Zovio Inc
Q3 2017 Earnings Call Transcript

Published: 25 Oct 2017

[Operator:]

Good afternoon and welcome to Bridgepoint Education's Third 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, Sarah and good afternoon. Bridgepoint Education's third quarter 2017 earnings release was issued earlier today and is posted on the Company’s website at www.bridgepointeducation.com. Joining me today are Andrew Clark, Chief Executive Officer; Joe D’Amico, Interim Chief Financial Officer and Steve Burkholder, Vice President and Chief Accounting 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 current date 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 quarter ended September 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 third quarter 2017 earnings call. After I discuss our third quarter our Interim Chief Financial Officer, Joe D’Amico will review our financial results and key operating metrics. After Joe concludes, I will offer my closing comments. Over the past year we have been implementing an updated marketing strategy designed to accomplish two key objectives. We wanted to attract prospective students who have a higher probability of being academically successful while concurrently making meaningful improvements to the efficiency of our advertising admissions and marketing spend. To accomplish this, we have combined a sophisticated student behavior model with marketing analytics allowing us to attract a high quality prospective student. On our last earnings call I mentioned that as a result of this strategy I forecasted new enrollments in the third quarter would be negative by approximately the same amount of the second quarter. I'm pleased to report that in the third quarter the strategy performed well beyond our internal expectations and our plan is working. New enrollments during the third quarter were down just 11% versus the 21% decline we had previously expected. To better understand how the strategy is working let me described in detail the third quarter year-over-year changes. Our student inquiries were down 42% and yet new enrollments declined by just 11%. The improved efficiency of this strategy can also be found in the decline on advertising spend of 14.5% and a 26% decline in admissions labor. Additionally our lead conversion rate improved by 300 basis points when compared to the same quarter in the prior year and 71.7% of our new enrollments at Ashford came from our homegrown channels during the current quarter up from 63.5% for the same quarter in the prior year. We also continue to strengthen our partnerships with various employers. Our work in this area has gained traction and become an important part of our strategy. To help establish a stronger brand identity for these corporate efforts we utilized input from the companies currently in the program to select the new name that best describes the valuable work we are doing together. As a result we have rebranded these employer offerings under the name Educational Partnerships. The Educational Partnerships group includes our Full Tuition Grant or FPG program which was previously known as the Leadership Development Grant program. During the third quarter of 2017 Educational Partnerships added 12 new Full Tuition Grants or FTG partners. The enrollment in these programs continued to increase and FTG enrollments were up 75% as compared to the same quarter a year ago. As the conversations around student debt continue these types of innovative partnerships are valuable examples of partnering with employers to provide an education to students without requiring them to take on any debt while at the same time helping employers develop, retain and grow the skills of their employees. Ashford's annual cohort retention rate is 58.2% for the third quarter 2017 as compared to the 61.6% reported for the third quarter of 2016. As part of our long term efforts on improving student retention, we continue to work on increasing our overall number of graduate level students and our corporate educational partnership students which all retained at a higher rate than our overall student population. We are also continuing to adjust our marketing mix focusing on attracting students with the best possibility of achieving their academic goals. In addition we are launching internal projects like a pilot with [indiscernible] which will allow student advisors to more easily identify students who may be at risk in order to provide them with additional support or resources to help them be successful. In addition, as we announced last quarter, Ashford University launched an honors college to help us attract and retain our highest achieving students. Ashford is seeing good progress with the program with students who enroll having an average GPA of 3.9. We recently increased our efforts to reach out to prospective new students who would qualify for the program. We anticipate that the effects of all of these efforts should lead to increased retention over time. As we discussed on our prior 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. In regards to closing the skills gap, we have discussed the need employers and industries have for skilled workers in high and jobs. According to their economic development and employer planning system, as of 2017 there are 128 jobs that are identified as being in the highest demand, require at least an Associates' degree and pay high wages which are defined as those in the 75th percentile or higher across various industries. There is a higher demand for these positions because recent historical lack of relevant skills among the workforce. These jobs can be found in the field of medicine, finance, defense, engineering, technology, business, entertainment and more. Data provided by the economic modeling company EMSI showed that Ashford University students and alumni have been employed in over 80 of the 128 high demand, high paying and high skilled jobs. The EMSI data in the study included a sampling of over 51,000 Ashford University students and alumni. These students and alumni work or have worked as general practitioners, accountants, human resource managers, educational administrators, et cetera, at companies such as Kaiser Permanente, Signet, New York Life Insurance, AT&T, [indiscernible], Toyota, Time Warner and KinderCare just to name a few. In fact reports from LinkedIn showed that each of the companies I've just mentioned have employed at least 10 or more Ashford alumni. In summary in many industries where the skills are short and the impact is potentially long-lasting, Ashford students have contributed to help build the gap. Second, in regards to closing the learning gap we continue to focus on improving access to education for individuals who want to attend college as well as developing new approaches to help all students achieve success and learning and degree completion. As part of these efforts, our free 24 x 7 tutoring on demand program which his offered in some of our most challenging courses continues to show positive results in helping students be more success in the classroom. Students have logged over 25,000 tutoring sessions as the program began and our course offering tutoring continues to have a reduction in overall drop rate, a reduction in fail rate and an increase in the overall pass rate. In addition, students who utilized tutoring have a higher persistence in completing their next four courses. One of our priorities is also the student experience. As we have discussed on our prior quarterly calls, we recently watched a new learning management system. We are continuing efforts to enrich the classroom experience and we are now working on several enhancements to the course design and user experience. These efforts support a strong experience and positive outcome for our students. Lastly, in our efforts to closing the transparency gap new and more robust metrics reported by the U.S. Education Department National Center for Education Statistics Integrated PostSecondary Education Data System or IPEDS for short are helping provide deeper insight into the performance of today's college population. Recently on October 12, 2017 the Center released data collected during the winter of 2016-'17 including the first release of outcomes measured data. This new data includes two new student populations; non-first-time students and part-time students as opposed to just first-time full time students and these changes provide a more comprehensive view of college students as a whole. With this new data we can see a much more complete picture of Ashford student population. In fact the comparison shows that Ashford outperforms our peers in regard to non-first-time full time student degree recipients with 50% percent of the 2008 cohort having received a degree at the eight year mark versus the approximate 44% in the sector overall. On previous earnings calls we have discussed the changes we've been making to our marketing mix which we expect will continue to attract students likely to persist and be successful. Those changes matched with metrics at the national level to capture outcomes for more type of students including the nontraditional students Ashford serves will continue to more accurately reflect our retention of these students. 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'm pleased to turn the call over to Joe D'Amico who is our Interim Chief Financial Officer to review our financial and operating results.

[Joseph D’Amico:]

Thank you, Andrew and let me begin by providing some key financial and operating information for the quarter ended September 30, 2017. For the third quarter revenue was $119.4 million compared to revenue of $136.6 million for the same period in the prior year. The decrease is primarily due to lower average weekly enrollments. As of September 30, 2017 total student enrollment was 42,132 compared to 47,831 as of September 30, 2016. For the third quarter of 2017 instructional costs and services were $57.8 million or 48.4% of revenue compared to $64.1 million or 46.9% of revenue for the third quarter of the prior year. The decrease in absolute dollars was in part due to lower enrollments and the related lower expense for compensation, instructor fees, support services and facilities. The increase as a percentage of revenue was primarily driven by largely higher technology costs, [indiscernible] fixed as well as bad debt. Bad debt expense in the third quarter of 2017 was $7.5 million or $6.3% of revenue compared to $7.6 million or 5.6% of revenue for the comparable prior period and compared to $7.7 million or 6.2% of revenue for the second quarter 2017. Managing the level of bad debt expense remains mainly our focus and our goal is to reduce this expense as a percentage of revenue over time. Admissions, advisory, and marketing expenses for the third quarter of 2017 were $43.7 million or 36.6% of revenue compared to $52.6 million or 38.5% of revenue for the comparable period of the prior year. This decrease of $8.9 million is primarily attributed as a result of the efficiency and lower cost from executing our updated marketing strategy that Andrew discussed earlier. General and administrative expenses for the third quarter of 2017 were $11.4 million or 9.6% of revenue compared to $11.6 million or 8.5% of revenue for the comparable period of the prior year. The increase as a percent of revenue is primarily driven by higher professional fees. We incurred $8 million of restructuring and impairment charges in the third quarter of 2017 which include charges taken relating to reassessing certain lease assumptions as well as severance charges. This is compared to $0.1 million of restructuring and impairment charges recorded in the third quarter of the prior year. We do not have any legal settlement expenses in the third quarter of 2017 whereas we incurred $16.8 million of legal settlement expenses in the third quarter of the prior year. Net income for the third quarter of 2017 was $39,000 which is essentially breakeven earnings per share. This has compared to a net loss of $9.5 million or a loss of $0.20 per diluted share for the third quarter of 2016. We had a tax benefit for the third quarter of approximately 1.2 million. We continue to provide a full valuation allowance against our net deferred tax assets and we anticipate a low annual effect of tax rate for the full year. Our non-GAAP net income for the third quarter 2017 was $7.5 million or income of $0.25 per diluted share compared to the net non-GAAP net income of $4.2 million or income of nine cents per diluted share for the third quarter of 2016. This increase in large part is due to our marketingship and disciplined expense management. Non-GAAP net income for the third quarter of 2017 excluded restructuring impairment charges of $8 million as well as related tax impacts. Non-GAAP net income for the third quarter of 2016 excluded both legal settlement expenses of $16.8 million and restructuring and impairment charges of $0.4 million as well as related tax impacts. As of September 30, 2017 the company had combined cash, cash equivalents, restricted cash and investments of $212.1 million compared to $381.8 million as of December 31, 2016. The company used $16.7 million of cash in operating activities during the year-to-date period ended September 30, 2017 by comparison the company had $12.9 million of cash in operating activities during the same period in 2016. The net accounts receivable balance was $34.3 million as of September 30, 2017 compared to $26.5 million as of December 31, 2016. This is higher than year end and is consistent with our business cycles. Capital expenditures for the year-to-date period ended September 30, 2017 were $2.9 million as compared to $1.6 million for the same period last year. Now I’ll turn the call back over to Andrew for his closing comments.

[Andrew Clark:]

Thank you, Joe. In closing we are pleased to announce that Ashford has recently received approval for 16 new degree programs and we are looking forward to offering these programs to new prospective students. None of these new programs are graduate programs and almost half are focused on high demand student areas which we hope will help in narrowing the skills gap in our country. We are pleased to have received approval on these programs and the university will work on a strategic plan to roll out these programs throughout 2018 and beyond. We continue to believe that 2017 will be a foundational year for future growth in 2018 and beyond. We do anticipate revenue will be lower for the full year 2017 when compared to 2016 by mid to high single digits due to our deliberate strategy to diversify our various marketing channels and reduce the percentage of news students that come from the affiliate channel. We continue to expect our new enrollment in the fourth quarter of 2017 to be flat to slightly negative as compared to the new enrollment level we experienced in the fourth quarter of 2016. We will continue to be disciplined with our expense management which should grow our non-GAAP EBITDA in the low to mid single digits from 2016 to 2017. Our strategic investments will focus on consistency of the student experience to ensure the best possible student outcomes in innovating and 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 higher levels of new enrollments in 2018 and beyond. At this time I’ll ask our operator to open the phone lines for your questions.

[Operator:]

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

[Peter Appert:]

Thank you. So Andrew a couple of questions on the enrollment front any, can you give us any color on what you're seeing here in the fourth quarter in terms of inquiry volumes?

[Andrew Clark:]

In the fourth quarter I think our inquiry volumes have been pretty consistent to date Peter. Nothing outside of what we've expected so far.

[Peter Appert:]

So I think you mentioned you were down 11% in the third quarter, would you still be tracking down at that level in fourth quarter?

[Andrew Clark:]

No, I think that, oh I'm sorry go ahead.

[Peter Appert:]

I was just asking in the context of, right I’m thinking that you've annualized some of the changes that you had initiated in the fourth quarter last year and I was wondering if that had maybe was translating in some improvement in the inquiry trends?

[Andrew Clark:]

No, I mean so our inquiry trends in the third quarter as I mentioned were better than what we expected in terms of the overall conversion improvement and what we saw in terms of just the strength of the prospective new students coming from our homegrown channel. If you include referrals into that channel almost approaching 84% of our new enrollments in the third quarter came from homegrown and referrals with the remainder coming from the affiliate channels. So we really now after almost a year have made a significant change in where our new prospective students are coming from. If you look at the fourth quarter, I mean our view is it will, and this has been consistent throughout the year, it will be at flat to slightly negative our new enrollment on a year-over-year basis.

[Peter Appert:]

Okay and then what portion of the total enrollments currently are from the Educational Partnerships channel or Partnership Relationships?

[Andrew Clark:]

Yes, so good question, the Full Tuition Grant program which was formerly the Leadership Development Grant program, those students that grew at about 75% year-over- year this last quarter, those students almost make up about 10% of the total enrollment of Ashford.

[Peter Appert:]

And then I apologize if you mentioned this and I missed it, but in terms of the Forbes School what are you seeing there?

[Andrew Clark:]

You know the Forbes School has been doing really well. It has from a total enrollment standpoint it's been slightly negative, but slightly and not at the overall kind of total enrollment decline that we saw in the quarter of 11%. I would say it was more around kind of mid single digits and that is due in large part I think to the differentiation that we have with Forbes and the success that we have in our Educational Partnership Program and a lot of those students are seeking business degrees.

[Peter Appert:]

All right and with the growth in the FTG program then Andrew, should we anticipate that there might be modest declines in the revenue per students then going forward?

[Andrew Clark:]

Yes, I think you could anticipate that there would be some modest declines certainly as we kind of look out towards 2018.

[Peter Appert:]

Okay and then lastly maybe for Joe. I'm just wondering based on your early analysis if you see opportunity for more to be done on the cost side of the equation, I mean the company has been quite successful here in terms of managing the cost in the last couple of years and I'm wondering if we're sort of getting to the end of the rope on that?

[Andrew Clark:]

Yes, so maybe I'll dive in for Joe since and give him a break Peter, since he has only been here like I think 14 days or maybe less. So he is a good sport to sit in on the call with us here. But I think that we still have some opportunity in terms of our disciplined expense management. The company I think has done a really good job to date at that and we will continue to be very focused on that. Certainly Joe with his background perhaps could bring us some new insight and new ideas about ways in which we could become more efficient.

[Peter Appert:]

Got it. Thanks very much.

[Andrew Clark:]

Yes, thanks for your questions.

[Operator:]

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

[Andrew Clark:]

All right, I want to thank you for your interest in Bridgepoint Education and for your participation on today's call.

[Operator:]

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