Zovio Inc
Q1 2018 Earnings Call Transcript

Published: 2 May 2018

[Operator:]

Good afternoon, and welcome to Bridgepoint Education First Quarter 2018 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Ms. Anna Davison, VP of Corporate Communications and Investor Relations for Bridgepoint Education. Please go ahead.

[Anna Davison:]

Thank you, Christine, and good afternoon. Bridgepoint Education's first quarter 2018 earnings release was issued earlier today and is posted on the company's website at www.bridgepointeducation.com. Joining me today are Andrew Clark, Chief Executive Officer; Kevin Royal, Chief Financial Officer; and Joe D'Amico, who served as our Interim Chief Financial Officer during the last quarter. Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking, including statements regarding enrollment, student retention and graduation rate, bad debt, pending legal matters, other financial and related guidance, the impact of our student support effort, our ability to manage regulatory metrics and commentary regarding the remainder of 2018 and beyond. 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 current date. 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 non-GAAP financial 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-Q for the quarter ended March 31, 2018, which was filed with the SEC earlier today; as well as our earnings release posted today for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website. At this time, it is my pleasure to introduce Bridgepoint Education CEO, Andrew Clark.

[Andrew Clark:]

Thank you, Anna. And welcome to Bridgepoint Education's First Quarter 2018 Earnings Call. I'd like to begin by welcoming back our Chief Financial Officer, Kevin Royal. Kevin returned to Bridgepoint on April 16, 2018, and we're thrilled to have him in this role in the company again. I'd also like to thank Joe D'Amico, who has transitioned to a new role as Senior Adviser to the CEO, for his contributions to our company over the last six months as Interim CFO. After I discuss our first quarter, Kevin will review our financial results and key operating metrics. After Kevin concludes, I will offer my closing comments. The first quarter represented the beginning of a new chapter for Bridgepoint. On March 13, we announced plans to separate Bridgepoint from its academic institutions, Ashford University and University of the Rockies, and become an Online Program Management company or OPM. This is a strategic decision we have thoughtfully evaluated for quite some time. We're very proud of what Bridgepoint Education, Ashford University and University of the Rockies have accomplished and believe that together, we have served an essential public purpose. The innovative student focused education we have provided has allowed over 114,000 students to graduate from our institutions, many of whom might not have enjoyed that opportunity otherwise. Because of the dynamic nature of the higher education environment, we believe this conversion will permit us to continue to pursue our mission in new and exciting ways. As an OPM, Bridgepoint Education will seek to assist colleges and universities as they adapt to emerging technological innovations, shifts in student demographics and changing expectations regarding the role of higher education in supporting workforce development. Today, more than 36 million Americans have some amount of college credits, but for one reason or another, they've not taken the steps to complete their degree. In addition, the demand for non-traditional education solutions is growing. And as an OPM, we believe Bridgepoint will be well positioned to help higher learning institutions meet the wide-ranging needs of today's learners. Today's students use technology in almost every facet of life and are looking for new models of education. They also want access to a wider range of education options, including skills-based training that can be applied quickly in the modern workforce. These seemingly very simple shifts are dramatically disrupting higher education. The most successful institutions will focus their investments on the technology needed to help this generation enter the workforce quickly using programs that best fit their interests and goals. As an OPM, we feel confident that Bridgepoint can play a significant role in helping these institutions navigate this evolving education landscape and better serve their students. To date, the OPM market has largely focused on addressing the demand for graduate degrees. And while we believe this is an important area, we see the next phase of the transformation occurring within higher education, addressing the adult undergraduate who has a different set of needs that online education will be well positioned to meet. Our investments in marketing, technology and new program development are all aimed at helping address these students. We believe our innovations and services, when extended across universities beyond Ashford, will become a very important source of growth for Bridgepoint over the long-term. I will provide some key milestones we anticipate relating to our conversions to an OPM in just a few moments. But first, let me review the quarter. For the first quarter of 2018, revenue was $118 million with total enrollment as of March 31, 2018, of 41,523 students. Net income for the first quarter of 2018 was $2.3 million or $0.08 per diluted share. New enrollment for the first quarter of 2018 was down high single digits as a percentage when compared to Q1 of 2017. Similar to the fourth quarter 2017, new enrollment was impacted by a voluntary decision to temporarily suspend enrollment for VA students, which we resumed enrolling on February 6. On an apples-to-apples basis, new enrollment was down mid-single digits, excluding VA students. We also want to provide you with a brief update on our litigation with the Iowa Department of Education relating to GI Bill benefits. On Friday, April 27, we received word that the Iowa Supreme Court ruled to vacate the original judgment against Ashford, due to the fact that the judge failed to disclose her conflicts of interest. Outside of the facility's code having been assigned to Arizona by the VA, this decision returns Ashford University to the original status of two years ago in Iowa. The case will now proceed to be heard again before a new judge. While this is a very positive development for Ashford, we have been and will continue to work in good faith with the VA to find a resolution that will safeguard our VA students' right to use their GI Bill benefits as they choose. In terms of GI Bill benefits, this means Ashford University currently has approval status in both Arizona and Iowa, but is certifying veteran students out of our Arizona location. Returning to our discussion of new enrollments in the first quarter. As we have discussed on previous earning call, in mid-2017, we made a strategic shift in our marketing strategy, and this change impacted both enrollment and costs during the first quarter of 2018. As we implemented our enhanced strategy that move the marketing emphasis from affiliates to homegrown sources, more inquiries were being made outside of typical business hours, as many of these potential students maintain full-time employment. As a result, we were unable to connect with them live when we responded back during business hours the next day. In January, our team quickly identified this timing issue and began refining our media buying. We also extended our hours of operations in February to improve the conversion of these homegrown inquiries. In March, we began to see improved conversion rates. This improvement has continued and we are pleased with the results to date in April. That being said, we continue our strategic focus on attracting students with the highest potential for success. There are two areas where this is evident. The first is our enrollments of homegrown inquiries. New enrollments from homegrown sources, including digital media and referrals, is 86% for the quarter, up from 75% in the same quarter last year. The second area that shows evidence of our strategic focus is the growth in our education partnerships. Total enrollment from our Full Tuition Grant program and our educational partnerships has grown to 13% of total enrollments, which is up from approximately 7% of total enrollments a year ago. In addition, Ashford also continues to focus on interventions designed to assure student preparedness, raise academic quality and improve student outcomes such as student retention. Ashford's annual cohort retention rate was 58.8% as of the end of the first quarter of 2018 as compared to 59.7% as of the end of the first quarter of 2017. Although retention was down year-over-year, it has remained consistent as comparable with the rates for the second half of 2017. We also continue to focus on increasing our Full Tuition Grant program students and our graduate students, who both historically retain at a higher rate than the overall student population. Switching gears. We believe our future success as an OPM will be bolstered through the success of the merged Ashford University and University of the Rockies. As such, we're highly focused on strengthening our business today through an enhanced marketing strategy, our educational partnerships and improving and expanding our portfolio of program offerings. As I mentioned, our shift in our marketing strategy was aimed at accomplishing two key objectives

[Kevin Royal:]

Thank you, Andrew. Let me begin by providing some key financial and operating information for the quarter ended March 31, 2018. As Andrew mentioned, revenue for the first quarter of 2018 was $118 million compared to revenue of $129.5 million for the same period in the prior year. The decrease is primarily due to lower average weekly enrollment. Revenue is negatively impacted by $0.3 million as a result of implementing the new revenue recognition standards in the first quarter of 2018. As of March 31, 2018, total student enrollment was 41,523 compared to 46,383 as of March 31, 2017. For the first quarter of 2018, instructional costs and services were $56.9 million or 48.2% of revenue compared to $63 million or 48.7% of revenue for the first quarter of the prior year. The decrease in absolute dollars was primarily driven by lower bad debt expense, labor and license fees. The bad debt expense decrease, including the resulting impacts of $1.1 million in part - are in part a result of implementing the new revenue recognition standards in the first quarter of 2018. The decrease in instructional costs and services as a percentage of revenue was primarily driven by the decrease in bad debt. Bad debt expense in the first quarter of 2018 was $6.6 million or 5.6% of revenue compared to $9.3 million or 7.2% of revenue for the comparable prior period. Admissions, advisory and marketing expenses for the first quarter of 2018 were $48.2 million or 40.8% of revenue compared to $44.8 million or 34.6% of revenue for the comparable period of the prior year. This increase of $3.4 million is primarily a result of a strategic increase in advertising spend in the first quarter, partially offset by a decrease in labor created by the efficiencies we are continuing to gain through our new marketing strategy. General and administrative expenses for the first quarter of 2018 were $12.7 million or 10.8% of revenue compared to $12 million or 9.3% of revenue for the comparable period of the prior year. The increase as a percentage of revenue was primarily driven by higher professional fees, including those costs relating to the planned conversion to an OPM. This trend will continue in alignment with the conversion time line. We recorded a credit of approximately $0.2 million to restructuring and impairment in the first quarter of 2018, which is due to a reduction in our expected lease charges, partially offset by severance charges. There were no restructuring and impairment charges recorded in the first quarter of the prior year. Net income for the first quarter 2018 was $2.3 million or net income of $0.08 per diluted share. This is compared with net income of $9.9 million or net income of $0.23 per diluted share for the first quarter of 2017. Net income was positively impacted by implementing the new revenue recognition guidance during the first quarter of 2018 by approximately $0.7 million. We had a tax benefit for the first quarter of approximately $1.7 million. The tax benefit is primarily related to expected tax refunds from mainly prior year's tax returns for certain additional educational development related deductions for tax purposes. Excluding this onetime discrete item, we anticipate a nominal annual effective tax rate for the full year. Our non-GAAP net income for the first quarter of 2018 was $0.4 million or income of $0.01 per diluted share compared to the non-GAAP net income of $9.9 million or income of $0.23 per diluted share for the first quarter of 2017. Non-GAAP net income for the first quarter of 2018 excluded the credit to restructuring and impairment line item of $0.2 million as well as a tax deduction of $1.7 million. As of March 31, 2018, the company had combined cash, cash equivalents and investments of $173.3 million compared to $187.2 million as of December 31, 2017. The company used $15.1 million of cash in operating activities during the three months ended March 31, 2018. By comparison, the company used $11.5 million of cash in operating activities during the same period in 2017. The year-over-year increase of $3.6 million in the cash used in operating activities is primarily driven by a decrease in earnings as well as seasonality, partially offset by improvements in working capital. We expect cash from operating activities to trend positive as we move through the year. As a result of our disclosure of the planned conversion, we have not yet acted on our currently authorized share repurchase program. That said, we have a $20 million authorization, which we could execute on as circumstances warrant. The net accounts receivable balance was $33.6 million as of March 31, 2018, compared to $27.1 million as of December 31, 2017. This is higher than the year-end and is consistent with our business cycles and the growth of our FTG enrollment. Capital expenditures for the year period-to-date through March 31, 2018, were $0.8 million as compared to $1.3 million for the same period of the prior year. Now I'll turn the call back over to Andrew for his closing comments.

[Andrew Clark:]

Thank you, Kevin. In closing, our priorities for the remainder of 2018 will be twofold. First, we will continue to focus on strengthening our core business through our efforts to grow new and eventually total enrollments, improve student retention and create a more efficient cost structure. In addition, we will continue to work creatively to constantly enhance and enrich the student experience and student outcomes. Second, we will diligently move forward on the transformational separation of Bridgepoint from Ashford University and University of the Rockies that will allow us to focus on becoming a leading Online Program Management company. Bridgepoint, Ashford University and the University of the Rockies are in mutual alignment toward these objectives and believe this change will allow each of us to focus on our strengths going forward. We are confident that the goals and framework that we have in place will make us successful in creating meaningful value for our stakeholders throughout 2018 and beyond. 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.

[Chris Howe:]

Good afternoon. This is Chris Howe sitting in for Alex Paris.

[Andrew Clark:]

Hi, Chris.

[Chris Howe:]

Hi. I had a - in relation to your comments about the educational partnership program. Yes, I guess, I was just curious if you could provide some additional color on kind of what the pipeline looks like as far as the mix, the type of companies that you target for this partnership program and kind of what the outlook is for 2018. And I believe on the last call, you had mentioned for mid-teens percentage of total enrollments. Is that still the guidance for the full year?

[Andrew Clark:]

Yes, sure. Thanks, Chris. So that program in terms of the mix of new partners that we bring on each quarter has been pretty consistent. Typically, it's about eight new partners a quarter. This quarter, obviously, a little higher than that at 11. We target primarily Fortune 1000 companies. Those are the companies that we're looking to work with. These are companies that have tuition reimbursement benefits up to the IRS allowable $5,250. And we continue to believe that the educational partnership group and the FTG program, in particular, will be somewhere around the mid-teens by the end of 2018 in terms of its percentage of our total enrollments.

[Chris Howe:]

Okay. That's very helpful. And then I just had one more question as it relates to the use of cash for the full year. You had mentioned the share repurchase authorization that you have access to and also the majority of the investments being done in Q1. Will there be any further investments to kick start new enrollments and get toward the low to mid-single-digit new enrollment growth for the full year?

[Andrew Clark:]

No. That's why I made the comment, Chris, that our marketing advisory and advertising spend as a percentage of revenue should be similar to what it was as a percentage of revenue last year in each of the remaining three quarters. So we anticipate that really the investment we made in the first quarter, as I mentioned, has created some nice momentum going into the second quarter here. And we believe that we'll be able to achieve low to mid-single-digit new enrollment growth with a spend, as a percentage of revenue, that's approximately the same as what we did last year.

[Chris Howe:]

That's helpful. Thank you.

[Operator:]

[Operator Instructions] Your next question comes from the line of Peter Appert from Piper Jaffray. Your line is open.

[Peter Appert:]

Thanks. So I am wondering, Andrew, if you could give us more of a time line in terms of how you see the OPM transition playing out, any additional color on that?

[Andrew Clark:]

Yes. I'll try and give you my best view as of right now, Peter, which we expect that both the merger of the Rockies into Ashford as well as the conversion of Ashford that those would be taken up at the WASC Commission meeting at the end of June. We'd probably be notified sometime in early July. IRS approval would happen probably sometime during the third quarter, maybe early fourth quarter. And then we would anticipate that the Department of Education approval would follow fairly shortly after that. So by the end of 2018, we would expect to have all of the necessary approvals.

[Peter Appert:]

Okay. And is WASC, in your opinion, the biggest challenge in terms of the approval process?

[Andrew Clark:]

Well, I don't prescribe kind of a challenge to any of the three that I just mentioned. I do think that certainly, working closely with WASC to help them understand that this separation really allows the university up here to do what it's really great at and allows Bridgepoint at the same time to do what it's really great at. And I think kind of the mutual benefit of those two things occurring because of the separation, we want to make sure that we communicate that very effectively to our accreditor and how it ultimately is in the best interest of students and the faculty and the administration of the institution.

[Peter Appert:]

Is there any feedback at this point from WASC that would - you could probably be able to share with us?

[Andrew Clark:]

No, I don't think I'll have any updates for you until early July. If I do have an update before that, I'd certainly share it with you.

[Peter Appert:]

Thank you. You mentioned in your prepared remarks a bit about how you see Bridgepoint's positioning in the OPM market. Can you just maybe dig a little deeper in terms of your - the strategic advantages that BPI has? And I ask for some context, obviously, of this being a pretty competitive market?

[Andrew Clark:]

Yes, sure. Well, I certainly think we have a variety of strengths, highlighting a couple, definitely, our marketing, data analytics and our technology team. You're familiar, Peter, because you've been with us a long time around the things we've done in terms of Constellation and Waypoint. I also think and I said this earlier that I really do believe that the undergraduate market is going to go online in a much more meaningful way as institutions look to try to serve the adult population of students, the 36 million students that are out there that have some college education, but have not yet completed their degree. I think more and more of those institutions - more and more institutions will try to position themselves to serve those students. And that's fairly - I'd say, fairly early innings in that regard today, most of the focus is in graduate degree programs.

[Peter Appert:]

Got it, got it. And then in terms of the first quarter weakness in the start numbers, would you call out any particular programmatic areas or channels that were weak or is it pretty much just across the board?

[Andrew Clark:]

Well, I want to make sure and clarify. We were down mid-single digits when you exclude for the VA. And that was really, because as we were continuing to refine the marketing mix and the early part of the quarter there, we had a disproportionate percentage of our student inquiries coming in during the half hours. So we would follow up with those inquiries the next business day. Most of those folks are working folks and weren't as available, and so our conversion was down as a result of that. We identified that pretty quickly, began course correcting for it in February, increased the hours we were open, made sure and concentrate that mix shift change so that inquiries were coming in during our hours that we were opened. And then we saw improved conversion as a result in March and continue to see that trend here in April. So it really - I don't think it was - there was no weakness from an inquiry standpoint. We were getting the inquiries. It was just the timing that impacted the first quarter.

[Peter Appert:]

Well, was that - I guess, the part I don't understand is that the numbers have been progressively getting better through 2017 as these marketing changes were being implemented. So were you - was it a shift in customer inquiry patterns that resulted in this change in the first quarter?

[Andrew Clark:]

Yes, it was a shift in - as we've described to you, we continue to shift our affiliate and homegrown strategies and increase more of it on the homegrown side. And as we continue to refine that, it was literally a shift of a higher percentage of our total inquiries coming in during off-hours. And so you could almost say, Peter, but not for that, you would have seen similar performance on new enrollments in the first quarter, excluding VA, that you did in the fourth quarter, excluding VA. So it really was just that one kind of operational, I'll call it, issue that once we corrected it, we were able to correct it and improve it in the quarter. But it improved late in the quarter, so it was unable to kind of overcome what happened in January and kind of the first part of February.

[Peter Appert:]

Got it. And are you far enough along at this point, Andrew, that you can see some visibility to get to positive starts in the June quarter?

[Andrew Clark:]

Yes. So as I mentioned, we saw that conversion coming back in line in March, so the very end of the first quarter. It's been where we expected it in April, so the beginning of the June quarter. So assuming that we continue to stay on pace there, my expectation, as I said in opening remarks, is that we will be somewhere in that low to mid-single-digit new enrollment growth for the second quarter as well as the third and the fourth.

[Peter Appert:]

Got it. Okay, great. I think that's good for me. Thanks so much.

[Andrew Clark:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I will now turn the call over to Andrew Clark for any closing remarks.

[Andrew Clark:]

Yes, I just want to thank everybody for your interest in Bridgepoint Education and for your participation in today's call.

[Operator:]

This concludes today's call. You may now disconnect.