Zovio Inc
Q4 2016 Earnings Call Transcript

Published: 8 Mar 2017

[Operator:]

Good afternoon and welcome to Bridgepoint Education's Fourth 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, Mike, and good afternoon. Bridgepoint Education's fourth 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; Kevin Royal, Chief Financial Officer; and Dr, Jane McAuliffe, Chief Academic 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 future periods. 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 included in our Annual Report on Form 10-K for the period ended December 31, 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 website. 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 fourth quarter 2016 earnings call. After I discuss our fourth quarter, our Chief Academic Officer, Dr. Jane McAuliffe will provide you with the results of our annual alumni survey. After Jane, our Chief Financial Office, Kevin Royal, will review our fourth quarter financial results and key operating metrics. After Kevin speaks, I will offer my closing comments. On our last three earnings calls, I have commented on how pleased I was with our progress in 2016. I am happy to report that this has continued into our fourth quarter. You will recall that on our second quarter 2016 earnings call, we described how we were evaluating the mix of advertising spend in our various advertising channels. And during the fourth quarter of 2016, we continued to concentrate less of our advertising spend in the affiliate channel. Partially as a result of this change, our new enrollment for the fourth quarter of 2016 was down by low double-digits when compared to Q4 of 2015. However, new enrollment in Q4 2016 was also adversely impacted by the number of weeks in the November enrollment month compared to 2015, which caused fewer starts in 2016 in comparison to 2015. On a comparable basis, including the same number of enrollment weeks in both November enrollment periods, new enrollment in Q4 2016 would have been down by low single-digits when compared to Q4 of 2015. As a result of our shift in advertising mix, we realized savings in our Admissions, Advertising and Marketing expense of approximately $3.5 million when compared to Q4 of 2015. As we continue to refine the mix of our advertising spend, we expect Admissions, Advertising and Marketing expense as a percentage of net revenue to gradually decline throughout the year. Total enrollment for both institutions at the end of Q4 2016 was down by high single-digits when compared to the end of Q4 of 2015, primarily as a result of our decision to concentrate a lower amount of our advertising spend in the affiliate channel. Even with the lower enrollment performance, we are pleased with our financial performance in the fourth quarter of 2016. We continue to be disciplined in our expense management. In addition, we continue to make progress in our leadership development grant program, or LDG. This program is designed to leverage tuition assistance benefits provided by our corporate partners and provide a debt-free education to their employees. During the fourth quarter of 2016, we added nine new LDG partners to the program for a total of 94 partners at the end of Q4 2016. Student enrollment in the LDG program continues to increase and LDG enrollments were up by over 1,000 students as compared to the same quarter a year ago. Turning to retention, Ashford's annual cohort retention is 60% for the fourth quarter of 2016 as compared to the 61% reported for the Q4 of 2015. Our historical range for cohort retention has been in the low to mid-60s 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, raise academic quality and improve student outcomes. We have launched a number of initiatives to improve the quality of our students' experiences. We are currently in the process of enhancing our student experience through the implementation of a new learning management system, or LMS. This new state-of-the-art LMS system will allow us to further enhance our ability to deliver knowledge and engage students in a dynamic online learning environment. It also offers a robust mobile platform, allowing students and faculty to access the system from their phone or tablet anywhere at anytime. In addition, we’ve been running pilot programs on a number of online, on-demand tutoring solutions aimed at helping students be more successful in the classroom, which we will believe will improve both student learning outcomes and retention. Finally, during the quarter, we moved our financial aid processing in-house in order to improve the process, making it easier for students to know when to expect their financial aid. We believe this will improve our students’ on-boarding progress and enhance the overall student experience. As we look forward, we have several focus areas for 2017 and beyond. The past decade has seen major policy and regulatory changes in higher education driven in part, by the needs of the changing economy and pressure on the system to respond in the areas of cost, quality, innovation, funding and the needs of the growing nontraditional student demographic. During the period, workforce development needs in America have also seen enormous change. The shift to a knowledge-based economy is changing. What is being demanded and required by today's employers. And almost half of employers in the United States report they are not able to find individuals with the skills and education they need to fill open positions, leading to a skills gap of over 5 million jobs. The question remains, what must be done to help more individuals attend college and obtain the skills they need to be competitive in the global marketplace and improve their lives? Bridgepoint Education and our institutions, Ashford University and the University of the Rockies, remain committed to advancing economic opportunity for all of those who we serve. To help the needs of today's nontraditional learner, we have identified three primary areas of focus that will be our priority going forward. Our first area of focus will be closing the skills gap. Today job is required new skills and education. We will work with employers and industries to create a new talent pipeline that aligns education and program outcomes with the skills students will truly need to be successful. We will also continue to develop new programs at Ashford University focusing on increasing programs in critical areas of need, leading to credentials that matter and which will help promote both an individual's and our country's competitiveness. We understand the importance of offering programs that create value and opportunity for our students. For example, our roadmap for new programs includes multiple STEM programs and will support the need for increased diversity and innovation in those fields. Over 70% of our students are women, and these programs will provide opportunities for women studying at our universities to pursue degrees in these STEM areas. Our second area of focus will be closing the learning gap. There has been an ongoing focus on improving access to education for individuals who want to attend college, and these efforts must now be accompanied by new approaches to help all students achieve success in learning and degree completion. National studies show that while access and participation in higher education have increased over the last few decades, major gaps in college attainment for minorities and low income students continue. It's incumbent upon all institutions of higher education to prioritize inclusion and diversity of their student bodies, creating economic opportunities for all and not just a chosen few. Ashford is committed to this cause, and data from the Integrated Postsecondary Education Data System, otherwise known as IPEDS, report for students graduating in 2014-2015 showed that Bachelor's degrees awarded to black African American students at Ashford University during 2014 and 2015 comprised 30% of all Bachelor's degrees awarded at Ashford, which was a higher proportion than the average of over 2,300 four-year institutions in the data set. Ashford also has the second highest total number of Bachelor's degrees awarded to black African American students at four-year institutions in the United States. We will continue our support of a diverse student body and strive to provide students with new forms of learning that move beyond traditional education and degrees and ultimately enable them to succeed in the workplace and close the income gap. Our third focus area will be closing the transparency gap. The U.S. higher education landscape is complex. The data commonly used to describe and compare the performance of higher education institutions are outdated, as they are designed for traditional students attending traditional institutions. To be truly transparent and reduce confusion, the consumer information currently available for all institutions must be updated and reflect the needs of today's society and the types of students an institutions serves. We will work with a cross-section of stakeholders to help identify new consumer information that can be provided to students on all institutions in a consistent format so that they can make informed decisions. These three focus areas will drive our efforts going forward and provide the framework for evaluating and sharing our results with our stakeholders. As always, we remain focused on creating a student experience that supports student goals and outcomes, innovating in ways that lead to more differentiated institutions, and attracting and retaining students with the best possibility of achieving their academic goals. It is our belief that these priorities will provide long-term benefits to our students and our stakeholders. Now I'll turn the call over to Dr. Jane McAuliffe.

[Jane McAuliffe:]

Thank you, Andrew. Ashford remains committed to initiatives that assist in ensuring student preparedness, raising academic quality, improving student outcomes, and supporting alumni. Our 2016 Ashford Alumni Survey, which we have done for the last seven years, shows that our efforts are resulting in strong quality outcomes and consistent satisfaction from our students. The following results reflect over 5,100 students who responded to the Alumni Survey in 2016. Of the 73% of alumni who reported having previously attended a traditional institution, 89% feel the quality of education at Ashford is the same as or higher than a traditional college or university. 89% of our graduates said they would recommend Ashford to others, and 86% indicated they were satisfied or very satisfied with their Ashford experience. 86% of our alumni agreed that earning their degree from Ashford gave them confidence in pursuing new job opportunities. And finally, 88% agreed that earning their Ashford degree was worth the time commitment required to fulfill their educational goal. We also asked our alumni about how they view their return on investment in their education, as measured by their self-reported salary before and after attending Ashford. Based on alumni survey responses collected in 2016 from our Bachelor's degree earners, we estimate that the average salary of these alumni is 18% greater than the average salary they were earning when they first enrolled at Ashford. Based on alumni survey responses collected in 2016 from our graduate degree earners, we estimate that the average salary of these alumni is 18% greater than the average salary they were earning when they first enrolled at Ashford. Based on alumni survey responses collected in 2016 from our Bachelor's degree earners, we estimate that the average salary of these alumni is 20% greater than the average salary they were earning when they first enrolled at Ashford. The consistency of the survey results from both 2015 and 2016 continue to affirm the quality education an Ashford degree is providing and the positive return on investment it is creating for our alumni. We are pleased with the value our alumni are seeing in attending Ashford and proud of the benefits an Ashford degree is bringing to the lives of our alumni and their families. 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, Jane. Let me begin by providing some key financial and operating information for the quarter ended December 31, 2016. For the fourth quarter of 2016, revenue was $119.5 million compared with revenue of $131.4 million for the same period in 2015. The decrease is primarily due to lower average weekly enrollment year-over-year driven primarily by our decision to reduce advertising spending in the affiliate channel. As of December 31, 2016, total student enrollment was 45,087 compared to 49,159 as of December 31, 2015. For the fourth quarter of 2016, instructional costs and services were $63.8 million or 53.3% of revenue compared to $65.8 million or 50.1% of revenue for the comparable period of the prior year. The increase as a percentage of revenue was primarily driven by an increase in bad debt expense, offset by decreases in facilities costs and IT expenses. The increase in bad debt expense in the fourth quarter is a result of transitioning financial aid processing from our outsource processor, Xerox Business Services, to an in-house solution. During this transition, we experienced a temporary slowdown in our financial aid processing which resulted in higher bad debt expense, but has since been rectified. Included in instructional costs and services for the fourth quarter of 2016 was bad debt expense of $9 million or 7.5% of revenue. Admissions, Advisory and Marketing expenses for the fourth quarter of 2016 were $45.4 million or 38% of revenue compared to $48.9 million or 37.3% of revenue for the comparable period of the prior year. While Admissions, Advisory and Marketing expenses were higher as a percentage of revenue in Q4 2016 compared with the same period of the prior year, we are pleased with the reduction of $3.5 million that we achieved in Q4 2016. General and administrative expenses for the fourth quarter of 2016 were $12.1 million or 10.2% of revenue compared to $13.7 million or 10.4% of revenue for the comparable period of the prior year. The decrease in total dollars as a percentage of revenue and 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 $1.6 million related to stock-based compensation expense. For the fourth quarter of 2016, we also recorded restructuring and impairment charges of $16.5 comprised primarily of lease exit costs for properties in San Diego, as well s impairment of the related assets. This compares to the $9 million of restructuring and impairment that was recorded in the fourth quarter of the prior year. Our nest loss for the fourth quarter of 2016 was $13.8 million, for a loss of $0.30 per diluted share compared with net loss of $6.7 million or loss of $0.15 per share for the same period in 2015. The non-GAAP net loss for the fourth quarter of 2016 was $700,000 or earnings of $0.001 per diluted share compared to a non-GAAP net income of $2 million or earnings of $0.04 per diluted share for the fourth quarter of 2015. Non-GAAP net income for the fourth quarter of 2016 excludes restructuring and impairment charges of $16.5 million as well as the related income tax impacts. As of December 31, 2016, the Company had combined cash, cash equivalents, restricted cash and investments of $381.8 million, compared to $374 million as of December 31, 2015. The Company had $11.1 million in cash provided by operating activities during the 12 months ended December 31, 2016 By comparison the Company had $18.8 million in cash provided by operating activities during the same period in 2015. Our capital expenditures for the 12 months ended December 31, 2016 were $1.9 million as compared to $2.5 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. In closing I want to provide our high level view for how we think 2017 and 2018 will look. Our view is that 2017 should be a foundational year for future growth in 2018 and beyond, as we continue to make investments in STEM and other degree programs that are aimed at helping the 36 million unskilled Americans in narrowing the skills gap. We anticipate revenue will be lower in 2017 by low to mid single-digits, due to our deliberate strategy to diversify our various marketing channels and reduce the percentage of new students that come from the affiliate channel. However, we will continue disciplined expense management, which should grow our EBITDA profitability by low to mid double-digits from 2016 to 2017. Our strategic investments will focus on consistency of the student experience to ensure the best possible student outcomes and innovating in ways that lead to more differentiated institutions that attract and retain students with the best possibility of achieving their academic goals. We believe these strategic priorities, some of which we began in 2016, will produce high quality enrollment revenue at earnings in 2018 and beyond. At this time, I’ll ask our operator to open the phone line for your questions.

[Operator:]

[Operator Instructions] Your first question is from Peter Appert from Piper Jaffray.

[Peter Appert:]

Thanks. Good afternoon. So Andrew just speaking on the expectations on 2017 for a second, can you talk a little bit – or maybe this is for Kevin about the drivers of EBITDA growth, in context of the revenue design I’d suggest you’re going to continue to be pretty aggressive on the cost side, just give a little more specifics on that or is some of [indiscernible] restructuring charges?

[Andrew Clark:]

So Peter, I’m having a hard time hearing you. You’re kind of breaking up a little bit. I think you were asking around – about some of the drivers around our growth and profitability is that correct?

[Peter Appert:]

Yes, that’s correct. And I just wanted to be sure that you’re not counting in the absence of restructuring charges as a growth driver?

[Andrew Clark:]

Yes. So when we look at the growth and profitability, that's primarily coming from the efficiency that I talked about, Peter in the AANM line that will gradually occur throughout the year.

[Kevin Royal:]

Peter, this is Kevin. Could you repeat your question related to the restructuring costs and how we are viewing those? I'm not sure I quite understood.

[Peter Appert:]

Yes, I just want to understand your based EBITDA number for 2016 as you think about the comparison, are you including the restructuring charges in that base number?

[Kevin Royal:]

Yes, both the current and future periods excludes restructuring charges.

[Peter Appert:]

Okay, great. Thank you for that. And then persistence has been down, obviously as you’ve highlighted, can you just talk about how you’re thinking about the ability to improve the persistence numbers and when we might see some [level into] that?

[Andrew Clark:]

Yes. I think from the perspective of the persistence are retention numbers. They have kind of bounced around throughout the year. We’ve had quarters that they’ve been positive and some quarters where they’ve been slightly negative. We continue to look at ways in which we can improve those. I talked about this on-demand tutoring that we’ve been experimenting with. Peter, we’ve been doing it over the last couple quarters and our preliminary data suggests that helps both in student learning outcomes as well as student retention. So that's probably just one small example of what we are doing. I think as we continue to diversify in our new programs with more graduate programs that certainly will also help in terms of our overall retention number that we report. But that will take some time. You wouldn’t see that until towards the end of 2017.

[Peter Appert:]

Thank you. And Andrew, any additional visibility on potential uses of your growing cash balances?

[Andrew Clark:]

Yes. I don’t have any color on that for you today, Peter kind of what we’ve consistently said which is that we’re evaluating our usage of cash with our Board every single quarter and we will do that again this quarter.

[Peter Appert:]

Okay. And then last thing from me, I noticed the bad debt expense has been going up for the last several years which is actually sitting in contrast to some of your peers. I am wondering, what do you think the drivers of that are and if there is any expectation you might be able to manage that debt down going forward?

[Kevin Royal:]

Peter, this is Kevin. It is true that we had higher bad debt expense in 2016 when you compare to 2015. We had a couple quarters where we experienced delays in packaging that was Q1 and Q4. That caused our bad debt expense to be higher in those two quarters and really drove the overall increase for the year. As I mentioned in my prepared remarks, we’ve now transitioned away from our outsource provider for financially packaging. We brought that in-house. We‘ve got all of our process in current and we firmly believe that having that in-house and being current with our packaging moving forward will help us control and reduce our bad debt expense as we move forward.

[Peter Appert:]

Okay, great. Thanks very much.

[Andrew Clark:]

Thank you, Peter.

[Operator:]

[Operator Instructions] The next question is from Alex Paris from Barrington Research.

[Christopher Howe:]

Hi, good afternoon. This is Chris Howe sitting in for Alex Paris. I know it’s early in the administration right now, but have you noticed any improvement at the DOE under the new administration? 8 plus programs were held up last year, I think 11 announced and two or three were later approved. Has there been any positive movement of yet?

[Andrew Clark:]

Yes. Chris, I appreciate your question. I think as you identified, it’s early and so I think based on how early it still is, it would be difficult for me to comment. I can't say that I really noticed any changes in particular at the department so far.

[Christopher Howe:]

Okay. Thank you for taking my question. End of Q&A

[Operator:]

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

[Andrew Clark:]

All right. We’d like to thank everybody for your interest in Bridgepoint Education and for your participation in today’s call.

[Operator:]

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