Zovio Inc
Q3 2016 Earnings Call Transcript

Published: 9 Nov 2016

[Operator:]

Good afternoon, and welcome to Bridgepoint Education's Third Quarter 2016 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 of Bridgepoint Education. Please go ahead.

[Anna Davison:]

Thank you, Heidi, and good afternoon. Bridgepoint Education's third quarter 2016 earnings release was issued earlier today and is posted on the company’s Web site 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 the remainder of 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 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 period ended September 30, 2016, 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 Web site. At this time, it is my pleasure to introduce Bridgepoint Education's CEO, Andrew Clark.

[Andrew Clark:]

Thank you, Anna, and welcome to Bridgepoint Education's third quarter 2016 earnings call. After I discuss our third quarter, our CFO, Kevin Royal will review our third quarter financial results and key operating metrics. After Kevin’s speak, I will offer my closing comments. On our last two earnings calls, I’ve commented on how pleased I was that 2016 was off to a good start. I’m happy to report that this momentum has continued into our third quarter and I am pleased with our results. As we announced on our second quarter earnings call, we have been evaluating the optimum mix of advertising spend in our various advertising channels and during the third quarter of 2016, we began concentrating less of our advertising spend in the affiliate channel. As a result of this change and also as a result of not enrolling new VA students for a portion of the quarter, our new enrollment performance for the third quarter of 2016 and total enrollment at the end of Q3 2016 were down by low-single digits when compared to Q3 of 2015. In order to provide new enrollments on a comparable basis, excluding VA new student enrollments in both Q3 2015 and Q3 2016, new enrollment in Q3 2016 would have grown by low-single digits when compared to Q3 2015. Even with the lower enrollment performance, we are pleased with our financial performance in the third quarter of 2016. The new programs added in 2015 and in the beginning of 2016 are primarily graduate programs and have a total enrollment of approximately 1,400 students, as of the end of the third quarter of 2016. We also continued to make progress in our Leadership Development Grant program. The LDG program is designed to leverage tuition assistance benefits provided by our corporate partners and provide a debt free education to their employees. During the third quarter of 2016, we added eight new LDG partners to the program for a total of 85 at the end of Q3 2016. Student enrollment in the LDG program continues to increase and LDG enrollments were up approximately 1,000 students as compared to the same quarter a year ago. Turning to retention, Ashford’s annual cohort retention rate was 61.6% for the third quarter of 2016, which has improved from the 60.1% reported for Q3 2015. We have continued to enhance our efforts around student retention. As a reminder, our historical range is 60% to 66% and we continue to place a strong emphasis on increasing student retention. To support this, Ashford continues to focus on initiatives to assure student preparedness, increased academic quality and improved student outcomes. Last month, we received the Department of Education’s draft gainful employment debt to earnings rate. Based on the draft rate, none of our programs fail under the gainful employment regulations and two of our current programs fall into the zone. We will continue to review the information provided by the Department of Education. While we do currently operate in a challenging and sometimes unpredictable external environment, we remain focused on our universities and the students we serve. As we have discussed over the last year, the company is committed to three main goals. First, we’re focused on stabilizing and restarting enrollment growth; second, on improving admissions and marketing efficiency; and third, on increasing shareholder value. Regarding enrollments, we continue to focus on diversification of our portfolio of program offerings primarily at the graduate degree level and will continue to seek opportunities to differentiate our schools like we have done with the Forbes School of Business. Ashford has added several new programs and others are in various stages of development or in the approval process. We currently offer approximately 78 degree programs. Our strategy for new enrollment growth this year was predicated on the strategic broadening of new programs throughout 2016. I commented previously that we would reinvest marketing efficiencies to support the new programs rolled out throughout the year. However, a slower new program launch has dampened our expectations for growth for the remainder of the year. We do see promising growth from our Leadership Development Grant program and we are strengthening our investment in that program. Second, on the cost side, we’re focusing on improving admissions and marketing efficiency as well as effectively controlling costs in all areas. We've been evaluating the optimum mix of advertising spend in our various advertising channels and as discussed last quarter, we will be concentrating a lower amount of our marketing spend in the affiliate channel moving forward. We believe this is a valuable change and will ensure our marketing and enrollment resources are focused on recruiting students that have a higher probability of being academically successful. As a result of this refinement of our strategy, we are experiencing lower near-term enrollment in revenues but the change should ultimately provide better retention and a higher return on investment on an individual student basis. Finally, we remain focused on improving shareholder return and we continue to evaluate options for doing so within our capital structure and the current industry environment. Our priority is the long-term health of the company and we are committed to protecting our financial position and ability to invest in future growth. Moving forward, we will continue to implement these initiatives as well as to find others. I look forward to sharing the progress of our efforts. Now, I’ll turn the call over to Kevin Royal, our Chief Financial Officer, 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, 2016. For the third quarter of 2016, revenue was 136.6 million compared with revenue of 140.8 million for the same period of 2015. The decrease is primarily due to lower average weekly enrollment year-over-year of 4.4%. As of September 30, 2016, total student enrollment was 47,831 compared to 49,982 as of September 30, 2015. For the third quarter of 2016, instructional costs and services were 64.1 million or 46.9% of revenue compared to 69.2 million or 49.2% of revenue for the comparable period of the prior year. The decrease as a percentage of revenue was primarily driven by a decrease in bad debt, facilities costs and IT expenses. Included in instructional costs and services for the third quarter of 2016 was bad debt expense of 7.6 million or 5.6% of revenue. Admissions, advisory and marketing expenses for the third quarter of 2016 were 52.6 million or 38.5% of revenue compared to 47.8 million or 34% of revenue for the comparable period of the prior year. The increase as a percentage of revenue was primarily driven by advertising costs and selling compensation, partially offset by lower facilities costs. General and administrative expenses for the third quarter of 2016 were 11.6 million or 8.5% of revenue compared to 13.3 million or 9.5% of revenue for the comparable period of the prior year. The decrease as a percentage of revenue was primarily driven by lower IT consulting and facilities costs. Included in our three main expense categories for the third quarter of 2016 is approximately 1.4 million related to stock-based compensation expense. During the third quarter of 2016, we recognized 16.8 million of legal settlement expenses. Of this amount, 14.8 million was related to reaching a settlement with the Consumer Financial Protection Bureau stemming from the civil investigative demands that were issued in 2015. For the third quarter of 2016, we also recorded restructuring and impairment charges of $365,000 comprised primarily of remaining charges associated with the closure of the residential campus in Clinton, Iowa. This compares to 44.9 million of restructuring and impairment that was recorded in the third quarter of the prior year. Our net loss for the third quarter of 2016 was 9.5 million or a loss of $0.20 per diluted share compared with net loss of 62.7 million or a loss of $1.37 per diluted share for the same period in 2015. The non-GAAP net income for the third quarter of 2016 was 4.2 million or earnings of $0.09 per diluted share compared to a non-GAAP net income of 6 million or earnings of $0.13 per diluted share for the third quarter of 2015. Non-GAAP net income for the third quarter of 2016 excludes a legal accrual of 16.8 million and restructuring charges of 365,000 as well as the related income tax impacts. As of September 30, 2016, the company had combined cash, cash equivalents, restricted cash and investments of 357.4 million which is compared to 374 million as of December 31, 2015. The company used 8.9 million cash in operating activities during the nine months ended September 30, 2016. By comparison, the company generated 16.6 million in cash from operating activities during the same period in 2015. The net accounts receivable balance was 30.6 million as of September 30, 2016 compared to 24.1 million as of December 31, 2015. Our capital expenditures for the nine months ended September 30, 2016 were 1.6 million as compared to 2.3 million in the same period last year. Now, I will turn the call back over to Andrew for his closing comments.

[Andrew Clark:]

Thank you, Kevin. As Kevin mentioned earlier, during the third quarter we reached a settlement with the Consumer Financial Protection Bureau. This resolution is consistent with our desire to eliminate regulatory uncertainty and we are pleased to have this matter behind us. We continue to see 2016 as a pivotal year both for the short-term and long-term growth at Bridgepoint. Focusing on a high-quality, well-differentiated, broader product offering has continued to produce improved financial results. With our recent decision to partially redirect our advertising spend away from the affiliate channel, we may not be able to continue to grow new enrollments in the near term; however, we do believe this decision is the best for the organization over the long term. In addition, we continue to focus on disciplined cost management in the current operating environment. It is my belief that these actions, coupled with strong operational excellence, will lead to market share gains over the long term. 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 Peter Appert with Piper Jaffray. Your line is open.

[Peter Appert:]

Thanks. So, Andrew, you talked a little bit about slower program rollout possibly impacting growth. Can you just expand on that a little bit more?

[Andrew Clark:]

Yes. Peter, our programs have gone through an accreditation approval and are currently sitting at various stages at the Department of Education. So we’re basically kind of waiting for those programs to work themselves through the Department’s processes.

[Peter Appert:]

So to get back to positive start growth putting aside the changes in the marketing strategy, you need to get these approvals presumably?

[Andrew Clark:]

Getting those approvals definitely would be helpful to our new enrollment growth. As I indicated in my opening comments, if you excluded VA enrollment in Q3 of '15 as well as '16, we did have positive new enrollments in the low-single digits. So, interestingly, you can tell from that that while still early, our shift in our affiliate strategy did not have a significant impact to our new enrollment for us during the quarter.

[Peter Appert:]

So how does that connect then with you comment about new enrollments may potentially be down on a near-term basis?

[Andrew Clark:]

Well, as I’ve just said, we just started that change during the third quarter on our affiliate and that continues through kind of mid second quarter of '17. So I would anticipate as we move through that that there would be the opportunity for some volatility and some decline in new enrollment growth on a year-over-year basis.

[Peter Appert:]

Got it. And then just a couple more, I don’t want to hog everything here. Can you just remind me where we are in terms of reinstating your involvement with VA?

[Andrew Clark:]

As you’ve probably recall, we went to the Iowa courts and they issued an injunctive release order and so it’s sitting there with the Iowa courts and it will go through that process, which we estimate would take about approximately 10 months.

[Peter Appert:]

Okay. But you’re still precluded from recruiting while that process continues?

[Andrew Clark:]

No. I’m glad you asked that. I want to make sure that you understand that we voluntarily decided not to recruit VA students in the third quarter. With the court’s decision, we decided to begin recruiting VA students again. We felt that with the court order in place, it was appropriate to allow interested VA students to be able to pursue their education with Ashford, especially when we believe that they really appreciate the quality of the education, the tools and the support that Ashford has in place to help our VA students be successful.

[Peter Appert:]

So in the fourth quarter, there will theoretically be some intake of VA students?

[Andrew Clark:]

Yes, that’s correct.

[Peter Appert:]

Got it.

[Andrew Clark:]

In the fourth quarter, yes.

[Peter Appert:]

In the fourth quarter, right. Okay. All right, I’ll let someone else ask some questions. Thanks so much.

[Operator:]

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

[Andrew Clark:]

If you want to let Peter ask another question, that’d be good.

[Operator:]

Certainly. Mr. Appert, your line is open.

[Peter Appert:]

Okay. I’m back.

[Andrew Clark:]

You’re back, Peter.

[Peter Appert:]

In terms of the recent operating losses at least on a GAAP basis, Kevin, maybe you could address how that impacts the financial responsibility score? Is that something that we should be focused on?

[Kevin Royal:]

Yes. So the financial responsibility score has three different areas; two are financial condition and one would be related to operating results. And our balance sheet is quite strong as you know of about 356 million in cash. So we will not come close in order to dropping below the required composite score for the year. So even with those losses, we’ll still have a very strong composite score.

[Peter Appert:]

Got it. And in terms of the evolving marketing strategy, how should we think about this in the context of the near-term trend in just the admission, advisory and marketing expense line?

[Andrew Clark:]

So over time – so we are moving away from the affiliate channel and concentrating more of our spend in the higher quality affiliate leads as well as other sites of lead generation. Over time, you’ll see our advertising as well as the related labor cost associated with converting those leads decline.

[Peter Appert:]

Okay. But on a near-term basis, presumably it does represent some incremental expense?

[Andrew Clark:]

That’s right. On a near-term basis, the declines will be relatively minimal and we’ll see the significant impact will be in 2017.

[Peter Appert:]

Right. Okay. So in '17 theoretically, advisory and marketing expenses might decline a little bit?

[Andrew Clark:]

That is correct. That’s our current plan.

[Peter Appert:]

Got it. And Andrew, is it possible to venture a guess in terms of when you might see an inflection in total enrollments?

[Andrew Clark:]

It’s possible to venture a guess. I guess I would qualify it. I think that would occur towards the end of 2017. It could obviously occur earlier depending upon how those new programs eventually get released and the timing of that. But I think it’s probably appropriate to say towards the end of '17 at this point.

[Peter Appert:]

Okay, great. I appreciate all the insights. Thanks so much.

[Andrew Clark:]

Thank you, Peter.

[Operator:]

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

[Andrew Clark:]

All right. Well, we’d like to thank everyone for their interest in Bridgepoint Education and for your participation on today’s call.

[Operator:]

Thank you. This concludes our presentation. A replay for this call will be accessible later today via telephone.