Zovio Inc
Q1 2017 Earnings Call Transcript

Published: 2 May 2017

[Operator:]

Good afternoon and welcome to Bridgepoint Education's First Quarter 2017 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 for Bridgepoint Education. Please go ahead.

[Anna Davison:]

Thank you, Kristine and good afternoon. Bridgepoint Education's first quarter 2017 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 the remainder of 2017 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 reports on Form 10-Q for the quarter ended March 31, 2017, 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 S. Clark:]

Thank you Anna and welcome to Bridgepoint Education's first quarter 2017 earnings call. After I discuss our first quarter our Chief Financial Officer, Kevin Royal will review our first quarter financial results and key operating metrics. After Kevin speaks I will offer my closing comments. On our past few earnings calls I had mentioned that I was pleased with our progress in 2016 and I'm happy to report that, that progress has continued into our first quarter of 2017. As I discussed on prior calls we have been evaluating the mix of spend in our various advertising channels and during the fourth quarter of 2016 we began spending less of our advertising dollars in the affiliate channel and are shifting to channels that have demonstrated improved student retention. In anticipation of this shift in advertising spend and resulting lower new enrolment, we formulated a plan to reduce spending and improve profitability. Partially as a result of this change and in line with our expectations, our new enrollment for the first quarter of 2017 was down by high single-digits when compared to the first quarter of 2016. Also in line with our plan we continued to exercise disciplined expense management which has allowed us to achieve lower spending both in terms of absolute dollars and as a percentage of revenue and we are seeing improved profitability even with a slight decline in revenue. As a result of changes in our advertising strategy as well as our focus on expense management, our non-GAAP operating income increased to 9.7 million in the first quarter of 2017 compared to our non-GAAP operating loss of 1.7 million in the first quarter of 2016. We also continue to strengthen our partnerships with employers. The LDG program is designed to assist our corporate partners in offering education options that can help them develop, retain, and grow the skills of their employees. During the first quarter of 2017 we added 11 new LDG partners to the program for a total of 105 partners. Student enrollment in the LDG program continues to increase and LDG enrollments were up approximately 1300 students which is an increase of nearly 70% as compared to the same quarter a year ago. As a reminder these students tend to retain at a significantly higher rate than the rest of our student population. Turning to retention, Ashford annual cohort retention is 60% for the first quarter of 2017 which was slightly lower than the 62% reported for the first quarter of 2016. As a reminder, our historical range has been in the low to mid 60's and we continue to place a strong emphasis on increasing student retention. In order to improve our student retention we are focused on increasing our graduate degree program offerings and increasing our corporate partnership students through the leadership development grant program. In addition as mentioned previously we are shifting our advertising spend to channels that have demonstrated improved student retention. As we discussed in our last earnings call, we have three key focus areas for 2017 and beyond, closing the skills gap, closing the learning gap, and closing the transparency gap. First we will discuss closing the skills gap. Employers and industries need higher education institutions to align education and program outcomes with the skills students need to be successful in today's jobs. We will help address this by continuing to develop new programs at Ashford University focusing on increasing programs in critical areas of need. We are also offering new alternatives that can help individuals quickly enhance skills in a particular area. An example is the launch of the new Forbes Bootcamp series by Ashford University during the first quarter of 2017. Forbes Bootcamps are skill based education offerings for individuals seeking to expand their skills and knowledge in a specific subject matter. These non-credit offerings allow participants to quickly sharpen in demand, hard and soft skills, while also developing business expertise. The first online module offering under the Forbes Bootcamp series is the content marketing bootcamp presented in two, three week phases. Future bootcamp subjects will address the specific areas today's businesses need including relevant business learning for finance, information technology, and more. We are focused on ways to help close the learning gap. As we discussed last quarter while there's been an ongoing focus on improving access to education for individuals who want to attend college, these efforts must now be accompanied by new approaches to help all students achieve success in learning and degree completion. We are helping support student success through several important initiatives like our On Demand tutoring programs. These tutoring offerings are aimed at helping students be more successful in the classroom which we believe will improve both student learning outcomes and retention. We continued these pilot programs over the last quarter for some of our most challenging courses, offering students access to free on demand tutoring all online 24 hours a day. The initial findings have been positive specifically our pilot courses have seen a reduction in overall drop rate, a reduction in fail rates, and an increase in overall pass rate. Additionally students have logged over 14,000 tutoring sessions since the pilot began and on a scale of one to five students have given these sessions an average rating of 4.89. We also continue our implementation of a new learning management system or LMS which we have launched to our first group of students in the first quarter of 2017. The new LMS will allow us to further enhance our ability to deliver knowledge and engage students in a dynamic online learning environment. The robust mobile platform provides an enhanced student experience and truly reflects the needs of our students allowing them to access the system from their phone or tablet anywhere at any time. Our third area of focus is on closing the transparency gap. The consumer information currently available for higher education institutions must be upgraded to provide a more accurate picture of the complex U.S. higher education landscape and better enable students to make informed decisions. The majority of data available today reflects only traditional students attending traditional institutions. Our institutions support a diverse student body and current data does not always accurately reflect the needs of their individual education journey. Students need information that provides more accurate comparisons for different student populations. For example using iPad data our Institutional Research Services Department found that for masters degrees awarded to Black African American students in the 2014-2015 academic year, Ashford University awarded over 3000 degrees which was more than the two largest historically black colleges and universities combined. We continue to be committed to serving a diverse student population and the programs and student success initiatives we have in place are helping these students reach their academic goals. We will continue to drive our efforts in these three focus areas going forward and believe our work in these areas will provide long-term benefits to our students and our stakeholders. Now I will 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 March 31, 2017. For the first quarter revenue was 129.5 million compared to the revenue of 133 million for the same period in the prior year. The decrease was primarily due to lower average weekly enrolment. As of March 31, 2017 total enrolment was 46,383 compared to 50,814 as of March 31, 2016. For the first quarter of 2017 instructional cost and services were 63 million or 48.7% of revenue compared to 69.6 million or 52.3% of revenue for the comparable period of the prior year. The decrease as a percentage of revenue was primarily driven by a decrease in instructor fees related to lower enrolment and lower facilities costs. Included in instructional costs and services for the first quarter of 2017 was bad debt expense of 9.3 million or 7.2% of revenue compared with 9.6 million or 7.2% of revenue in Q1 2016. Admissions, advisory, and marketing expenses for the first quarter of 20147 were 44.8 million compared to 51.7 million for the comparable period of the prior year. As a result of our continuing shift in advertising mix we realized savings in our admissions advisory and marketing expenses of 6.9 million when compared to Q1 of 2016. There's reduction in advertising costs to reduce our costs of student acquisition by 6% and reduced our total marketing cost as a percentage of revenue by approximately 430 basis points when compared to the same period in the prior year. As we continue to refine the mix of our advertising spend, we expect admissions, advisory, and marketing expense as a percentage of net revenue to gradually decline. General and administrative expenses for the first quarter of 2017 were 12 million or 9.3% of revenue compared to 13.5 million or 10.1% of revenue for the comparable period of the prior year. The decrease as a percentage of revenue was primarily driven by lower labor costs, partially offset by higher professional fees. Including our three main expense categories for the first quarter of 2017 is approximately 900,000 related to stock based compensation expense. We did not have any legal settlement expenses or restructuring and impairment charges in the first quarter of 2017 compared to 13.9 million of legal settlement expenses and 700,000 of restructuring and impairment charges recorded in the first quarter of the prior year. Net income for the first quarter of 2017 was 9.9 million for income of $0.23 per diluted share compared with net loss of 10.1 million or a loss of $0.22 per diluted share for the comparable period in 2016. Our tax provision for the quarter was lower than we had anticipated. During the quarter we recognized a portion of our deferred tax assets that would be available to reduce the 2017 tax liability. We anticipate a fairly low effective tax rate for the year with the exception of Q2 2017 where we estimate our tax privilege [ph] to be approximately 1.6 million. The lower tax rate during Q1 2017 contributed approximately $0.08 to our earnings per share for the first quarter. The non-GAAP net income for the first quarter of 2017 was the same as net income of 9.9 million or income of $0.23 per diluted share compared to a non-GAAP net loss of 900,000 or a loss of $0.02 per diluted share for the first quarter of 2016. Non-GAAP net loss for the first quarter of 2016 excluded legal settlement expenses of 13.9 million and restructuring and impairment charges of 700,000 as well as the related income tax impacts. As of March 31, 2017 the company had combined cash, cash equivalents, restricted cash from investments of 216.7 million compared to 381.8 million as of December 31, 2016. On March 10, 2017 the company repurchased approximately 18.1 million shares of its common stock for 150 million and 11.6% discount to market portals on the date immediately prior to the date of the repurchase. The company used 11.5 million of cash and operating activities during the three months ended March 31, 2017. By comparison the company used 20.5 million of cash in operating activities during the same period in 2016. The net accounts receivable was 32.9 million as of March 31, 2017 compared to 26.5 million as of December 31, 2016. Our capital expenditures for the three months ended March 31, 2017 were 1.3 million as compared to 300,000 for the same period last year. Now I'll turn the call back over to Andrew for his closing comments.

[Andrew S. Clark:]

Thank you, Kevin. At the end of our last earnings call I provided our high level of view of how we think 2017 and 2018 will work. I noted that we believe 2017 should be a foundational year for future growth in 2018 and beyond as we continue to make investments and stamped another degree program that are aimed at helping the 36 million unskilled Americans and narrowing the skills gap. As I previously stated anticipated revenue will be lower in 2017 by lower to mid single-digits due to our deliberate strategy to diversify our various marketing channels and reduced percentage of new students to come from the affiliate channel. As demonstrated in the first quarter of 2017 we will continue to be disciplined about expense management which should grow our non-GAAP EBITDA 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 and earnings in 2018 and beyond. At this time I will ask our operator to open the phone lines for your questions.

[Operator:]

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

[Peter Appert:]

Good afternoon. Maybe I can just start with a couple of financial questions for Kevin. First on the tax rate Kevin, the deferred tax benefit, does that get used up in 2017 or some continuing benefits going forward?

[Kevin Royal:]

There are additional deferred taxes that could contribute to a tax reduction in future periods. Right now our deferred tax assets are fully reserved so those don't show up on the balance sheet. So if we saw a situation where we could take advantage of the deferred tax asset as a deduction it would offset any cash taxes to be paid. You would see the deferred tax asset then show up on the balance sheet and it would offset as it did in the current period, it would offset income tax expense.

[Peter Appert:]

Okay, understood that but maybe you could help us just in terms of actual cash taxes paid in 2017, what will that look like, is it just the basically the 1.6 million in the deminimus amounts in other quarters?

[Kevin Royal:]

That is correct. That is correct, so the deminimus amount in Q1 is AMT -- minimum tax. We've got a potential discrete item in Q2 that would drive that 1.6 million and then you would have similar AMT taxes in Q3 and Q4 and the combination of those are approximately $1.9 million, we estimate would drive the cash taxes paid for 2017.

[Peter Appert:]

Thank you and then on the revenue per student number, I am recalling that you had one less start there I think in the fourth quarter, does that flow over to the first quarter and therefore distorts them higher?

[Kevin Royal:]

The revenue per student was slightly higher partially for the impact that you described as well as lower mix of military students in the first quarter as well. And then we also had a tuition increase in the second quarter last year which would cause the revenue per student to be a little bit higher this year in Q1 versus Q1 of 2016.

[Peter Appert:]

How should we think about revenue per student over the balance of the year?

[Kevin Royal:]

So I would think about it as probably flat to slightly down as we increase our mix of LDG students and as we drive higher component of military students as a percentage of the total.

[Peter Appert:]

Okay, and then just maybe for Andrew on the enrolment numbers, just sort of your sense of, I'm not sure how to think about this but maybe mix of students, where you're seeing strength, I mean you call that the LDG obviously, are there any problematic areas that are stronger or weaker that are noteworthy?

[Kevin Royal:]

Yeah, thanks Peter. You know so, I wouldn't say there's problematic areas that are stronger or weaker. They have been pretty consistent. Of course LDG as you noted definitely continues to be a highlight for us. I think one thing that I would want to point out about our new enrollment and our strategy here around the affiliate channel is that our student inquiries year-over-year were down about over a third but you see that our new enrolments were down just high single-digits which implies of course a significantly higher conversion rate. So I think that's kind of the real highlight Peter in the quarter, is that the strategy that we began to employ at the really the beginning of Q4 of last year is working effectively and as we intended.

[Peter Appert:]

Do you think following on that maybe that as you annualize that as we get to the fourth quarter of 2017 would that be when you might expect to see the numbers turning positive?

[Kevin Royal:]

Yes, it is a great question. So yes, the way I think about it, new enrollment declines are going to be steepest in the next two quarters because of when we began this strategy and how we employed it. And so you don't get to a full anniversary until Q4 of this year and so yet, in the fourth quarter I'm not sure that we'll see growth. If we have a decline in the enrolments in Q4 I would expect it to be relatively small. So I'd say kind of best case flat to slightly negative in the fourth quarter.

[Peter Appert:]

Okay, great, I will let someone else ask some questions. Thanks.

[Operator:]

[Operator Instructions]. There are no more questions. This concludes our question-and-answer session. I will now turn the call over to Andrew Clark for any closing remarks.

[Andrew S. Clark:]

Thanks operator. We would just like to thank you for your interest in Bridgepoint Education and for your participation on the call today.

[Operator:]

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