Zovio Inc
Q2 2018 Earnings Call Transcript

Published: 26 Jul 2018

[Operator:]

Good afternoon. And welcome to Bridgepoint Education’s Second Quarter 2018 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Nolan Sundrud, Director of Corporate Communications for Bridgepoint Education. Please go ahead.

[Nolan Sundrud:]

Thank you, Christine, and good afternoon. Bridgepoint Education's second 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 and Kevin Royal, Chief Financial Officer. 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, our ability to affect the planned mergers, separation, and conversion, and impact other financial related guidance, the impact of our student support efforts, 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 quarterly report on Form 10-Q for the quarter ended June 30, 2018, which was filed with the SEC earlier today; as well as our earnings press 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’s CEO, Andrew Clark.

[Andrew Clark:]

Thank you, Nolan. And welcome to Bridgepoint Education’s second quarter 2018 earnings call. After I discuss the quarter, Kevin will review our financial results and key operating metrics. After Kevin concludes, I will offer my closing comments. We are very pleased with our results for the quarter, which included a return to new enrollment growth supported by more efficient marketing spend, further expansion of our education partnerships, the introduction of additional program offerings, a slightly improved retention rate, and approval from WASC to merge University of the Rockies into Ashford University. Let me quickly walk through some of the highlights. First and foremost our new enrollment grew low single-digits marking a return to growth for the first time in seven quarters. This return to growth reflects the deliberate marketing strategy that optimizes our spending while generating a higher quality and more efficient mixture of inquiries designed to attract new students with a greater potential to succeed. As a result we delivered a higher quality cohort of new students at a lower spend in the admissions advisory and marketing, declining 880 basis points this quarter, as compared to the same quarter a year ago. This improved performance is attributable to a better, medium mix achieved through our digital media strategy, continued success in our education partnerships group and a more efficient enrollment process. Further the new enrollments coming from homegrown sources and referral sources increased to 87% for the second quarter, as compared to 79% for the same quarter last year. This shift drove a 600 basis point improvement in the overall inquiry to new enrollment conversion rates for the quarter, as compared to last year. And as a result the cost per new enrollment declined 10% year-over-year. We are in the midst of implementing various recommendations to further improve efficiency and reduce cost, and we will continue to do so throughout the year which we anticipate will position us for improving operating margins on a year-over-year basis going forward. That said we do expect to continue to incur some one-time costs associated with our upcoming transitions over the next year. In addition, as we continue to execute on the successful marketing strategy, we believe we can produce low-to-mid single digit new enrollment growth for the remainder of 2018 and ultimately total enrollment growth beginning in mid-2019. Our educational partnership group continues to be a driver of our success. Among these programs is our Full Tuition Grant program, which uses tuition assistance benefits provided by our corporate partners to provide a debt free education to their employees. Enrollment in our Full Tuition Grant programs has grown to approximately 14% of total enrollments, up from approximately 8% of total enrollments a year ago. During the second quarter of 2018 we were pleased to add 16 new Full Tuition Grant partners to the program. And student enrollment from Full Tuition Grant was up approximately 60% as compared to enrollments the same quarter a year ago. These programs showcase the value of partnering with employers to create programs that meet their needs, while allowing students to gain critical skills without taking on any debt. We expect students enrolled in these programs to becoming meaningful percentage of our overall mix as we continue to invest, raise awareness and expand our corporate partnerships. We remain steadfast in our commitment to improving and expanding our portfolio of program offerings, primarily at the graduate degree level, that helps fill certain high demand areas. During the second quarter of 2018, Ashford launched an additional two new programs with students starting in classes during the second quarter of 2018. Over the past eight months we've launched a total of 11of the 16 new Ashford University programs previously approved by the Department of Education. Ashford plans to roll out the remaining programs throughout the remainder of 2018 and plans to continue to invest in marketing efforts to support these new programs. Early results, year-to-date from these new offerings, have been promising. Enrollment in these programs have exceeded our internal expectations, although it remains a small percentage of total enrollment. Going forward, we expect to see meaningful growth from these programs in 2019, particularly in our IT related programs. While new enrollment growth is important, retaining those students and helping them to be successful is our ultimate goal. Ashford’s an annual cohort retention rate was 59.4% as of the end of the second quarter of 2018, as compared to 59.2% as of the end of the second quarter of 2017. Retention did improve slightly, in spite of some of the macro headwinds we continue to face, such as record low unemployment. We remain keenly focused on improving our students' retention and are continually exploring strategies and tactics to boost these outcomes. Examples of these strategies include interventions designed to support new students, including additional proactive outreach and automated tools that alert advisors when students begin to struggle, interventions to assure student preparedness with 24/7on demand tutoring, student video conferencing and the introduction of chat box to provide fast answers to frequent questions and programs to encourage subject mastery, such as our Honors College program. In addition to improving our student intervention strategies we plan to increase the percentage of graduate students and education partnership students throughout the remainder of 2018. Because these two groups have higher, historical retention rates, increasing the percentage of these students should contribute to further stabilizing and improving our overall retention rates. Let me switch gears to our pending conversion. Last week we were pleased to announce that we received approval from WASC to merge the University of the Rockies into Ashford University. While the merger is awaiting approval by the Department of Education and State Regulatory bodies, the WASC approval is an important first step. As we work toward completing the merger of our two universities, we also continue to work on the separation of Bridgepoint from Ashford and the subsequent conversion of Ashford into a nonprofit university. As we've said in the past, we believe returning to nonprofit status will enable Ashford to better serve students by putting the university on a level playing field with other nonprofit universities, which will give it more flexibility to participate in academic opportunities including, enabling of students to qualify for scholarships, allowing the university to apply for grants and other sources of financial support for research. Further, as I will discuss in a moment, most traditional colleges and universities understand that higher education is evolving. And the way students want to learn is changing. Ashford will be uniquely positioned at the forefront of this transformation and large part because of the foundation we have built over the last decade in terms of its differentiated value proposition and learning model. The proposed merger will establish a new doctoral college within Ashford, which will initially offer four doctoral programs developed by the University of the Rockies. The addition of these graduate level social and behavioral science programs will broaden Ashford’s offering and make it more competitive by appealing to a wider array of students, while ensuring continuity of opportunity for students of both universities. With respect to Ashford's planned return to not-for-profit status, WASC determined that given the significant differences between the merger of our two institutions and the proposal to convert from a for-profit institution to an independent not-for-profit institution, that these two milestones should be treated as two separate structural changes. As a result, the team site visit for the conversion request is expected to occur sometime in September, for the recommendation to the commission in November. Looking ahead, let me provide some additional color on why we believe we can effectively compete in the online program management space, against more well-established players. Most traditional colleges and universities understand that to meet the needs of the majority of college students, they need to operate different learning models, particularly online options. Currently, nearly one-third of all postsecondary students are taking at least one distance course. And within that universe only 15% are taking exclusively distance courses, with 83% of distance students studying at the undergraduate level. More and more higher education institutions are outsourcing the creation and management of their online programs. According to a recent Babson Survey Research Group study, distance education continues to be the primary source of enrollment growth within higher education, and this growth is accelerating. However, distance education enrollments remain highly concentrated in a relatively small number of institutions, at 5% of institutions account for nearly half of all online students. That leaves a large, addressable market with plenty of room for multiple quality companies. Bridgepoint offers a differentiated value proposition and learning model. Whereas to date many OPMs have focused on their graduate student market, our expertise lies in serving adult, graduate and undergraduate students. We intend to offer end-to-end and à la carte services and can customize the type of support we provide to serve the individual needs of our future clients. Our work over the last decade building a strong educational institution has enabled us to establish a differentiated approach to the online market. As such, we have an extensive track record of serving online students, promoting their success while enrolled and enhancing their professional skill and job readiness. We also have a wealth of analytical data and business intelligence that we are leveraging to continuously improve our retention and intervention tools, marketing techniques, program development systems and many other students support services. Quite simply, we are not starting this business from scratch. We have the scale, the experience and efficiency to quickly position Bridgepoint for a long-term success. With that let me turn the call over to our CFO, Kevin Royal, to review our financial and operating results.

[Kevin Royal:]

Thank you, Andrew. Let me begin by providing some key financial and operating information for the quarter ended June 30, 2018. Revenues for the second quarter of 2018, was $120.8 million, compared to revenue of $124.6 million for the same period in the prior year. The decrease is largely a result of lower average weekly enrollment, partially offset by a tuition increase. For the second quarter of 2018, instructional costs and services were $54 million or 44.7% of revenue, compared to $61.1 million or 49.1% of revenue for the comparable prior period. A decrease in absolute dollars and the improvement as a percentage of revenue was primarily driven by lower bad debt expense. Bad debt expense from the second quarter of 2018 was $5.1 million or 4.2% of revenue, compared to $7.7 million or 6.2% of revenue for the comparable prior period. The bad debt improvement was a result of implementing the new revenue recognition standard in 2018, as well as operational improvements. From an operational perspective, compared on an apples-to-apples basis, bad debt improved 80 basis points as a percentage of revenue. Admissions, advisory and marketing expenses for the second quarter of 2018 were $39.9 million, or 33% of revenue, compared to $43.7 million, or 35.1% of revenue for the comparable prior period. This decrease of $3.8 million reflects a continued shift in our marketing strategy to improve the cost and effectiveness of our student acquisition costs. General and administrative expenses for the second quarter of 2018 were $12.5million, or 10.4% of revenue, compared to $13.6 million or 10.9% of revenue for the comparable prior period. The decrease as a percentage of revenue was primarily driven by lower headcount, partly offset by higher legal fees, which include approximately $1.1 million of cost related to the planned conversion. The incremental professional fees will continue in alignment with the conversion timeline. We recorded approximately $2.7 million of restructuring and impairment charges in the second quarter of 2018, which was primarily due to lease and asset write-offs, as well as severance charges. There were no restructuring and impairment charges recorded in the second quarter of the prior year. Net income for the second quarter of 2018 was $17.2 million, or net income of $0.63 per diluted share. This is compared to net income of $6.3 million or net income of $0.21 per diluted share for the second quarter 2017. We recorded a net tax benefit of $5.4 million for the second quarter of 2018 which was primarily driven by the release of an uncertain tax position liability. The liability was eliminated as a result of the successful completion of the tax authority audit. Excluding discrete items, we continue to anticipate a nominal, annual, effective tax rate for the full year. Our non-GAAP net income for the second quarter of 2018 was $14.4 million or income of $0.53 per diluted share, compared to the non-GAAP net income of $6.3 million or income of $0.21 per diluted share for the second quarter of 2017. Non-GAAP net income for the second quarter of 2018 excluded the restructuring and impairment charges of $2.7 million, as well the impact of a tax benefit of $5.7million. As of June 30, 2018, the company had combined cash, cash equivalents and investments of $173.3 million, compared to $187.2 million as of the December 31, 2017. The company uses $9.2 million in cash in operating activities during the six months ended the June 30, 2018. By comparison, the company used $11.5 million of cash in operating activities during the same period in 2017. The year-over-year decrease in cash used in operating activities was primarily driven by an increase in earnings and improvements in working capital. We expect cash from operating activities to turn positive as we move through the year, consistent with the seasonality of our business. During the second quarter of 2018, we repurchased 392,000 shares under our currently authorized share repurchase program for approximately $2.4 million including fees. As we move through the conversion timeline, maintaining cash and preservation of capital will be a focus. The net accounts receivable balance was $34.1 million as of June 30, 2018, compared to $27.1 million as of December 31, 2017. The increased balance is consistent with our business cycles and the growth of our Full Tuition Grant enrollment. Capital expenditures for the year-to-date period ended June 30, 2018 were $1.3 million, as compared to $2.3 million in the same period last year. Before I turn the call back over to Andrew for his closing comments, let me provide some color on the second half of the year. Clearly, the second quarter marked an inflection point for Bridgepoint, as we delivered a return to new enrollment growth and strong financial performance. For the second half of the year we continue to expect year-over-year new enrollment growth in the low-to-mid single digit range on a quarterly basis in Q3 and Q4, while our average enrollment will trend downward sequentially. For admissions, advisory and marketing expenses, we expect spending in Q3 and Q4 to be consistent with the prior year as a percentage of revenue. In addition, we expect G&A expenses to be higher than the prior year in terms of absolute dollars and as a percentage of revenue due to cost associated with the conversion. Our efforts to retain higher quality students and drive new enrollment growth are paying-off. And as we move into 2019, we anticipate improvement in many of our key metrics as new enrollment growth continues. Now I will 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 remain the same. First, building on the progress we made in the second quarter, we will continue to focus on strengthening our core business through our efforts to improve student retention, to grow new and eventually pull enrollments, and to create a more efficient cost structure. At the same time we will continue to work creatively to constantly enhance and enrich the student experience and student outcomes. Second, having reached the key milestone with WASC approval of the merger in July, we will systematically move forward to complete the merger and subsequently 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. We remain confident that the goals and framework that we are establishing will generate meaningful value for all of our stakeholders in 2018 and beyond. At this time I'll ask our operator to open the phone lines for your questions.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Peter Appert, from Piper Jaffray. Your line is open.

[Peter Appert:]

Thank you. Good afternoon. The revenue numbers were quite a bit better than I had anticipated. It looks like the revenue per students were – revenue per student would have been up maybe 6%, 7% if I'm calculating this correctly. Can you talk a little bit about that or what's driving that?

[Kevin Royal:]

Yes, Peter, so in my prepared remarks, I mentioned that we did have a tuition increase in the year and so that had an increase, as you said, to the revenue per student of about the range that you mentioned.

[Peter Appert:]

That would be a fairly dramatic price increase and relative to what you've done in recent years, particularly, in the context of the – I assume the impact of the tuition scholarship grant program. So what – just a little more about your thinking behind that.

[Andrew Clark:]

Yes so Peter it's Andrew. You're right. The increase is significantly more than what we've done in prior years. We did a marketing study back at the kind of the third quarter of last year where through that study we discovered because the institution has been so horribly priced for so long that there was quite a bit of pricing power available to the institution. And that it actually had quite a bit of runway and opportunity to increase its tuition prices and its fees, if it – so chose to do so. So that information was provided to the institution and they did make a decision to increase that. And you're seeing that reflected. Now that really only hits approximately 50% of the student population because you'll have to – a little greater than 50%. You'll have to recall that the military population is about 25%. So that those costs don't impact them. And certainly, our education partnership programs receive a discount as well. So those costs don't impact them. And certainly, our education partnership programs receive a discount as well. So those costs would not impact them either.

[Peter Appert:]

Got it. Understood. So that would imply then for the next several quarters, presumably, we will continue to see this benefit, which presumably could get you to positive year-to-year revenue comps perhaps as early as the fourth or first quarter. Does that make sense?

[Andrew Clark:]

Yes, I don't think as early as fourth quarter. But you have to kind of balance that. I guess the only caution I would provide is you have to kind of balance that. I guess the only caution I would provide is you have to balance that with the tremendous success we are having in that educational partnership group, both with the tuition benefit program, as well as the Full Tuition Grant program. And so the scholarships that come from that success will have somewhat of an offset to the revenue per student in the third and fourth quarter.

[Peter Appert:]

Got it. Thank you. And the Kevin, apologies if I missed this. On the cost side of the equation, did you give any guidance in terms of expectations for admission and marketing costs in the second half of the year?

[Kevin Royal:]

Yes, what we said is that we would expect as a percentage of revenue, our A&M cost to be consistent with the percentage of revenue that we incurred in Q3 and Q4 of 2017.

[Peter Appert:]

That was – well, that would be a bit of a reversal of the benefit you saw in the second quarter. Is it a timing issue or something else going on that would account for that?

[Andrew Clark:]

No, I think a lot of it is just seasonality in terms of the investments in the third quarter, Peter, in A&M. And then some of it is being offset by increasing expenses in G&A around the separation of Ashford from Bridgepoint. So those increase – those costs are increasing in the third and fourth quarter over what they were in the second quarter and they...

[Kevin Royal:]

And then another item is that we have experienced great success with our Full Tuition Grant program, and we're continuing to ramp that up in Q3 and Q4. So that contributes to that increased percentage as a percentage of revenue as compared to Q2 and how Q2 compares to 2017. Those are headcounts, Peter, that we would put in place now that won't necessarily yield the same level of productivity upfront that they will say six months out.

[Peter Appert:]

Understood. And then, Andrew, can you talk a little more perhaps about how you are thinking about the economics of the conversion? Any preliminary thoughts in terms of how we should think about things like revenue split and potential margin structure for the new entity once the transition takes place?

[Andrew Clark:]

Yes, sure. Well, I mean, I think we – the caveat, Peter, obviously is that we continue to negotiate with the University. But I think, we think the revenue split would be similar to what we've seen out in the market. This will be a market rate, market-competitive type of revenue share. So I guess the most recent example of that, one would point to would be Grand Canyon at 60%. So I think somewhere in that 60% to 65% range would be a good assumption. I think from a margin perspective, and I'm talking EBITDA. Look, in the second quarter, we did 13%, Peter. And if you take out the cost that we incurred in the second quarter or the conversion, it was really about 14%. And I think that gives Kevin and I, a good feeling about 2019 because we know we're not done in terms of all of the kind of efficiencies and the cost structure pieces of the puzzle that we're putting together. And I think our expectation would be that in a OPM arrangement, we would have margins that would be somewhat equal to what we did in this quarter, somewhere in kind of that I would say mid- to high-teen range.

[Peter Appert:]

Great. And in terms of the merging of Ashford and University of the Rockies, the economic impact of that, does that have any measurable impact on operating results in the second half of the year?

[Andrew Clark:]

It's a great question. A lot of that will be dependent upon timing. The way that Kevin and I have thought about it, Peter, is we haven't assumed any gains in terms of efficiencies in 2018, but we do assume those gains in 2019. So I think if you think about it the same way that probably will help.

[Peter Appert:]

Okay, great. Alright thanks very much. I appreciate it.

[Andrew Clark:]

Yes, thank you.

[Operator:]

Your next question comes from Alex Paris from Barrington research your line is open.

[Unidentified Analyst:]

This is Chris sitting in for Alex Paris. Great quarter guys. Good afternoon.

[Andrew Clark:]

Hey thanks Chris.

[Unidentified Analyst:]

Yes, I had a question, just a couple of questions here. I just want to make sure I caught it correctly as far as the go-forward time line with the conversion, and what I guess points of interest that we should pay attention to moving forward as Ashford converts to a nonprofit and Bridgepoint separates from Ashford?

[Andrew Clark:]

Yes, so as I mentioned in my opening comments there, Chris, we expect that a visiting team from WASC will come in September. The commission will take up the conversion in November. So I would expect that we would hear from WASC sometime in December. And that we would receive probably our IRS and eventually DOE approvals in the first part somewhere between January and March of the first quarter of next year.

[Unidentified Analyst:]

Okay, that's helpful. And I guess just following up on that. Assuming the transition is completed, how should we think about the time line towards adding another institution within the 12 months following as far as marketing for those additional programs or would the first six months or so be focused upon establishing Ashford and kind of getting all your ducks in a row? How should we think about that?

[Andrew Clark:]

Yes, it's a great question, Chris. Our first focus and primary focus is going to be on Ashford for the first six months to 12 months. Certainly, we've reached an inflection point in this quarter. We feel good about the direction of the institution, the merging of the Rockies into Ashford and how that will strengthen the institution. We just want to make sure to continue to build on those things for Ashford in 2019. And I think in terms of other institutions, we would look kind of towards the end of that 12-month or 18-month period before we begin to add new clients.

[Unidentified Analyst:]

Okay. And then in regard to the growth that you're seeing in new student starts and your expectations for the third and fourth quarter, what do you see as the keys towards retaining these students or improving your retention rates?

[Andrew Clark:]

Yes, a great question. I mean, our retention has been really stable in the last three quarters and it was nice to see it slightly improved this quarter over last year same quarter. We are doing a tremendous amount of work across, not only in the institution, but also here at Bridgepoint in supporting the institution. Using data analytics quite a bit to try and help with early student intervention where our faculty have greater visibility and are able to proactively reach out to students, kind of the idea being before the student even realizes that they're on a path that might lead to them not being successful and not retaining. And we do that as well in the student advisement area. And as I mentioned in my opening remarks, we have plans actually in this quarter to use chat box in a variety of different use cases to try and help improve both the student experience, as well as student learning outcomes. So there's a tremendous amount of effort being put around the retention at the institution, a lot of good things being done currently and more on the way.

[Unidentified Analyst:]

Okay. And I just had one last question as it relates to the five remaining programs. How do those compare with the ones that you've already launched? And I know you mentioned that they would be not as material. How should we think about the 16 new programs for total enrollments and how much of a contributor do you expect them to be in 2019?

[Andrew Clark:]

Yes, I'm not going to give you an exact number for 2019. I do think that they will significantly add to the new enrollment growth opportunities that the University has in 2019. The ones that are on the way that haven't been launched are mostly around technology and then health care. So for example, we have Master's of Science in nursing that's coming. We have a Bachelor's of Science in cyber and data security technology that's on its way. Bachelor's of Science in web design and mobile app technology, a Master's of Science in health and information – informatics and analytics. So those programs, especially the technology and health care programs have already been successful in 2018 in ways in which we hadn't predicted. They've exceeded our own internal expectation. So I think we're pretty bullish on how they can contribute to 2019.

[Unidentified Analyst:]

Thank you for taking my questions, congratulations.

[Andrew Clark:]

Yes, thanks again Chris.

[Operator:]

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

[Andrew Clark:]

We would like to thank all of today's callers for your interest in Bridgepoint Education, and for your participation on the call today.

[Operator:]

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