Zovio Inc
Q3 2018 Earnings Call Transcript

Published: 10 Nov 2018

[Operator:]

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

[Dori Abel:]

Thank you and good afternoon. Bridgepoint Education's third 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 the performance of our marketing strategy, new enrollments, operating margin improvements, education of partnerships and other programs and services, new program enrollment growth, our ability to affect the planned separation and conversion, and its timing and impact, tax rate, cash, expenses, other financial and related guidance, 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 September 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, Dori, and welcome to Bridgepoint Education’s third 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. For the third quarter of 2018, we reported revenue of 114.9 million and diluted income per share of $0.16, excluding restructuring and impairment charges of 1.2 million, separation transaction costs of 2.6 million and the impact of tax benefit of 0.2 million, non-GAAP income per share was $0.29. Before I comment on new enrollment for the quarter, I want to provide some color on how our marketing strategy is performing. This quarter we continued to improve the media mix and add more students from our education partnerships. As a result, the proportion of new enrollment from homegrown sources for Q3 2018 was 88% up from 83% in Q3 2017. While our new student enquiries were purposely down 11% in the third quarter year-over-year, our conversions applications were up meaningfully, even more significant, however, was our enrollment service advisor workforce was 20% lower year-over-year. As a result, our enrollment services team productivity was approximately 19% higher than last year. Overall, our costs for new enrollment continued to trend downward during the third quarter on a year-over-year basis, further demonstrating our more efficient marketing spend. Our marketing strategy is producing efficiencies and attracting better performing students, which is underscored by our increased student retention, which I will also discuss shortly. Turning to new enrollments, despite dramatic efficiency gains from our marketing strategy, enrollments were down mid-single digits due to several operational items. First, in an effort to improve student on-boarding and retention Ashford made some curricular changes in its initial courses, which impacted the first course students take. As a result, this affected the matriculation rate and negatively impacted new enrollment and as such they’re reevaluating the shift. Second, the decision was made to not operate as many start date for courses for new students during the quarter, which reduced the number of new enrollments. This decision has since been reversed during the fourth quarter to ensure a similar number of start dates for courses as in the prior year. Third, as a result of the merger of the students and programs of the University of Rockies into Ashford there were certain disruptions in new enrollments; while we have addressed many of these items and expect new enrollments to improve. We anticipate new enrollments for the fourth quarter to be flat to slightly down. Importantly, while we've experienced some uneven new enrollment trends over the last 18 months our continued focus on improving efficiency and reducing operating costs has delivered substantial expansion in our overall profitability. Year-to-date, GAAP net income year-over-year grew by approximately 47% despite lower top line revenues. We continue to believe our efforts will continue to drive year-over-year improvement and our operating margins going forward. As I mentioned earlier, the growth of our educational partnerships remain strong and this group continues to be a key driver of our success. Our Full Tuition Grant program which uses tuition assistance benefits provided by our corporate partners to provide a debt free education to their employees continues to gain traction, as a popular option for full time workers, looking to start or continue their degrees. During the third quarter of 2018, we added 16 new Full Tuition Grant partners to the program. Student enrollment from full tuition grant was up approximately 48% as compared to enrollments the same quarter a year ago, while enrollment in our Full Tuition Grant programs has grown to approximately 15% of total enrollments up from approximately 10% of total enrollments a year ago. While each and every partner is critical to this program, in September, we were particularly pleased to announce our partnership with U.S. Xpress Enterprises. U.S. Xpress Enterprises publicly rolled out Full Ride a first-of-its-kind college scholarship program for company truck drivers and their families in partnership with Ashford University. By adopting this groundbreaking program, the Company hopes to not only providing meaningful benefits to its existing employees but also to attract new employees that might not have previously considered driving a truck. Through the U.S. Xpress Full Ride scholarship, U.S. Xpress will cover a 100% of tuition for a BA or MA at Ashford University. Cover two members of the drivers’ family at one time which could either be the Company driver and a dependent or two dependents of the Company driver. This could translate into two or more free degrees for each U.S. Xpress driver. These programs continue to be well-received by both employers and employees alike and that highlights the value of partnering with employers to offer program that will allow their employees to pursue further education in a cost friendly manner. We continue to anticipate students enrolled in these programs to become a meaningful percentage of our overall mix. As we continue to raise awareness of and expand our corporate partnerships. Another key focus areas for us continues to be our commitment to expanding the breadth of our product offering, mainly at the graduate degree level to help meet the demands of today's workforce, through the end of October, Ashford launched an additional two new programs. These two programs were in the area of IT including web design and cyber security. In total over the past 11 months, Ashford has launched 14 of the 16 programs previously approved by the Department of Education just one year ago. Enrollments in these new offerings have continued to exceed our internal expectations and as of the end of the third quarter represented approximately 3% of total enrollment. Ashford plans to roll out the remaining programs during the fourth quarter of 2018, and we will continue to invest in marketing efforts to support these new programs. Going forward, we expect to see continued growth from these programs in 2019, particularly in our IT related programs. As we have stressed in the past, retaining quality students from a diverse range of backgrounds and helping them succeed is our ultimate goal. Ashford’s annual cohort retention was 59.1% as of the end of the third quarter of 2018, up from 58.2% as of the end of the third quarter of 2017. Again, this continued improved retention for the third quarter despite some of the macro headwinds that we continue to face is a testament to the strength of our model and the effectiveness of our improved marketing strategy in seeking high quality students. Before I turn the call over to Kevin, let me quickly touch on the pending transactions. As discussed on the second quarter call, we previously received approval from WASC to merge University of the Rockies at Ashford University, and we recently received approval by the Department of Education as well to move the programs from the University of the Rockies to Ashford. As we work towards completing the move of the students to Ashford, we also continue to work on the separation of Ashford University from Bridgepoint and the subsequent conversion of Ashford into a non-profit University. We are currently awaiting approval from WASC to convert Ashford from a non-profit institution to an independent, non-profit institution, which we anticipate will be notified in December. Following the WASC approval, we would then need the IRS approval for the non-profit entity as well as the Department of Education approval, which we anticipate will be late in the first quarter…. [Technical difficulty]

[Operator:]

This is the lead operator. Please stand by while we’re waiting for the presenters to join back in. Sorry for the delay.

[Andrew Clark:]

Okay, so my apologies. It sounds like we lost everybody there. I’m going to try and pick up where I think I left off and then turn it over to Kevin. As I was saying, as we worked toward completing the move of Ashford -- of students to Ashford, we also continue to work on the separation of Ashford University from Bridgepoint and the subsequent conversion of Ashford into a non-profit university. We are currently awaiting approval from WASC to convert Ashford from a for-profit institution to an independent non-profit institution, which we anticipate we will be notified in December. Following the WASC approval, we would then need the IRS approval for the non-profit entity as well as the Department of Education approval, which we anticipate will be late in the first quarter of 2019. Looking forward, we’re excited for the opportunity ahead of us. We believe Bridgepoint offers a differentiated value proposition powered by predictive data and analytics that will further bolster our abilities to succeed as the technology services company for higher education institution. As we have said in the past, our expertise lies in serving adult, graduates and undergraduate students. While there is substantial opportunity at graduate level, the undergraduate arena remains a relatively untapped opportunity. As you can see by the strength of Ashford's program, we understand that the needs of students in higher education field are constantly changing and we want to ensure that our product offerings are flexible enough to meet those needs and help our students be successful. We are working hard to develop our strategy to leverage our strong foundation built on a scale, efficiency and expertise to serve the individual needs of our future clients. 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 September 30, 2018. Revenue for the third quarter 2018 was 114.9 million compared to revenue of 119.4 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 third quarter of 2018, instructional costs and services were 54.5 million or 47.4% of revenue, compared to 57.8 million or 48.4% of revenue for the comparable prior period. The decrease in absolute dollars and the improvement as a percentage of revenue was primarily driven by lower bad debt expense. Bad debt expense in the third quarter 2018 was 6.8 million or 5.9% of revenue compared to 7.5 million or 6.3% of revenue for the comparable prior period. The bad debt improvement was primarily a result of implementing the new revenue recognition standards in the current year. Admissions advisory and marketing expenses for the third quarter 2018 were 41.9 million or 36.5% of revenue compared to 43.7 million or 36.6% of revenue for the comparable prior period. This decrease reflects the continued shift in our marketing strategy to improve the cost and effectiveness of our student acquisition costs. General and administrative expenses for the third quarter 2018 were 13.7 million or 12% of revenue compared to 11.4 million or 9.6% of revenue for the comparable prior period. The increase as a percentage of revenue was primarily driven by higher legal and professional fees which include approximately 2.6 million of cost in the quarter relating to the planned conversion and separation, partially offset by lower headcount. The incremental professional fees will continue in alignment with the conversion timeline. We recorded approximately 1.2 million of restructuring and impairment charges in the third quarter of 2018 which is primarily due to lease charges as well as severance charges. There were 8 million of restructuring and impairment charges recorded in the third quarter of the prior year. Net income for the third quarter of 2018 was 4.3 million or net income of $0.16 per diluted share. This is compared to net income of 39,000 or essentially a breakeven net income per diluted share for the third quarter of 2017. We recorded a tax benefit of 0.4 million for the third quarter of 2018. We continue to anticipate nominal annual effective tax rate for the full year of 2018. We anticipate our annual tax rate in 2019 before any discrete items to be approximately 25%. Our non-GAAP net income for the third quarter of 2018 was 8 million or income of $0.29 per diluted share compared to the non-GAAP net income of 7.5 million or income of $0.25 per diluted share for the third quarter of 2017. Non-GAAP net income for the third quarter of 2018 excluding restructuring and impairment charges of 1.2 million separation transaction costs of 2.6 million, as well as the impacts of tax benefit of 0.2 million. As of September 30, 2018, we had combined cash, cash equivalents restricted cash and investments of 190.7 million compared to 207.6 million as of December 31, 2017. We used 10.7 million of cash in operating activities for the nine months ended September 30, 2018 compared to 16.7 million of cash in operating activities during the same period in 2017. The year-over-year decrease in cash used in operating these was primarily driven by an increase in the 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. The net account receivable balance was 33.6 million as of September 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 September 30, 2018 were 1.7 million as compared to 2.9 million in the same period last year. The third quarter continued to deliver strong financial performance. As Andrew mentioned, we expect the new enrollment to be flat slightly down in the fourth quarter compared to the prior year. For admissions advisory and marketing expense, we expect the spend in Q4 to be consistent with the prior year as a percentage of revenue. In addition in the fourth quarter, 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 costs associated with the plan conversion separation. Now, I'll turn the call back over the Andrew for his closing comments.

[Andrew Clark:]

Thank you, Kevin. In closing, the future is bright for Bridgepoint, Ashford and its students. We remain steadfast in our focus to further strengthen Ashford to improve student retention to grow new and eventually total enrollments and to create a more efficient cost structure. And currently, we are diligently working to establish the foundation for the future as Bridgepoint transitions towards technology services company that can serve the evolving needs of its all graduates and undergraduate students to constantly enhance and enrich their experience and outcomes. We remain confident that the goals and framework that we’re establishing will generate meaningful long-term value for all of 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. Alex your line is now open.

[Alex Paris:]

I have a couple of follow-up questions. First, on the new enrollments, you explained essentially three reasons for it to be short of what you had previously expected, curricular changes in the first course, the December start dates and then the merger. So you kind of went to that quickly or kind of quickly for me, with regard to the first point, the curricular changes in the first course you don’t count first course as new enrollment, you don’t start counting second course is that it?

[Andrew Clark:]

No, we count students that complete the first course, Alex. So, the curricular changes led to higher percentage of students either dropping out in that first course, so not making it all the way through to completing that first course, so they’ve been dropped out of the new enrollment number.

[Alex Paris:]

And what’s the nature of this first course?

[Andrew Clark:]

Certainly, an introductory course that the University does and it’s focused as you would expect on adult learners who have who have been out of college for some period of time and we’re constantly -- the University is constantly looking for ways in which we can better support and help those learners kind of readapt to going back to school, to going to college. And so, this was a well intention adjustment that the university made to try and further enhance that and help those students in their first course. It just didn't have the intended impact that they hoped for.

[Alex Paris:]

Sounds like you scared them off.

[Andrew Clark:]

Well, I am not sure that we scared them off, but we’re definitely -- the University is taking another look at the changes that were made, and we'll see if we can better identify kind of why folks didn't complete that first course at a similar rate as to before the changes were made and see if we can then rectify that.

[Alex Paris:]

And then moving on, you reduced the number of certificates, that decision has already been reversed. Is that the way you said it?

[Andrew Clark:]

Yes, so we have reversed that. We were able to reverse it partly into fourth quarter here. So, it didn't get reversed for all the start in the fourth quarter, but we have been able to reverse it. So that some of the remaining start in the fourth quarter have the same number of start opportunities that they would have last year.

[Alex Paris:]

And then the last point, the merger of Ashford and Rockies created certain disruptions. Can you elaborate?

[Andrew Clark:]

Yes, its' just a transition between the program that the Rockies, Ashford, and I really would emphasize of the three areas that was the smallest contributor, really the start changes and particular changes we’re the majority of it. But we’re dealing with -- generally speaking Alex, even for fourth quarter, it’s a small, relatively small number of students compared to the entire quarter that can move things you either positive or negative, so the sensitivity is kind of high and that’s why even though the Rockies was a small contributor, its nonetheless the less contributing.

[Alex Paris:]

Okay, and then you guided for the fourth quarter is flat to slightly down, if you achieve that flat to slightly down, what would be your expectations for Q1?

[Andrew Clark:]

Well, again, I think we've identified the operational items and we continue to work through those and our expectation is that we should have new enrollment growth in 2019. And we certainly are in the midst of working through those plans with the University, around the expectations that they are going to have for new enrolling growth next year, and what they will ask us as their provider to do for them. So, we haven’t finalize those plans, but I know that in the drafting of them that we do see a path to new enrollment growth beginning in the first quarter and beyond.

[Alex Paris:]

And then, with regard to increase retention that’s in process of big improvement and improvement in the last nearly 100 basis points year-over-year. Would you expect those that trend -- is that a one quarter trend or is that -- I don’t think you had an improvement in retention last quarter?

[Andrew Clark:]

Actually, our retention has been kind of steadily improving now kind of small amount each of the last three quarters, and then I think this quarter was really the largest bump, that we’ve seen, but we’re really pleased about much of what we’ve done in terms of the whole marketing strategy to attract and retain a better academically prepared students. We believe it's starting to show itself in improved retention of students going forward. So, we’re of course doing some other things using data analytics for early student intervention when we see a student that is struggling academically and both from the student advisor as well for faculty side of things. But the marketing strategy is also playing a significant role in that. So I think our retention should continue to improve in future quarters.

[Alex Paris:]

Thank you and then I guess you've got two last questions and then I will get back into the queue. On October 31, you've actually merged Ashford University and the Rockies after getting approval earlier. What sort of -- I would assume there's some cost savings to expect in 2019 versus 2018. Care to quantify that or at least give us some color or qualitative sort of response?

[Kevin Royal:]

Yes, Alex, we should see savings associated with that merger on a full year basis of about $2 million.

[Alex Paris:]

So, on a full year basis in 2019 versus 2018, even though you switched with 2 months left to go, you expect a net pickup of $2 million year-over-year?

[Kevin Royal:]

That's correct.

[Alex Paris:]

And then the last one is charges. Charges for restructuring and impairment at $3.8 million year-to-date, costs associated with separation of $0.9 million if I did my math correctly. What should we expect in terms of charges in the fourth quarter even with the restructuring and impairment, but more specifically separation?

[Kevin Royal:]

Alex, we're having a little difficulty hearing you. Can you repeat the question?

[Alex Paris:]

Sure. I was taking about the charges that you've been incurring year-to-date. What sort of charges should we expect in the fourth quarter, particularly those with regard to the separation?

[Kevin Royal:]

We had, as we called out in our earlier comments, we had $2.6 million we reported in Q3 and right now our forecast includes a very similar amount, I think $2.5 million for Q4.

[Alex Paris:]

Okay. So that's for separation. Do you anticipate any other restructuring impairment charges in the fourth quarter?

[Kevin Royal:]

I don't anticipate other restructuring charges in the fourth quarter.

[Alex Paris:]

Okay, great. Pleased to see the improved earnings and pleased to see the improved retention. I'll get back into the queue. Thank you.

[Operator:]

Our next question comes from the line of Peter Appert from Piper Jaffrey.

[Kevin Estok:]

This is Kevin Estok in for Peter. I've just got one question. It's just about the long-term pricing outlook for BPI. I was wondering if you could describe that a little bit. I know you had a tuition increase a bit ago, but I guess how should we think about it long term?

[Andrew Clark:]

I think the university has indicated that their tuition pricing would probably be in line with what they've historically done which has been more in the kind of 1% to 2% range. It was a little higher in 2018, but I think if you think about them in 2019 and beyond, they have indicated to us that that's kind of their comfort zone.

[Operator:]

And this concludes our question and answer session. I will now turn this call over.

[Andrew Clark:]

Does Alex want to ask a follow-up, operator?

[Operator:]

Oh, actually I am seeing yes, Alex Paris has a follow-up question.

[Alex Paris:]

Maybe a couple of others. So the full time, the Full Tuition Grant program is now 15% of the total. I think that was your target for yearend, so you got there a little bit before we expected. My question, oh, and then you added 16, so what does that put us at, 176? I think you were at 160 at the end of Q2.

[Andrew Clark:]

Yes, I think that's approximately right, yes.

[Kevin Royal:]

That's correct.

[Alex Paris:]

And then, how about the tuition benefit program, I think there's over 400 corporate customers there. What percentage of total enrollment is that today?

[Andrew Clark:]

You know what, I think it's about another approximately 5%, Alex. I'll double check that number. If you look at FTG and then the tuition benefit, it's about 20% combined of total enrollment as of right now.

[Alex Paris:]

And then let's see -- the last question I have is, any update on the VA? We haven't talked about that in a while.

[Andrew Clark:]

No, there's no real update on the VA. Other than we continue to cooperatively work with them to find a solution. So, those conversations are ongoing and I'm hopeful that we can get to a solution sooner rather than later.

[Alex Paris:]

As would I. Is there a court date set in the Federal Circuit Court? Obviously, you're trying to work in good faith with them around that impending date, but at some point, there's a date for a court hearing, correct?

[Andrew Clark:]

Yes, at some point there will be a court date set for that. But we don't have one at this point. It probably would be sometime in the first quarter of next year and I'm just kind of guessing on that.

[Alex Paris:]

Okay. Then I guess the very last question, new programs. You've launched 14 of 16, you expect to get the other 2 launched by the end of the year. I would assume, given that these are better than expected performance so far, 3% of the total today, this ought to gain momentum and become a bigger percentage of the total in 2019, and help drive student enrollment in 2019. Is that the right way to think about it?

[Andrew Clark:]

Yes, that's definitely the right way to think about it. I mean we're really pleased that it's already 3% of our total enrollment. As you know, Alex, many of these programs just got launched at the beginning of the year. So I think that portends a lot of good things in terms of the new programs and their further contribution to new and total enrollment in 2019 and beyond.

[Alex Paris:]

Great. Well, thank you very much for that. Appreciate it.

[Operator:]

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

[Andrew Clark:]

Thank you, everybody for attending today's call. I appreciate your interest in Bridgepoint Education.

[Operator:]

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