended December 31, 2019, was $13.9 million or non-GAAP diluted lost per share of $0.47 compared with non-GAAP net income of $13 million or non-GAAP diluted income per share of $0.47 for the year ended December 31, 2018.Income tax benefit for the full year ended December 31, 2019, was 800,000 which primarily related to discrete tax benefits. The company used $46.1 million of cash in operating activities during the 12 months ended December 31, 2019, by comparison, the company used $7.6 million of cash in operating activities during the same period in 2018.Capital expenditures for the 12 months ended December 31, 2019, are $31 million as compared to $2.6 million in the comparable period last year. The increase in 2019 was primarily due to our new headquarters facility in Chandler, Arizona. As of December 31, 2019, the company had combined cash and cash equivalence of $69.3 million as compared to $166.3 million as of December 31, 2018.Turning to our outlook, given the letter of credit and the planned conversion, we are reaffirming our full year 2020 guidance that was provided during our call in January. As a reminder, we believe that it's most appropriate to look at 2020 from a first half versus a second half viewpoint using the June 1 closing date. We are also including guidance for the first quarter of 2020 as the quarter will be impacted by seasonality.For the first quarter of 2020 which includes three months of projected consolidated financial results, we expect to deliver revenues in the range of $95 million to $98 million adjusted EBITDA in the range of negative $2 million to breakeven or adjusted EBITDA margins of approximately negative 2% to breakeven, adjusted EPS in the range of negative $0.15 to negative $0.07 per share, ending cash in the range of $74 million to $76 millionFor the first half of 2020 which includes five months of consolidated financial and one month Zovio post-conversion, we expect to deliver revenues in the range of $187 million to $193 million. Adjusted EBITDA in the range of $6 million to $11 million or adjusted EBITDA margins of approximately 3% to 6%.Adjusted EPS in the range of $0.06 to $0.22 and ending cash in the range of $49 million to $54 million. For the second half of 2020 which represents Zovio post-conversion, we expect to deliver revenues in the range of $145 million to $149 million, adjusted EBITDA in the range of $11 million to $15 million or adjusted EBITDA margins of approximately 8% to 10%. Adjusted EPS in the range of $0.24 to $0.33, and ending cash in the range of $69 million to $74 million.As a result, for the full year of 2020, we expect revenues in the range of $332 million to $342 million, adjusted EBITDA in the range of $17 million to $26 million or adjusted EBITDA margins of approximately 5% to 8% and adjusted EPS in the range of $0.30 to $0.56.With regard to new enrollment, our financial guidance for the year assumes a range of negative high single digits new enrollment at the low end, to flat new enrollment at the high end. Further, new enrollment in the first quarter is expected to be down mid to high single digits. While second quarter new enrollment is expected to be flat to down mid single digits.For 2020, we continue to anticipate normal capital expenditure levels and as a result would expect in 2020 with unrestricted cash on hand in the range of $69 million to $74 million. Contemplated in this guidance is the letter of credit that is required by the U.S. Department of Education. And while we're in the early stage of discussions, we have indications that the total costs associated with securing this financing will be in the range of 18% to 22% on an annual basis.Now I will turn the call back over to Andrew for his closing comments.

[Andrew Clark:]

Thank you, Kevin.As we have said many times, while we reposition Zovio as an education technology services company, we remain focused on ensuring Ashford University has a strong foundation to support its long-term sustainability and success. We have a clear strategy in place to be a best-in-class education technology services company that will leverage our core strengths, while applying our technologies and capabilities to priority market needs, including recruitment, retention, and the learner experience.We believe through the execution of our strategic priorities and continued investments, we will create long-term growth and meaningful value for all our stakeholders.At this time, I'll ask our operator to open the phone lines for your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Alex Paris from Barrington Research. Your line is open.

[Alex Paris:]

Glad to have the transition year behind us and looking forward optimistically to 2020. I'm jumping right into it. New student enrollment better than expected in the fourth quarter. The decline was less than we had thought would be in the mid single digit decline. It was in the low single digit decline. What have you done differently to result in this outcome and improving a new student enrollment sequentially from the third quarter?

[Andrew Clark:]

Yes, sure. I'm happy to answer the question and you're a little muffled on our end, Alex. So, when one of the important things, I think Alex to understand is that we reduced the number of enrollment advisors by approximately 46% back in the third quarter and on a year-over-year basis. So, Q3 of '19 to Q3 of '18. And in that reduction on a year-over-year basis increased to about 50% in the fourth quarter. So, we have half of the workforce that to -- I think the question you're asking that is, I'm actually recruiting almost an equal number of new enrollments as the workforce for the same quarter in the prior year, which tells you that there's a dramatic gain going on in terms of our efficiencies, which we would attribute to our digital marketing strategy, our analytics and some reorganization that was done in the middle of last year around our admissions group.And so, as we guided before we thought we'd be down negative mid single digits. We were pleasantly surprised that we were only down a negative low single digits. But, you can see from what I just described, that we're having a dramatic gain in productivity and why all of that's important as you round the corner into '20, and you think about '20, we annualize that change in the workforce in the middle of 2020. And so that workforce is effectively very similar in the back half of the year. And in the first half of the year, we still have some pretty significant gains in that 50% range in terms of 50% fewer enrollment advisors. And so that's why we guided the way we did around a negative new enrollments in the first quarter because again, we're doing a lot more with a lot less. But, we're I'm uncertain to kind of how much more in terms of gains will continue to get out of that workforce. And then we lap that workforce in the second half of the year. So then it's very comparable and you expect to have kind of similar year-over-year numbers. That helped answer your question.

[Alex Paris:]

Yes, without a doubt. And while you didn't comment on new student enrollment growth in the second half, I would think it'd be reasonable to assume increased productivity, increase efficiency, easier comps that you're setting yourself up for, positive in new enrollment growth in Q3 and Q4, to get you to kind of flat for the full year?

[Andrew Clark:]

Yes. You'll recall we said last year that we expect flat new enrollment growth for 2020 and that's still our view. We in fact always had the view that we would have a negative new enrollment growth quarter in the first quarter and potentially maybe in the second quarter, although it could be flat to I think mid single low -- low to mid single digits. But in the back half of the year, we actually seeing it being equal to, or maybe slightly better than the prior year. And of course, it would have to be a little bit better for us to be at flat new enrollments for the full year.

[Alex Paris:]

Got you. I recall you guys talking maybe in the second quarter, but definitely in the third quarter about changes to the first course. How have those changes been received in, in what can you tell us about them?

[Andrew Clark:]

So they've been received well, I can tell you that the matriculation rates, which is what we look closely at to understand if the improvements in the curriculum are having a difference, that those have improved on a year-over-year basis, which I also would attribute a little bit to kind of our surprise upside in our negative new enrollments for the fourth quarter. We're continuing the university in concert with Zovio is continuing to make further enhancements to the course. So I wouldn't say that they're done, but the ones that they made initially, we've already seen a positive impact.

[Alex Paris:]

Great. Shifting gears. The $60 million to $65 million in expected cost savings in '20 over '19, where does that come in terms of line items, instructional cost of services, marketing, G&A across all three, is one more than the other or was it kind of equally dispersed?

[Kevin Royal:]

So Alex it is across all three. We spend more money in instructional costs and services, so disproportionate amount of the labor's savings will fall there. We also have roughly $8 million in facility savings year-over-year. And so that's spread over the three as well. And then, a fair amount of consulting travel other or miscellaneous type expenses that would fall over all three categories.

[Alex Paris:]

And then, I think at one point, Kevin, you said that some of the changes that you implemented in second quarter, for example, second quarter 2019, should yield savings of $8 million in '19 excluding any charges associated with that, did you realize those savings that you expected?

[Kevin Royal:]

Yes, we certainly did.

[Alex Paris:]

Okay. And then we have in terms of year-over-year -- up to $65 million additional savings versus 2019 and is that equally spread over the four quarters?

[Kevin Royal:]

Yes, it would be. I mean, it's not perfect, but I think it's fine to think about it that way.

[Alex Paris:]

Okay. And then I think you had forecasted on Q3 call that these cost reductions would result in an $11 million restructuring charge. And if you had a $13.6 million restructuring charge, what is the difference, goodwill impairment?

[Kevin Royal:]

No. there were a bit more reductions than what we had originally planned once the reduction was completed.

[Alex Paris:]

Does that mean more savings or is that included in the $60 million to $65 million forecast?

[Kevin Royal:]

No, that's included in the number that we just gave out on this call.

[Alex Paris:]

Yes. Okay, good. Then, last few questions. Can you give us some sort of idea, I'm impressed with the performance of both Fullstack and TutorMe during 2019 in your first year of ownership of these. Most notably, I think you're up to four institutional relationships at a Fullstack, most recently being LSU. Can you give us an idea, revenue and profit contribution of each of those businesses Fullstack, TutorMe, Learn at Forbes, these actual in 2019 or some sort of estimate for 2020?

[Kevin Royal:]

Yes, that's not information that we've disclosed in the past, Alex.

[Andrew Clark:]

Yes. We don't break them out separately, but I will say Alex we are very pleased with both of those acquisitions. As you mentioned, Fullstack has got four university partners and I know there's several others that are in the pipeline and I would expect announcements on probably in the first quarter. And TutorMe has done a fantastic, I think it had approximately 40 university partners. It's above 70 now. And so we're really pleased with how they're doing.

[Alex Paris:]

Okay. And then last question, for now, I guess given that you've received all the approvals for conversion and separation, are you able or have you been out there presenting your ed tech services offerings to new colleges and universities at this point?

[Andrew Clark:]

I think the short answer is no. We haven't been out there in a formal capacity presenting those. We continue to field informal interest from people that are curious about our capabilities and how we might be able to help them. Our two -- number one objectives and goals are first the conversion of the university and second, a return to new enrollment growth for the university. And really once we have both of those things completed, which should happen here in the first half of the year, I would anticipate us taking a more diligent approach to business development in the back half of the year meaning formally reaching out and cultivating beginning to cultivate potential clients.

[Alex Paris:]

And could you remind us who you might focus your marketing efforts on in that respect? What types of colleges and universities, are there any other types of partners you're contemplating for these services?

[Andrew Clark:]

Well, it kind of all depends if we're talking about providing technology and services to universities that are pursuing online degree programs for their adult student population. I think we're interested in strong kind of regional brands that already have a kind of university population, I will call it, kind of 7,000 to 12,000 students and want to meaningfully grow that population in the adult students online.Obviously, if it's Fullstack or TutorMe it's a different profile institution. I will tell you that there's an ecosystem there where we're able to utilize relationships that TutorMe or Fullstack has to make introductions for Zovio on the degree online offering side and vice versa as we're making inroads, we can share those opportunities with those other subsidiaries.

[Alex Paris:]

Okay, great. Well, that's very helpful. I appreciate the additional color guys. Thank you.

[Andrew Clark:]

Thank you, Alex.

[Operator:]

There are no further questions at this time. I'd turn the call back over to Mr. Clark for any closing comments.

[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.