Zovio Inc
Q2 2017 Earnings Call Transcript

Published: 26 Jul 2017

[Operator:]

Good afternoon and welcome to Bridgepoint Education's Second 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 June 30, 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 Clark:]

Thank you Anna and welcome to Bridgepoint Education's second quarter 2017 earnings call. After I discuss our second quarter our Chief Financial Officer, Kevin Royal will review our financial results and key operating metrics. After Kevin speaks I will offer my closing comments. On our past few earnings calls I discussed that 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 channels and are shifting to channels that have demonstrated improved student retention. As a result, our new enrollments were down 21% during the quarter. However, our combined media and admissions related labor spend were down 21.7% during the quarter and our lead conversion improved by 410 basis points when compared to the same period in the prior year. In addition 70% of our students came from our homegrown channels during the current quarter compared to 60% in the prior year. As planned we have experienced declines in new enrollment in the past few quarters as we execute on the strategy to shift our advertising spend away from the affiliate channels. As I mentioned in our last call we anticipated that partially as a result of this change we would see our steepest decline in enrollments in Q2 and Q3 of this year. Based on our current outlook we expect new enrollment in the fourth quarter 2017 to be flat to slightly down to the new enrollment level we experienced in the fourth quarter 2016. In addition in anticipation of the shift in advertising spend and resulting lower new enrollment, we formulated a plan to reduce spending and improve profitability. We are seeing results in line with those plans and we continue to exercise disciplined expense management which has resulted in lower spending in terms of absolute dollars and allowed us to maintain profitability similar to the prior year despite lower revenue levels. As a result of changes in our advertising strategy as well as our focus on expense management, our non-GAAP net income was $6.3 million in the second quarter 2017 compared to our non-GAAP net income of $5.8 million in the second quarter 2016. We also continue to strengthen our partnerships with employers. During the second quarter of 2017 we added 11 new leadership development grant partners to the program for a total now of 116 partners. Student enrollment in the LDG program continues to increase and LDG enrollments work up over 1400 students as compared to the same quarter a year ago which is an increase of over 70%. This innovative partnership with employers has provided an education to these students without requiring them to take on any debt. In fact, when we look at all the credits completed by LDG students and estimate the average debt per credit for non LDG students at Ashford we could estimate that the program has helped LDG students avoid over $60 million in debt. It should also be noted that the average total loan now for AU graduates earning a bachelor's degree is less than the national average. Over 500 students have graduation through participation in the LDG program and the program benefits these students by providing a debt free education and it fits our corporate partners in offering education options that can help them develop, retain and grow the skills of their employees. Ashford's annual cohort retention rate is 59.2% for the second quarter 2017 which is slightly lower than the 62.5% reported for the second quarter 2016. As part of our focus on improving student retention we continue to work on increasing both our overall number of graduate students and our corporate partnership students which both retained at a higher rate than our overall student population. The LDG undergraduate student retention is approximately 20% higher than non-LDG students. We anticipate that the effects of these efforts will be seen in increased retention in 2018. In addition, in Q2 2017 Ashford University launched the Honors College, a program that offers enriched interdisciplinary courses and special co-curricular opportunities. The program was created to support our highest achieving students and promote student success and continued growth. The Honors College curriculum adds a prestigious enhancement to an Ashford University degree by providing students with the ability to take honors classes in the place of select general education and and/or elective courses in a degree program. Honors classes are smaller, uniquely interactive and focused on promoting leadership innovation, global perspective and civic responsibility. We believe the Honors College will provide an enhanced student experience for our current high achieving students as well as attract new students with strong potential. In fact a recent survey of perspective students shows that 68% of prospective students were familiar with Ashford indicated they would probably or definitely consider Ashford. However, after the reduction of the Honors College concepts that number increased to 85% reporting that they would probably or definitely consider Ashford. As we discussed in our last few earnings calls, 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 skilled gap. Employers in industries need higher education institutions to align education and program outcomes with the skills students need to be successful in today's jobs. Jobs have become more complex and require new skills and education especially in the area of the new mill skills. In fact research shows that more than half of all jobs 54% in the United States today are middle skill jobs that require more than high school diploma but not a four-year degree, yet only 44% of workers are trained to the middle skill level. As I mentioned last quarter with the announcement of our Forbes Boot Camp series we are continuing to develop new alternatives and platform technologies under the Forbes brand that can help address today's needs and provide education offerings that can be useful to a wide variety of population. Second, we are focused on ways to help close the learning gap. As we discussed last quarter, while there has 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 students achieve success in learning and degree completion. To support student success we are continuing to develop important programs like our tutoring on-demand program. These tutoring offerings are aimed at helping students to be more successful in the classroom which we believe will improve both student learning outcomes and retention. We continued these strategic efforts over the last quarter for some of our most challenging courses offering student access to free on-demand tutoring all online 24 hours a day. The results continue to be positive. Students have logged approximately 18,000 tutoring sessions since the program began and our course tutoring continue to have a reduction in overall drop rate, a reduction in fail rate and an increase in overall pass rate. In addition, students can take advantage of tutoring, have a higher persistence in completing their next four courses. We also recently completed the implementation of a new Learning Management System or LMS and all students and courses have been successfully moved to the new enhanced system. This process began over a year ago as we worked at that new LMS solutions selected better tool for our students, aligned all existing systems and carefully deployed the new platform. The new LMS allows us to engage students in a dynamic online learning environment and offers a robust mobile platform so that students can access the symptoms from their phone or tablet, anywhere at any time. Now that we have successfully transitioned all of our existing courses into the system we will begin looking at enhancements to the course design and user experience as well as additional ways to utilize the elements to optimize the classroom experience for our students. Our third area of focus is on closing the transparency GAAP. The consumer information currently available for higher education institutions must be updated to provide a more accurate picture of the complex U.S. higher education landscape and better enable students to make informed decisions. Our institution supported the first student body and current data is not helpful for these students because many times it does not accurately reflect their needs or their individual education journey. This is one of the largest efficiencies in federally required and reported data. It provides very limited information. ISIP's data only includes first time, full time students. This information does not represent the majority of college students today. As with many other institutions almost 98% of our students are not included in the current federally required and reported data. To help this need we recently launched a new enhanced behind the numbers section of our Ashford University website dedicated to providing meaningful data and a more complete view of our students' success. The information we will provide on behind the numbers will include more comprehensive information that can help students make informed decisions. We will also be working with national experts going forward to continue to provide additional meaningful data including more accurate comparisons with different student populations. 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'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 June 30, 2017. For the second quarter revenue is $124.6 million compared to revenues of $138 million for the same period in the prior year. This increase is primarily due to lower average weekly enrollment. As of June 30, 2017 total student enrollment was 43,461 compared to 48,895 as of June 30, 2016. For the second quarter 2017 instructional costs and services were $61.1 million or 49.1% of revenue compared to $66.4 million or 48.2% of revenue for the comparable period of the prior year. The decrease in absolute dollars was due to lower expense for compensation, support services and facilities. The increase as a percentage of revenue was primarily driven by higher bad debts and lower revenues for the period. Included in instructional costs and services for the second quarter 2017 was bad debt expense of $7.7 million or 6.2% of revenue compared to $6.4 million or 4.6% of revenue in Q2 2016. Higher bad debt in total and as a percentage of revenue in Q2 2017 is a result of higher accounts receivable balances compared to Q2 2016 and we are working diligently to reduce our accounts receivable. Admissions, advisory and marketing expenses for the second quarter 2017 were $43.7 million or 35.1% of revenue compared to $52.5 million or 38.1% of revenue 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 approximately $8.8 million when compared to Q2 2016. This reduction in advertising costs reduced our total marketing cost as a percentage of revenue by approximately 300 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 second quarter of 2017 were $13.6 million or 10.9% of revenue compared to $11.7 million or 8.4% of revenue for the comparable period of the prior year. The increase in absolute dollars and as a percentage of revenue was driven primarily by higher professional fees. Included in our three main expense categories for the second 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 second quarter 2017 compared to $2.3 million of legal settlement expenses and $1.7 million of restructuring and impairment charges reported in the second quarter of the prior year. Net income for the second quarter 2017 was $6.3 million or $0.21 per diluted share compared with net income of $3.3 million or income of $0.07 per diluted share for the comparable period in 2016. Our tax provision for the quarter was lower than we had anticipated and we anticipate a fairly low effective tax rate for the full year with total tax expense for the year estimated to be $500,000. The non-GAAP net income for the second quarter 2017 was the same as net income at $6.3 million or income of $0.21 per diluted share compared to a non-GAAP net income of $5.8 million or income of $0.12 per diluted share for the second quarter 2016. Non-GAAP net income for the second quarter 2016 excluded the legal settlement expenses of $2.3 million and restructuring and impairment charges of $1.7 million as well as the related income tax impacts. As of June 30, 2017 the company had combined cash, cash equivalents, restricted cash investments of $218.1 million compared to $381.8 million as of December 31, 2016. The company used $11.5 million of cash in operating activities during the year-to-date period end of June 30, 2017. By comparison the company used $3.8 million cash in operating activities during the same period in 2016. The net accounts receivable balance was $32.7 million as of June 30, 2017 compared to $26.5 million as of December 31, 2016. Capital expenditures for the year-to-date period end of June 30, 2017 were 2.3 million as compared to $900,000 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. Before I make my closing remarks, I would like to provide you with a brief update on the status of Ashford's approval to provide GI Bill benefit to students. As we have stated numerous times we have been pursuing every available option to ensure our veteran students GI Bill benefits are not disrupted. As a result of those efforts I'm pleased to report that Ashford University recently received approval from the State of Arizona to provide GI Bill benefits to our students. We anticipate working with the federal VA to assign a facility code. We believe this is the last step in the administrative process and would ensure Ashford's VA students continue to receive the educational benefits to which they are entitled without any disruption. In addition, we continue to work with the Iowa Department of Education on approval of two new programs at the Clinton campus while pursuing a reconsideration of the lower court's decision and if necessary and appeal in the Iowa courts. In closing, on our last two earnings calls I provided a high level view for how we think of 2017 and 2018. I noted that we believe 2017 should be a foundational year for future growth in 2018 and beyond as we continue to make the best [indiscernible] and other great programs that are aimed at helping the 36 million unskilled Americans and narrowing the skills gap. We anticipate revenue will be lower in 2017 by mid-to-high single digits due to our deliberate strategy to diversify our various marketing channels and reduce percentage of new students that come from the affiliate channel. As demonstrated in the second quarter of 2017 we will continue to be disciplined with our expense management which should grow our non-GAAP EBITDA by approximately 15% 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 a 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 higher levels of new enrollment in 2018 and beyond. At this time, I’ll ask our operator to open the phone lines for your questions.

[Operator:]

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

[Peter Appert:]

Thank you. And for the 21% decline in starts in the quarters and this is obviously pretty significant deterioration, I know some of this is planned, but it might call into question whether the shift in working strategy is working, how do you get confidence that it is?

[Andrew Clark:]

Yes, sure thanks Peter for the question. So we feel very confident about this strategy and that it is working and I cited for example the significant increase that we had in conversion for those students. I want to emphasize with you that the decline we had in new enrollments was the decline that we anticipated to have in the quarter and you'll recall when we chatted on the last earnings call that I mentioned that both the second and third quarter would have our steepest decline and then the fourth quarter you would see us with kind of flat to maybe slightly negative new enrollment on a year-over-year basis. I guess what gives me comfort is, what I found is that our new enrollments Peter, have been very predictable and the quality in terms of the new student enquiries that we're getting as evidenced by that conversion rate has increased significantly. I think it was about 480 basis points or so.

[Peter Appert:]

But the higher bad debt expense level, what that also raised a red flag?

[Andrew Clark:]

You know a few things are not related, so I don't think you should raise a red flag. You'll recall that we used to outsource our title for packaging so zero apps [ph] last year and so, we brought that internal. We've been going through the conversion of that and I think that certainly has contributed to some of what you've seen in terms of higher bad debt. But we do not conclude that there's any correlation between the quality of the students we're bringing in and the bad debt. In fact the bad debt is more operational in nature.

[Peter Appert:]

Got it. Understood, thank you and order of magnitude wise should we anticipate that the third quarter sharp decline will be similar to what we saw in the second quarter?

[Andrew Clark:]

I think yes, consistent with my comments last earnings call our steepest declines would to be in these two quarters so I think that's fair.

[Peter Appert:]

Okay and then the Arizona approval for the GI benefits does that that ensure then that there is no gap that there won’t be a period of students not getting reimbursed?

[Andrew Clark:]

Well, certainly I mean, as I mentioned Peter, our goal is to ensure that there is no gap and that there are no harm to our veteran students, but they continue to receive their educational benefits. And we're very pleased that the state of Arizona has recognized our presence there and supported us and approved us and we look forward to working with the federal VA to get that facility above. And then, there's other institutions I guess by example that have switched from state-to-state and they haven't seen any disruption in benefits their veterans students.

[Peter Appert:]

Okay, so it's closed with Arizona is that right, this is all signed, sealed, delivered?

[Andrew Clark:]

Yes, the State of Arizona has approved Ashford's federal VA...

[Peter Appert:]

So the process is just getting the feds then to sign on to ensure that there's no disruption?

[Andrew Clark:]

That's correct.

[Peter Appert:]

Okay, understood. All right thanks very much.

[Andrew Clark:]

All right. Thank you, Peter.

[Operator:]

[Operator Instructions] We have another question from the line of Alex Paris from Barrington Research. your line is open.

[Unidentified Analyst:]

This is Chris Howe [ph] sitting in for Alex Paris. Good afternoon gentlemen.

[Andrew Clark:]

Good afternoon.

[Unidentified Analyst:]

I had a - my question is in regards to the new programs that are with the DOE right now that are waiting for approval. These nine programs have they already been approved by WASC?

[Andrew Clark:]

Yes, but then approved by both our creditor as well as the Bureau in California.

[Unidentified Analyst:]

Okay and then I guess just, I was just thinking kind of outside of the box here just hypothetically if tomorrow one of these programs was approved when would enrollment start, would it be in September or more towards the winter and going on that situation how soon after approval would you begin marketing such a program?

[Andrew Clark:]

Great questions. It would take a period of time after approval for us to market them and then eventually to ask students start the programs so using your hypothetical example it would be approximately the winter time I think before you'd see new students from those programs. I think an important point to make is my commentary around new enrollment and certainly fourth quarter and what we think we will see in the fourth quarter is not predicated half of those new programs, so it's all predicated on the existing programs we have today.

[Unidentified Analyst:]

And then, I guess still going on this hypothetical situation, how long would it take for you to recover your costs to I guess move forward to profitability with one of these new programs if they were to be approved tomorrow or for example.

[Andrew Clark:]

Yes, that’s a hard question to answer because it all depends on the kind of the growth rate of the new program and how quickly new students are coming into the program, and it also depends upon on kind the step function by which we roll out the programs if we rolled out all nine you know immediately or whether we'd roll out a couple at a time.

[Unidentified Analyst:]

Then my last question is, I guess just kind of from my general knowledge, what is the mix of the nine programs waiting for approval by the DOE as far as fields of study, degree levels and so forth?

[Andrew Clark:]

Yes, there are mostly technology programs, business programs and I think there is, yes there's is 60% Masters and I think there's some healthcare also in there as well been a little while.

[Unidentified Analyst:]

All right. Thank you so much for your time.

[Andrew Clark:]

Yes, thank you.

[Operator:]

Our next question comes from line of Shaheen [indiscernible] from Bloomberg. Your line is open.

[Unidentified Analyst:]

Hi there Shaneen [indiscernible] report from Bloomberg News. Thanks for taking my question. Could you walk us through how the company ended up choosing the State of Arizona as its GI Bill licensing authority? I know that Ashford had a physical campus in State of Iowa and its corporate headquarters are in California, what’s your presence in Arizona? Why were Arizona officials receptive, can you shed some light on that?

[Andrew Clark:]

I appreciate the question, but I'm not going to get into the specifics around the Arizona approval with you on this call other than to say that, the State of Arizona recognized our University's presence in the state and we really appreciate the effort but not any update but behind the university and recognizing us and approving us, so thanks for your question.

[Unidentified Analyst:]

I appreciate that, what is presence in the state?

[Andrew Clark:]

Again, I'm not going to get into the specifics with you on this call, but I would be happy to have our Vice President of Communications, Anna Davison followup with you, this is an Investor Call not a media call.

[Operator:]

We have no further questions at this time. This concludes our question-and-answer session. I will now turn the call over to Andrew Clark for any closing remarks.

[Andrew Clark:]

Thank you and I’d like to just thank everybody for joining our call today and we appreciate your participation in it.

[Operator:]

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