Zovio Inc
Q1 2015 Earnings Call Transcript

Published: 5 May 2015

[Operator:]

Good morning, and welcome to Bridgepoint Education's First Quarter 2015 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Paul Goodson, Associate Vice President of Investor Relations for Bridgepoint Education. Please proceed, Mr. Goodson.

[Paul Goodson:]

Thank you, Eric, and good morning. Bridgepoint Education's first quarter 2015 earnings release was issued earlier this morning 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 Dan Devine, Chief Financial Officer. Before we begin, we'd 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 and other financial and related guidance, the impact of our student support efforts, our ability to manage regulatory metrics and commentary regarding 2015 and later, including our future plans regarding programs, strategic partnerships, creation of efficiencies and improvement of shareholder returns. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual performance or results to differ materially, including the risk that new enrollments may not increase during 2015. 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. Please refer to our SEC filings, including our quarterly report on Form 10-Q for the period ended March 31, 2015, to be filed with the SEC as well as our earnings press release posted this morning 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, Paul, and welcome to Bridgepoint Education's First Quarter 2015 Earnings Call. After I discuss our first quarter, our CFO, Dan Devine, will review our first quarter financials and key operating metrics. After Dan speaks, I'll offer my closing comments. During the first quarter, I'm pleased to report that we've made progress in several areas. At Ashford, we made meaningful progress in differentiating the university through our Forbes relationship through a newly launched corporate initiative and through our investments in the continuous improvement of the student experience. One measure of our success is the growth we are seeing in the Forbes School of Business. The proportion of our total enrollment represented by the Forbes School of Business increased 7.7% from 35.1% in last year's first quarter to 37.8% of our total enrollment in the first quarter of 2015. This is also reflected in the growth of new enrollments in the Forbes School, which were up on a year-over-year basis. The incoming student surveys Ashford has done have shown that name recognition continues to be a factor among a meaningful percentage of students in choosing the Forbes School. Ashford has always differentiated itself through an emphasis on the affordability of our tuition and our efforts to keep our graduates' debt levels below national averages. We extended our effort in this area in 2014, when we launched our Leadership Development Grant, or LDG program, for students who are eligible to receive corporate tuition benefits. The LDG program makes it possible through a combination of employer contributions and scholarships from Ashford for students to earn their degree with no student debt. We're proud to offer a program that creates so much value for these students. Last year at this time, we began a quarterly reporting of the 12-month retention of Ashford students, in lieu of reporting new enrollments each quarter. Throughout 2014, Ashford had significant gains in retention, posting increases averaging 390 basis points each quarter. We attribute these gains to the numerous initiatives Ashford has taken to assure student preparedness, raise academic quality and improve student outcomes. For the first quarter of 2015, the 12-month retention for all Ashford students who were active on the last day of the first quarter of 2014 was 63.9%. For the first quarter of 2014, the 12-month retention for all Ashford students who are active on the last day of the first quarter of 2013 was 64.6%. Now I'd like to turn the call over to our Chief Financial Officer, Dan Devine, to review our financial and operating results.

[Daniel J. Devine:]

Thank you, Andrew. Let me begin by providing some key operating figures for the quarter ended March 31, 2015. For the first quarter of 2015, revenue was $142.5 million compared to revenue of $157.3 million for the same period in 2014. The decrease is primarily due to the decrease in enrollments during the period. As of March 31, 2015, total student enrollment was 55,322 compared with 64,495 as of March 31, 2014. For the first quarter of 2015, instructional costs and services was $75 million or 52.7% of revenue compared with $83.1 million or 52.8% of revenue for the first quarter of the prior year. The decrease in expense was primarily driven by lower personnel costs in the related instructional areas, consistent with our lower level of total enrollments. The decline in expense was also driven by lower facilities cost. Included in the instructional costs and services for the first quarter of 2015 was bad debt expense of $8.4 million or 5.9% of revenue. The first quarter followed a pattern similar to 2014, where bad debt in the first and third quarters was higher than the second and fourth quarters. We expect this pattern will continue and that the full year percentage for bad debt should be at or below 2014 levels. Admissions advisory and marketing expenses for the first quarter of 2015 were $52.3 million or 36.7% of revenue compared to $65.8 million or 41.8% of revenue for the first quarter of the prior year. The decrease in expense is primarily due to lower branding and related professional fees over -- period-over-period as well as a decrease in related compensation. General and administrative expenses for the first quarter of 2015 were $16.3 million or 11.5% of revenue compared with $16.3 million or 10.3% of revenue for the first quarter of the prior year. The slightly increased costs for the period were driven by higher support services offset by lower compensation. Included in our 3 main expense categories for the first quarter of the year is approximately $2.2 million related to stock-based compensation expense. For the first quarter of 2015, the operating loss was $1.2 million compared to an operating loss of $7.9 million for the same period in 2014. The net loss for the first quarter of 2015 was $0.4 million or a loss of $0.01 per diluted share compared to a net loss of $4.3 million or a loss of $0.10 per diluted share for the comparable period in the prior year. The effective tax rate used to calculate the tax benefit for the quarter ended March 31, 2015, is 27.4%. As of March 31, 2015, the company had combined cash, cash equivalents, restricted cash and marketable securities of $355.3 million, which is compared to $356.5 million as of December 31, 2014. The company generated $7.4 million of cash from operating activities during the 3 months ended March 31, 2015. By comparison, it used $16.5 million of cash in the operating activities during the same period in 2014. Net accounts receivable balance was $30.9 million as of March 31, 2015, compared to $21.3 million as of December 31, 2014. Capital expenditures for the first quarter of 2015 were $1.6 million as compared to $3.1 million in the prior year first quarter. Now I'll turn the call back over to Andrew for his closing comments.

[Andrew S. Clark:]

Thank you, Dan. I wanted to talk for a minute about my view of the external environment and in that context, what it means for Bridgepoint. As many of you are aware, over the past several years, the sector experienced a turbulent regulatory period. That regulatory turbulence has subsided and the sector's in a much more predictable regulatory environment. However, as witnessed by numerous reports from our peers, the sector is now experiencing soft market conditions and increased competition that is resulting in choppy enrollment performance. I think it's fair to say that the sector has experienced this and that -- and in our institutions, we have seen some of the same volatility. For the reasons I just described, we believe we will experience some variability in various quarters as we pursue our goals. This variability has the effect of lowering our total average enrollment at various points throughout the year. With that said, we are still pursuing the enrollment goals we outlined on the fourth quarter earnings call, which are to grow new enrollments in the mid-single digits and to stabilize our total enrollment by the end of the year. It is my belief that the keys to success in this environment are product differentiation and strong operational excellence, which will lead to market share gains over the long term. Our institutions are executing on plans that when fully implemented will position them well to recover and compete in this new market. These plans are based on our clear value proposition to students for high-quality, value-oriented education and one that will be increasingly differentiated as we extend our success with the Forbes brand, in addition to other actions we will take in the future. These actions include expansion in the number and breadth of programs, along with our emphasis on strategic corporate partnerships that will enable us to grow over the long term. Additionally, I want to convey that management is continuing to reduce our cost structure to better align our expenses with the total enrollment and revenue of the company, while maintaining our priorities on student experience, learning, academic quality and regulatory compliance. As we said on our last call in November of last year, we made expense cuts that represent a reduction of $24 million annually. This year, we are continuing a strategic analysis of all parts of our organization for opportunities that bring efficiency to our operational structure. In particular, we're focused on our advisory advertising and marketing expense line. In the first quarter, we decreased spending there by more than 20% on a year-over-year basis, while at the same time, growing new enrollments and increasing adviser productivity. This is a good example of our focus on the expense opportunity and importantly, our ability to differentiate our institutions through our value propositions and the Forbes School of Business. Our turnaround plan at Bridgepoint Education is focused around 3 key pillars

[Operator:]

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

[Peter P. Appert:]

So Andrew, I think you said that starts -- or you implied that starts were up in the first quarter. Is that correct? And if I was thinking sort of low single digit, 1% or 2% increase, would that be rather [ph] the correct order of magnitude?

[Andrew S. Clark:]

Yes, Peter. Yes, starts were up in the first quarter. They were up about mid-single digits.

[Peter P. Appert:]

Mid-singles, okay. And then any commentary in terms of what you're seeing in term of trends in application flow or inquiry flow, et cetera?

[Andrew S. Clark:]

I didn't catch the last part, application and what?

[Peter P. Appert:]

Application or inquiries?

[Andrew S. Clark:]

Okay. Yes, application flow has been good. Inquiry flow continues to be strong. I am overall pretty pleased with how we performed in new enrollments for the quarter. It certainly is in line with our goal for mid-single-digit new enrollment growth for the year. I'd like to see us outperform that if we can. But as I mentioned, Peter, it's a pretty choppy environment right now from an enrollment perspective. And so you kind of benefit in that choppiness sometimes and in other times, it works against you.

[Peter P. Appert:]

And when you say it's a choppy environment, are you meaning that you just see a lot of volatility month-to-month in terms of inquiry flows, for example?

[Andrew S. Clark:]

Yes, exactly, Peter. I mean, been doing this a long time and it used to be that it was very predictable. It was one of the kind of great parts about this is the predictability was very consistent. It was always there, and now you see volatility literally on a monthly basis. So some months really can go in your favor and other months don't. And so it makes it challenging to kind of forecast how a quarter will end up.

[Peter P. Appert:]

Right. And do you attribute that to competitive dynamics in terms of ad programs by competitors, for example, or just responses to your own advertising outreach?

[Andrew S. Clark:]

Well, I think our own advertising outreach has been very effective. And as I said, we had a 20% decrease in spending in that line. And yet, our productivity was up and our new enrollment growth was up. So you have to be pleased with those outcomes. But as I mentioned, it is a soft market right now. I think demand is soft. And in addition to that, you certainly do have more competitors in the marketplace.

[Peter P. Appert:]

Just one last thing and I will get off. The lower retention year-to-year, I might have missed this. But anything you'd call out in terms of what was contributing to that?

[Andrew S. Clark:]

Nothing in particular. I mean, obviously, as I mentioned, we have kind of a -- I think it was a 390-basis-point average kind of each quarter last year. So outperforming it this year is going to be a challenge for us, but one that we're definitely focused on. I think one important distinction would be that, as you're aware, about 78% of our students are undergraduate students. And in undergraduate 12-month cohort retention, we only saw that down just very slightly. So it was mostly the graduate students where we saw the decline in retention. And that was -- that represents about 12% of Bridgepoint's total enrollment.

[Operator:]

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

[Jeffrey M. Silber:]

Actually just to follow up on that last question. Any specific reason why graduate student retention was down so much?

[Andrew S. Clark:]

Yes, Jeff. I don't have any specific reason. There is sometimes volatility from quarter-to-quarter. We're looking very closely at it. And we're very focused as an organization on retention and improving student retention. So to the extent that we can find anything in particular in the graduate area that led to what happened in the first quarter, we would obviously take whatever steps we can to correct that. We do have an increased military population. So there is a possibility that military folks taking breaks could be some of that, but I wouldn't attribute all of that to the military.

[Jeffrey M. Silber:]

Okay. And then just continuing to focus on your graduate programs. Can you remind us where your focus is right now? And you mentioned the new graduate programs that are coming out, if we can get a little bit more color, are they new disciplines, new verticals, et cetera?

[Andrew S. Clark:]

Yes, sure. Great question. So master's in accountancy, psychology, criminal justice and education, special ed. So kind of a diverse cross section there of graduate programs. Also looking at master's in leadership, educational leadership, international leadership, human development and public sociology.

[Jeffrey M. Silber:]

And I'm sorry. Where had your focus been historically on the graduate side?

[Andrew S. Clark:]

On the graduate side?

[Jeffrey M. Silber:]

Yes.

[Andrew S. Clark:]

I think historically, it's been more business oriented. And so certainly, we're trying to diversify that here with -- as I just read off, quite a few graduate programs in education. We have the psychology and criminal justice, as well. So really, the only 2 business graduate programs we would have are the leadership and the accountancy.

[Jeffrey M. Silber:]

Got it. And you mentioned the strong growth at Forbes. Was that undergrad, grad? Was it mixed?

[Andrew S. Clark:]

It was in both, if my recollection's correct. I think I remember that we had good enrollment growth at the undergraduate as well as the graduate level. I think the graduate level was actually stronger than the undergraduate level.

[Operator:]

Your next question comes from the line of Paul Ginocchio with Deutsche Bank.

[Paul Ginocchio:]

Just 2 questions. First on the Leadership Development Grant, is that -- I think that's new, at least to me. How long have you been doing that? And what percentage of your students may be eligible for that? And what would be the -- if it's fully rolled out, what would be the impact on revenue per student? And I've got one follow-up.

[Andrew S. Clark:]

Yes, Paul, so we started that program last year. And we kind of eased into the program just to see what the reaction would be by employers. Of course, it's been very favorable. And just to give you a little bit more color, a company that reimburses at -- their employees at $5,250, those are the folks that qualify for that program. And then Ashford scholarships, the difference. So that again, the student is able to effectively go and pursue their college education for free and without incurring any student debt, which we think is an excellent outcome for the student. And the companies are also very pleased that, obviously, their employees aren't taking any debt and at the same time, the educational and academic outcomes they're achieving. So in terms of the future, the program is growing quite nicely. We've had a tremendous response to it. I wouldn't want to make any predictions about what that might look like for the rest of 2015. And I'll turn it over to Dan. He can talk to you about the revenue per student piece.

[Daniel J. Devine:]

Yes. This is Dan. So the revenue per student would be lower, obviously, in that program because it is a scholarship program. If you look at, for the remainder of the year, the population -- I don't have the specific population, but it's not a huge amount of people at this point. It will likely have a flattening effect on year-over-year revenue per student, which would be offsetting an increase that was put through in April of approximately 2%. So I think what you're seeing is your revenue per student would be down, obviously, as this program grows. I don't expect it to grow at such a rate where it would take it below kind of flat year-over-year revenue per student.

[Paul Ginocchio:]

Great. And has this -- has the Leadership Development Grant enticed more corporates to sign on with you?

[Andrew S. Clark:]

Yes, I would say that it has incented more companies to partner up with Ashford University in particular. And we have -- we've seen good growth in terms of the number of corporate partners early in 2015 versus 2014.

[Paul Ginocchio:]

Great. And just a comment. I know you made some comments around bad debt. It was up year-on-year in the first quarter versus first quarter of '14. And you're calling for it to be roughly flat. What changes for the rest of the year to get it trending below year-on-year?

[Daniel J. Devine:]

It was up slightly year-over-year. You're correct. So basically the way we're modeling it out, we anticipate that we will see some benefit from some of the changes we made in our future quarterly bad debt. And for the year, we expect it to be at or below where it was last year.

[Paul Ginocchio:]

Right. I have it up, as a percentage of revenue, 110 basis points, am I not calculating that right? It's up a little bit on an absolute basis, but as a percent, it's up...

[Daniel J. Devine:]

I thought it was 90 basis points, it was up.

[Operator:]

Your next question comes from the line of Corey Greendale with First Analysis.

[Corey Greendale:]

So first question, in light of the commentary about the opportunities in graduate degrees, can you just give a little backward-looking commentary on how the new student performance and total enrollment performance was in graduate versus undergraduate as a whole?

[Andrew S. Clark:]

Well, new student performance, I can't break it out for you right now, Corey, in terms of undergrad versus grad. I can get back to you. I think my inclination is that we performed slightly better in the graduate piece probably because of the Forbes School of Business and how that's increasing. And then, we had good, strong new enrollment growth as well in addition to that in Forbes, particularly in the graduate area. But I have to get back to you with -- when we talk later today with kind of an exact -- a better view on that.

[Corey Greendale:]

That's fine. And then second question is, the -- your comments about volatility in the environment are clearly true. You talk to anybody in the space. Should we take away from that -- I hear that you've still got the same internal goals. How is your confidence level on hitting those goals relative to what it was when we last spoke on your last earnings call?

[Andrew S. Clark:]

Yes. I think I have good confidence about our new enrollment goal and the overall total enrollment goal by the end of the year. I think what you should really take away from that is, that choppiness causes, as I mentioned, a lower averaged total enrollment, which then lowers your revenue and causes kind of some volatility. And that volatility that's caused throughout the quarter has an impact to our overall revenues, and I think that's the most important thing to take from that. It just means there's going to be, I think, choppiness in the quarters from a revenue perspective because of that -- those new enrollments and total enrollments are kind of fluctuating to a greater extent than perhaps, we would've expected.

[Corey Greendale:]

Okay. And this is a question that may be hard to answer, but how much of the changed visibility is because of the environment? And how much is because you have changed the way that you are marketing and generating inquiries?

[Andrew S. Clark:]

Well, again, I'm pleased with our ability to generate inquiries and prospective new students, especially given the environment. I think most of it's related to the overall market. And as I mentioned, we did very well in the first quarter from the standpoint of our goal of lowering our overall expenses in advisory and advertising and marketing, while at the same time, growing new enrollment and increasing productivity. I think -- I mean, those are great outcomes and ones that you'd like to have every single quarter. So...

[Corey Greendale:]

But the takeaway is, we shouldn't necessarily expect that every single quarter, but it's clearly a favorable data point.

[Andrew S. Clark:]

It's -- I didn't catch that.

[Corey Greendale:]

It was sort of a rhetorical -- I was saying that the takeaway you're trying to leave us with though is don't necessarily expect that result every quarter because Q1's certainly a favorable data point as far as the new student result and being able to do that was lower marketing and admissions expense.

[Andrew S. Clark:]

Yes, Q1's a favorable data point. I mean, I wouldn't expect that every quarter because of the volatility. And again, I would focus on the effect that the volatility has on total enrollment and what that -- the challenges kind of that presents from a revenue standpoint and how the revenue will fluctuate from quarter-to-quarter.

[Corey Greendale:]

Okay. And then just one quick question on the cost side. How much of the decline in admissions, advisory and marketing was driven by advertising, and how much of it was headcount? And can you help us think about how to model that expense line through the quarters of 2015?

[Daniel J. Devine:]

Yes. Your first question is it was a mix of -- it was probably 70-30 advertising on the change quarter-over-quarter. And from a go-forward point of view, I would say that you're really looking at a -- kind of a flat run rate with what occurred in our first quarter.

[Corey Greendale:]

Great. And then just one last one for you, Andrew. The -- well, I understand if you don't want to comment specifically on your stock pricing. The stock continues to trade as if there is a significant risk of a material adverse change in the financial condition of the business. And can you just comment on your view of either fundamentals deteriorating to a level that would justify the current valuation or some sort of regulatory change or something focused specifically on Bridgepoint that would materially hurt the fundamentals relative to where we are now? Just your take on that.

[Andrew S. Clark:]

Yes, Corey. I mean, I can't point to anything that would justify the current valuation. And I don't see -- I don't foresee anything that would justify the current valuation. I, obviously, believe strongly that the -- that we're undervalued, especially for an organization that in this market environment, has shown new enrollment growth 5 out of the last 6 quarters, which, I think, a lot of folks are challenged to do. We had very strong retention gains at 2014. I don't see anything on the regulatory front that would just -- that would be -- that would impact us to such a greater extent than others in the sector that would justify against a much lower valuation. So I'm kind of as -- I'm kind of probably like you, challenged to understand why there would be a -- why we have the valuation we do and why folks don't recognize how undervalued we are and the opportunity that -- underlying opportunity that exists there.

[Operator:]

Your last question comes from the line of Alex Paris with Barrington Research.

[Alexander P. Paris:]

Couple of wrap-it-up sort of questions. I just have a follow-up on the corporate partners. Can you give us any sort of data that will allow us to kind of figure out what, like -- I just want to determine what percentage of enrollment has to do with students getting some sort of corporate reimbursement? How -- or -- I know it's tough to gauge -- or how many corporate partnerships you have versus 1 year ago versus 5 years ago, something like that?

[Andrew S. Clark:]

So I would say the level of corporate partnership students that make up a percentage of the new enrollment is still fairly small today. It's not a percentage that I would put out to you. I think that -- and I can't tell you the exact number of corporate partners and how much it's grown on a year-over-year basis. I know that it's grown significantly in the last review we had. But I don't have that exact number for you.

[Alexander P. Paris:]

Okay. Then military, you said it's a growing percentage of the total. I think last time we talked, it was around 26% of the total. Is that number still fairly accurate?

[Daniel J. Devine:]

Yes. Alex, this is Dan. It has increased in the -- since the last time we spoke, I guess, in the first quarter. It's approximately about 28.5% to 29% now.

[Alexander P. Paris:]

Okay. And then, with regard to putting your cash to work. We've talked about that before. You touched on it on your prepared comments. What sort of things are under consideration, dividends, special dividends, tender offers? And when might we have some information there, after your next board meeting or later in the year? Just trying to get an idea there.

[Andrew S. Clark:]

Yes. So everything's under consideration, so I wouldn't take anything off the table. In terms of timing, it's hard for me to speak to that as well. I'm hopeful -- I would like it to occur sooner rather than later. And so I would say, from my perspective, my goal would be to have something -- to be able to tell you and everybody else earlier rather than later. I certainly don't -- I don't want to be announcing something at the end of the year. But that wouldn't be helpful to us and to our investors.

[Alexander P. Paris:]

Could you -- you probably can't, but could you handicap one versus the other, given that there is not a huge float, given 65% ownership by your private equity sponsor? Is a tender offer less likely than a dividend or some combination?

[Andrew S. Clark:]

Yes. It wouldn't be appropriate for me to try and handicap them. I mean, obviously, this is a board decision in terms of how we proceed. And I don't want to prejudge the view of the board.

[Alexander P. Paris:]

Okay. And then, I guess lastly then. The tax rate, Dan, was accrued at 27.5% or so in the first quarter. I'm using 45% for the full year. I think you did 44% last year out. Where ought we be for modeling purposes?

[Daniel J. Devine:]

I would say 45% is appropriate. The issue in the first quarter is that, as you probably know, you estimate your tax based on your expected situation at the end of the year. So therefore, you had a -- we had a loss kind of -- it doesn't exactly match 45% when you have a loss, and then 45% when you have a gain. So for the year, I think 45% is probably appropriate at this time.

[Operator:]

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

[Andrew S. Clark:]

Thank you. This concludes our call today. A replay of the call will be accessible later today at the telephone number and the passcode listed in our press release. Thank you, all, for your interest in Bridgepoint.

[Operator:]

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