Zovio Inc
Q1 2016 Earnings Call Transcript

Published: 3 May 2016

[Operator:]

Good afternoon and welcome to Bridgepoint Education’s First Quarter 2016 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Ms. Katie Sweet, VP, Corporate Communications and Investor Relations, Bridgepoint Education. Please go ahead.

[Katie Sweet:]

Thank you, Catlane, and good afternoon. Bridgepoint Education’s first quarter 2016 earnings release was issued earlier today and is posted on the company’s website at www.bridgepointeducation.com. Joining me on the call 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 enrollments, student persistence and graduation rates, bad debt, pending legal matters, other financial and related guidance, the impact of our student support efforts, our ability to manage regulatory metrics and commentary regarding 2016 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 measures. In our earnings release, you will find additional disclosures regarding non-GAAP measures, including reconciliations of these measures with U.S. GAAP. Note that these non-GAAP 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 period ended March 31, 2016, which is 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, Katie. Good afternoon, everyone, and welcome to Bridgepoint Education’s first quarter 2016 earnings call. After I discuss our first quarter, our CFO, Kevin Royal will review our first quarter financials and key operating metrics. After Kevin’s speak, I’ll offer my closing comments. I’m pleased to report that 2016 is off to a good start. First, as I have previously discussed, we are focused on returning to new enrollment growth through an expanded and differentiated product offering. To that end, we successfully launched three new programs in the first quarter of 2016. Due to the early enrollment success, we have had in our new programs from 2015, we will take our efficiency gains at admissions and marketing and reinvest them throughout the year into our expanding new program portfolio. We believe the strategic new program investments that we began in 2015 and are continuing in 2016, will provide new enrollment growth in both the short and the long-term. Second, while we continue to operate in a difficult external environment, we are starting to see tangible results that are planned coupled with our core operating principles of high-quality and strong execution is beginning to yield positive results. Third, we remain focused on increasing shareholder value by aligning our cost structure with our total enrollment, continuing to generate positive free cash flow, and constantly review our cash requirements in areas to invest in, in order to improve our shareholder return. This is a continued focus and priority for the company, and it’s the topic of discussion with our Board on a quarterly basis that received a significant amount of attention. Our new enrollment in the first quarter of 2016 exceeded new enrollment in the same period of the prior year by mid single-digits. In addition, our total enrollment was up from the fourth quarter of 2015 by slightly more than 3%. The new programs added in 2015 have a total enrollment of almost 900 students as of the end of the first quarter. The majority of the Q1 sequential growth was driven by an increase in enrollments in the Forbes School of Business. We have not experienced sequential growth in total enrollment since the first quarter of 2014, and we are encouraged to see it return. We also continue to make progress in our Leadership Development Grant or LDG program. The LDG program is designed to leverage the tuition assistance benefits provided by our corporate partners in order to provide a debt-free education to their employees. During the first quarter of 2016, we added eight new LDG partners to the program for a total of 72 at the end of Q1. Student enrollment in the program continues to increase with LDG enrollment of just over 2,000 at the end of the first quarter of 2016, compared to approximately 800 at the end of the first quarter of 2015. Ashford has always differentiated itself through an emphasis from the affordability of tuition and efforts to keep its breath to its debt levels below national averages. The LDG program makes it possible through a combination of employer contributions and scholarships from Ashford for students to earn their degree with no student debt. We are proud the institution offers a program that creates so much value for its students. Turning to retention, Ashford’s cohort retention rate is 62.2% for the first quarter of 2016 compared with 64.2% at the end of the first quarter 2015. While the retention rate is down year-over-year, it has increased from the fourth quarter of 2015 cohort retention rate by 98 basis points. We believe that the continued strong job market as well as increased competition have impacted retention as compared to the prior year’s quarter. While our current cohort retention rate is within our historical range of 60% to 66%, we continue to place a strong emphasis on increasing student retention through various initiatives that effort has taken to assure student preparedness, raise academic quality, and improved student outcomes. Now, I would like to turn the call over to our Chief Financial Officer, Kevin Royal to review our financial and operating results.

[Kevin Royal:]

Thank you, Andrew. Let me begin by providing some key operating figures for the quarter ended March 31, 2016. For the first quarter of 2016, revenue was $133 million compared with revenue of $142.5 million for the same period in 2015. The decrease is primarily due to the decrease in average enrollment of 10.4% between periods. As of March 31, 2016, total student enrollment was 50,814 compared to 55,322 as of March 31, 2015. For the first quarter of 2016, instructional costs and services were $69.6 million, or 52.3% of revenue compared to $75 million, or 52.7% of revenue for the first quarter of the prior year. The decline in instructional costs and services from the same quarter in the prior year is due to lower compensation and benefits of $2.2 million, lower facilities costs of $2 million, lower information technology costs of $1.3 million, and lower instructor fees of approximately 600,000. These declines were partially offset by higher bad debt expense of $1.2 million in Q1 of 2016. Included in instructional costs and services for the first quarter of 2016 was bad debt expense of $9.6 million, or 7.2% of revenue. The first quarter followed a pattern similar to 2015, our bad debt in the first quarter and the third quarters were higher than in the second and fourth quarters. We expect that pattern will continue and that the full-year percentage for bad debt should be consistent with 2015 levels. Admissions, advisory and marketing expenses for the first quarter of 2016 were $51.7 million, or 38.9% of revenue, compared to $52.3 million, or 36.7% of revenue for the first quarter of the prior year. The decrease in expense is primarily due to lower facilities costs of $1 million. General and administrative expenses for the first quarter of 2016 were $13.5 million, or 10.1% of revenue, compared to $16.3 million, or a 11.5% of revenue for the first quarter of the prior year. The decrease in G&A is primarily due to lower compensation costs of $2.3 million and lower depreciation expense of $1.4 million, partially offset by an increase in facilities costs of $800,000. Included in our three main expense categories for the first quarter of 2016 is approximately $2.3 million related to stock-based compensation expense. As disclosed in previous 10-Qs as well as in our 10-Q filed earlier today, we have been in discussions with the California Attorney General and the Consumer Financial Protection Bureau. These discussions are continuing and during the first quarter of 2016, we recorded an accrual of $13.9 million, which represents our current best estimate of the cost of a joint resolution. Due to the confidential nature of these discussions, we will have no further comments regarding this matter on today’s call. In the first quarter of 2016, we also had restructuring and impairment charges of $700,000, neither of these type of charges occurred in the first quarter of 2015. For the first quarter of 2016, non-GAAP operating loss, which excludes restructuring and impairment charges and the above referenced legal approval was $1.7 million, compared to non-GAAP operating loss of $1.2 million for the same period in 2015. The non-GAAP net loss for the first quarter of 2016 was 900,000, or a loss of $0.02 per diluted share, compared to a loss of 400,000, or a loss of $0.01 per diluted share for the comparable period in the prior year. The effective tax rate used to calculate the tax benefit for the quarter ended March 31, 2016, is 35.2%. As of March 31, 2016, the company had combined cash, cash equivalents, restricted cash and investments of $351.9 million, which is compared to $374 million as of December 31, 2015. The company used $17.2 million of cash in operating activities during the three months ended March 31, 2016. By comparison, the company generated $7.4 million of cash from operating activities during the same period in 2015. The usage of cash in operating activities was primarily due to the increase in accounts receivable and the decline in deferred revenue and accrued liabilities during the first quarter of 2016. Net accounts receivable balance was $34.2 million as of March 31, 2016, compared to $24.1 million as of December 31, 2015. Our deferred revenue was $82.4 million as of March 31, 2016, compared to $88.8 million as of December 31, 2015, and our accrued liabilities declined by $8.3 million, due to the timing of payments related to payroll related items. Capital expenditures for the first quarter of 2016 were $300,000 compared to $1.6 million in the first quarter of the prior year. Now, I will turn the call back over to Andrew for his closing comments.

[Andrew Clark:]

Thank you, Kevin. To summarize, we see 2016 as a pivotal year, both for near and long-term growth at Bridgepoint, focusing on a high-quality, well-differentiated, broader product offering has produced two straight quarters of new enrollment growth, improved quarterly retention, and total enrollment. The external environment is challenging, but we continue to focus on the needs of our students and operational excellence. As a result, our current year plan includes investments around the student experience and developing new highly differentiated degree programs that will increase our ability to compete effectively and grow over the near and long-term. To support this, we will be increasing our marketing to bring awareness of the new degree programs and the overall value proposition of a degree from our institutions. Over the next quarter, we will continue to pursue these initiatives and implement others, if necessary. I look forward to sharing the results with you in the future. At this time, I will ask that our operator open the phone lines for your questions.

[Operator:]

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

[Peter Appert:]

Thank. So, Andrew, you highlighted the Leadership Grant program and Forbes’s as drivers of enrollment. Any other examples that you could call out in terms of the newer programs that are moving the needle for you, or examples of these new programs you have talked about in terms of the ones that might be pending here over the balance of the year?

[Andrew Clark:]

Yes. Sure, Peter, that’s an excellent question. We – actually in those 2015 programs that I mentioned where we have 900 students, all of those programs are graduate programs. We had a graduate program, for example, on accountancy, also a graduate program in psychology, just to name a couple of them. So I’m hopeful that as we continue to gain traction in those programs, in addition to the new one that came on Board in the first quarter this year and through the remainder of the year that we continue to see our graduate student population become a larger part of our overall student population.

[Peter Appert:]

And, I guess, that that actually addresses. My second question was – which was the revenue per student number, as I’m calculating was up pretty nicely on a year-to-year basis. I assume that’s because of the increased graduate students?

[Andrew Clark:]

Yes, the increased graduate students, I think contributed to that revenue per student in our last quarter and have the same effect again this quarter.

[Peter Appert:]

Okay, because the interesting thing is, if the Leadership Grant program obviously comes at lower revenue per student. So it’s a fairly significant impact when I guess from the – these newer programs. Have you done – have you tweaked the pricing?

[Andrew Clark:]

Yes. So beginning April 1 of last year, we did implement a 2% tuition increase. So part of that that nice increase in revenue per student is a result of that tuition increase that was implemented at the beginning of the second quarter of 2015.

[Peter Appert:]

Got it. You’ve not done a similar increase this year?

[Andrew Clark:]

No, we have a similar increase again this year, which goes into effect April 1 this year.

[Peter Appert:]

Okay. And, Andrew, can you comment at all on the visibility and start trends going into the second quarter, or even just sort of how the facing might go over the balance of 2016?

[Andrew Clark:]

Well, I’m a little bit hesitant, Peter, because it’s always a little bit uncertain because of the challenging in the external environment has been for everyone. However, I guess, the best way to address your question is the success we’ve had in the new programs that I talked about has given us confidence to reinvest our marketing efficiency gains back into the opportunity to really take market share essentially through this broader portfolio programmatic offering. So I think that kind of gives you a sense of our view about the opportunity in the future quarters.

[Peter Appert:]

So and then I thought this will be the last one, I’ll let someone else speak. The – when you mentioned reinvestment of the marketing efficiency is not sure exactly how to interpret that in terms of how that might flow through the income statement. Does that suggest you might be willing to operate at lower level of profitability than you might otherwise?

[Andrew Clark:]

Yes, what I suggest is, I think if you read that through on the standard as a percentage of revenue for the advisory advertising and marketing line. You’re going to see that up a little bit versus last year. Now, some of that is related to the decline in revenue and just the smaller revenue base. But some – a good portion of it is based upon our confidence and our ability to gain some market share, both in the short and the long-term through these expanded programs that we’re offering.

[Peter Appert:]

So up on a year-to-year basis, not necessarily up sequentially?

[Andrew Clark:]

Correct, correct.

[Peter Appert:]

Got it. Thank you.

[Andrew Clark:]

Yes, thank you.

[Operator:]

Your next question comes from the line of Corey Greendale from First Analysis. Your line is open.

[Ken Wang:]

Thank you. This is Ken Wang on for Corey. Thanks for taking my question.

[Andrew Clark:]

Yes.

[Ken Wang:]

So just wondering, if you could speak a little bit about any trends you’ve seen in scholarships were discounting?

[Andrew Clark:]

Ken, are you talking from a broader sector standpoint or…?

[Ken Wang:]

Just I think for a Bridgepoint in particular, has there been any higher level of scholarships, or discounting that you’ve been offering, or broader commentary be helpful as well.

[Andrew Clark:]

Sure. Well just for a Bridgepoint, I mean, we really haven’t gone out there and offered any kind of more aggressive type of scholarshipping. I did highlight for you the continued success of our strategic partnership group in the Leadership Development Grant. And as we have more students take advantage of that, as I mentioned, we scholarship the difference between the tuition reimbursement provided by the corporate partner in our tuition for that given year. So we’ve seen that scholarship line tick up slightly, and I think in large part due to the success that we’re having in that particular program.

[Ken Wang:]

Thanks. And just wondering also, are you seeing any enrollment benefits from other schools in the space that have kind of hit hard times and gone out of business?

[Andrew Clark:]

Not that I’m aware off. I don’t even have any anecdotal examples of that happening. I think, again, our success has been driven off of the new programs we’ve introduced the Forbes School of Business and our leadership development program, I think are he three main drivers.

[Ken Wang:]

Okay, thanks. It’s helpful. And maybe just one more for me, admissions, advisory and marketing expense, look like it was close to flat year-on-year, give any insight on what we should expect for the rest of 2016?

[Kevin Royal:]

Yes. So based on the outlook in kind of our current planning, we would expect that for the balance of the year have a slight uptick and that just represents the reinvestment of our – kind of our efficiency into our A&M efforts as Andrew had previously mentioned.

[Ken Wang:]

Thank you.

[Andrew Clark:]

Yes, thank you.

[Operator:]

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

[Christopher Howe:]

Hi, this is Chris Howe sitting in for Alex Paris. And I just had a question surrounding the tax benefit in the quarter. Was that mainly attributable to the tax refund that you had discussed in the previous quarter?

[Kevin Royal:]

That’s correct. The charge that we took associated with the legal accrual basically put us in a situation of the taxable loss and puts us in the position where we can capture carry that loss back to a previous period and actually recapture some taxes that were previously paid. So that’s exactly right and the reason that we booked the benefit in period.

[Christopher Howe:]

Okay, thank you. That’s helpful. And then, if I may, how do you see taxes mapping out for the remainder of the year? Is it pretty consistent with the prior year? Is that how you would model it out?

[Kevin Royal:]

So, I think, the right way to think about the taxes is at about a similar rate to what we bought in Q1. So we benefited pre-tax by a certain rate, if we have taxable income, we will record taxes at that same rate for a given quarter.

[Christopher Howe:]

Okay, that’s helpful. Thank you.

[Kevin Royal:]

Thanks, Chris.

[Operator:]

We have no further questions at this time. I’ll turn the call back over to the presenters.

[Andrew Clark:]

Thank you, operator. This concludes our presentation. A replay of the call will be accessible later today at the telephone number and passcode listed in our press release or on our website. We’d like to thank all today’s callers for your interest in Bridgepoint Education and for your participation on the call today.

[Operator:]

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