Zovio Inc
Q2 2015 Earnings Call Transcript

Published: 4 Aug 2015

[Operator:]

Good morning and welcome to Bridgepoint Education's Second Quarter 2015 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Matthew Mitchell, Deputy General Counsel for Bridgepoint Education. Please go ahead.

[Matthew Mitchell:]

Thank you, Tania, and good morning. Bridgepoint Education's second quarter 2015 earnings release was issued earlier this morning and it’s posted on the Company’s website at www.bridgepointeducation.com. Joining me on the call today are Andrew Clark, Chief Executive Officer; Jane McAuliffe, Chief Academic Officer; and Dan Devine, 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 2015 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, 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 June 30, 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 Clark:]

Thank you, Matt, and welcome to Bridgepoint Education's second quarter 2015 earnings call. After I discuss our second quarter, our Chief Academic Officer, Jane McAuliffe, will update you on academic developments, and our CFO, Dan Devine will review our second quarter financials and key operating metrics. After Dan speaks, I'll offer my closing comments. I want to begin by communicating how difficult it was to decide to close Ashford University campus in Clinton, Iowa. As you know, we spent a decade working to grow the campus in Iowa. We invested millions into improving the campus infrastructure and even more in scholarships to attract new students. We were successful in the first few years and grew the enrollment from 300 to more than 1,000 students. However, in 2012, we began to see a change for Liberal Arts colleges located outside of urban areas. Attracting new students despite our investments became increasingly difficult. Reasonably, the Ashford University Board of Trustees made the difficult decision to close the Iowa campus at the end of the 2015/2016 academic year. Our Number 1 priority will be the campus students and assisting them in accomplishing their educational goals. Approximately 35% of these students are on track to graduate next spring. Of the remaining 65%, approximately 60% can complete their degree at Ashford by switching to online courses if they choose. No matter what a student's decision may be, our focus will be on helping them persist in their goals to attain a college education. At our first quarter call, I concluded the call by providing my views of the external environment and in that context what it means for Bridgepoint. As recent reports from our peers highlight, the sector continues to experience soft market conditions and increased competition, but is resulting in unpredictable enrollment performance. I think it’s fair to say that this sector has experienced this and at our institutions, we are seeing some of the same volatility. For the reasons I noted in the prior call, we believe we will experience some variability in various quarters as we pursue our goals. In the second quarter, we did experience a decline in year-over-year new enrollments and a greater decline in year-over-year student retention than we had anticipated. The decline in new enrollment was driven primarily by a soft market and continued competition, evidence of the volatility we are seeing occurred in the quarter when we experienced significantly lower enrollments year-over-year in April, but then saw May and June combined exceed prior year by mid-single digits. Additionally, during the quarter we experienced challenges in starting all of the applicants as our potential students base increased verification scrutiny during their financial aid processing or deferred their decision to start in lieu of the strong job market. While we are encouraged by increased productivity during the quarter of our advisors and continued strong initial new student inquiries, it is below the level we wanted to achieve. Collectively what I just described is prolonging the timeline for us to achieve positive enrollments. As I previously noted, we also experienced a decline in our measurements on the annual cohort retention as compared to the prior year’s quarter. This decline of approximately 300 basis points was higher than we had anticipated. It does appear that a higher level of military enrollment on a percentage basis, lower annual reimbursement levels for the navy and coast guard are contributing. This will challenge us to achieve the enrollment goals we outlined previously which were to grow new enrollments in the mid-single digits and to stabilize our total enrollment by the end of the year. While these goals remain our focus, it does not appear that we will achieve these goals until 2016. Appropriately sizing the cost structure of the organization to meet the total enrollments of our institutions is a priority. As mentioned, the difficult decision was made to close the Ashford Campus and we are analyzing our real estate needs to meet the number of employees necessary to support our mission of providing a quality innovative affordable college education. Dan will address some of the progress we have made in this area in the second quarter in his section. We continue to assess the overall structure of the organization under a strategic goal of flattening the management structure allowing us to be more agile in a competitive environment. As I mentioned on our last call, Ashford University has implemented the leadership development grant program, a highly differentiated corporate partnership program that provides various companies with the opportunity to allow their employees to pursue and complete a college degree without incurring any student debt. While this program is still relatively small compared to our total enrollment, it continues to significantly expand. In the second quarter, eight more companies joined this program. Our student enrollment in this program increased by over 400% on a year-over-year basis. We are especially proud that the leadership development grant program affords the opportunity to pursue to attend and complete their education debt free. I want to emphasize that our turnaround planned at Bridgepoint Education remains the same. Despite the softness of the external environment, as a reminder, first we are focused on stabilizing and restarting enrollment growth, second improving admissions and marketing efficiency, which we did accomplish in both the first and second quarter and third on increasing shareholder value. First, enrollments. We continue to focus on diversification of our portfolio of program offerings primarily at the graduate degree level and the craft and healthcare and technology and will continue to seek out opportunity to differentiate our schools likes we have done with the Forbes School of Business. Second, on the cost side, we are focusing on improving admissions and marketing efficiency with the goal of a 6 percentage point EBITDA gain by 2017 as compared to 2014. We will achieve that goal through a combination of frontline productivity increases, marketing spend optimization and a more efficient advisory management structure, something we implemented during the quarter. Finally, our desire is to improve shareholder return and we are continuing our analysis of how best to accomplish that given our capital structure. I want to reiterate what I said last quarter, in all of our deliberations, our priority is the long-term health of the company and we will not do anything to jeopardize our financial position or compromise our ability to invest in future growth. For the remainder of the year, we will continue to implement these initiatives as well as to find others. I look forward to sharing the final outcome of our efforts with you over the next two quarters. Now, I’d like to turn the call over to our Chief Academic Officer, Jane McAuliffe to provide an update on academic developments.

[Jane McAuliffe:]

Thank you, Andrew. I want to provide an update on Ashford University’s most recent WASC Senior College and University Commission, WSCUC onsite accreditation special visit that took place April 8 through 10, 2015. This special visit was requirement that was made back in 2013 when the accrediting body granted initial accreditation. Ashford University hosted the special visit team and subsequently received an action letter outlining the team’s findings. The action letter stated that the special visit team had found substantial evidence that Ashford continues to make sustained progress in all areas cited as issues that require continued attention. The commission acted to receive the special visit report and scheduled a comprehensive review with the offsite review in fall 2017 and the accreditation visit in spring 2018. Congratulations to the Ashford faculties, leadership, staff and the Board of Trustees on their hard work and continued progress. I also want to report that we continue to focus on diversification of our portfolio of program offerings. Our team is excited to be in the process of developing approximately 20 new programs over the next two years. We anticipate that new programs are heavily focused in the graduate areas as we continue to expand our Masters and Doctoral program offerings at both of our institutions. Now, I’ll turn the call over to Dan Devine, our Chief Financial Officer to review our financial and operating results.

[Dan Devine:]

Thank you, Jane. Let me begin by providing some key operating figures for the quarter ended June 30, 2015. For the second quarter of 2015, revenue was $147.1 million compared with revenue of $171.5 million for the same period in 2014. The decrease is primarily due to the decrease in enrollments during the period. As of June 30, 2015, total student enrollment was 51,049 students compared with 61,117 as of June 30, 2014. For the second quarter of 2015, instructional costs and services was $71.4 million or 48.6% of revenue compared with $76.9 million or 44.8% of revenue for the second quarter of the prior year. The increase as a percentage of revenue was primarily driven by higher bad debt expenses in corporate support services. Included in the instructional costs and services for the second quarter of 2015 was bad debt expense of $7 million or 4.7% of revenue. Admissions advisory and marketing expenses for the second quarter of 2015 $48.5 million or 33% of revenue compared to $55.5 million or 32.4% of revenue for the second quarter of the prior year. The increase as a percentage of revenue was primarily driven by selling compensation and direct advertising cost offset by lower branding cost over the period. General and administrative expenses for the second quarter of 2015 were $13.2 million or 9% of revenue compared with $16.7 million or 9.8% of revenue for the second quarter of the prior year. The decrease as a percentage of revenue was primarily driven by lower information technology costs and compensation. Included in our three main expense categories for the second quarter of 2015 is approximately $3.4 million related to stock-based compensation expense. Additionally, as Andrew highlighted, we are focused on addressing our cost structure and in the second quarter of 2015, we recorded a restructuring and impairment charge of $14.4 million or 9.8% of revenue, but as we did not take such charge in the comparative period in 2014. These charges included lease exit cost, asset impairment and some severance cost. As we noted, the closing of the Ashford campus in Iowa was announced in July and we will be recording a restructuring charge related to this item in the third quarter of 2015. As a result of the above, operating loss was $500,000 for the second quarter of 2015 compared with operating income of $22.4 million for the same period in 2014. Net loss for the second quarter 2015 is $700,000 or a loss of $0.01 per diluted share compared to net income of $13 million or earnings of $0.28 per diluted share for the second quarter in the prior year. As noted, included in the fully-diluted loss per share for the second quarter of 2015, our restructuring charge is $14.4 million, which had an after-tax impact of approximately $0.18. The effective tax rate used to calculate the income tax for the six months ended June 30, 2015 is a negative 50.5%. As of June 30, 2015, Company had combined cash, cash equivalents, restricted cash and investments of $362.7 million, which is compared to $356.5 million as of December 31, 2014. The Company generated $14.8 million of cash from operating activities during the six months ended June 30, 2015. By comparison, the Company used $3.8 million of cash in operating activities during the same period in 2014. Net accounts receivable balance was $28.2 million as of June 30, 2015 compared to $21.3 million as of December 31, 2014. Capital expenditures for the six months ended June 30, 2015 were $2.2 million as compared to $6.2 million in the same period last year. Now, I’ll turn the call back over to Andrew for closing comments.

[Andrew Clark:]

Thank you, Dan. It’s 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. I want to also emphasize 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. At this time, I’ll ask that our operator open the phone lines for your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line Corey Greendale with First Analysis. Your line is open.

[Corey Greendale:]

Hey, good morning.

[Andrew Clark:]

Good morning.

[Corey Greendale:]

So, few questions. First of all, on the new student trend, I guess two questions. It sounds like it was better I think you said in May and June than in April. So, given that, I was wondering if you could comment on what you’ve seen in July and if it is recovering more, why the -- I mean, I understand being prudent with the outlook, but how cautious should we take away your tone as being?

[Andrew Clark:]

Yeah, Corey, let me just give you some more color on the quarter and maybe that would be helpful. As I indicated, new enrollment for the month of April were very unusual and May and June, we saw new enrollment growth that was more in line with the mid-single digit growth that we’ve seen over previous quarters. Unfortunately, I can’t really speak to what caused the anomaly in April. We looked at a lot of data to try and understand what caused that and couldn’t come up with anything conclusive. I think it speaks to some of the volatility that I’ve talked about, I’ve talked about in the last quarter. I think it also is helpful to understand kind of what things look like from kind of the very start, which is that the number of enquiries that we’re receiving from students continues to remain strong and the applications that we’re taking from students also remain strong. Where we see deterioration is students who have applied and then actually show up to start their course. So, if we see I think because of the job market in some cases kind of differing their decision to begin class. And that’s the kind of the piece that is hard to predict whether that effectively that show rate will return to what has been in previous years, last year or whether we will continue to kind of see a lower percentage of students being that first course. It’s been -- I would characterize that percentage as fairly stable this year, but lower relative to what we saw last year.

[Corey Greendale:]

Can you say whether the trend since the end of Q2 was more like April or more like May and June?

[Andrew Clark:]

I didn’t catch it right, the trend for –

[Dan Devine:]

Enrollment trends.

[Andrew Clark:]

This quarter?

[Corey Greendale:]

Since the end of the quarter.

[Dan Devine:]

Was it more like April or was it more like May, June.

[Andrew Clark:]

Well, I don’t really want to comment on the quarter that we are in. I should save that commentary I think Corey until our next earnings call. I feel, let me put it to you this way. I feel like certainly from an internal standpoint that we are doing the right things. We are making the right decisions in terms of our focus on students and student outcomes and I believe that that will eventually allow us to be in a position where we continue to have more enrollment growth, but it’s tough to kind of have that visibility when you are in a market that’s kind of as volatile as this one.

[Corey Greendale:]

No, I understand. I got it. And are you willing to say since you’ve been giving kind of at least directional feedback on magnitude like you talked about mid-single digit in new student growth, what the magnitude of the decline was in Q2?

[Andrew Clark:]

Yeah. The decline in new enrollments in the second quarter was about mid-single digits. Really it was, if not for April, you would have seen a second quarter that was very similar in new enrollment growth to other quarters.

[Corey Greendale:]

Okay. Good. And then a question on the cost side which is first, Dan, I just want to verify the impairments in restructuring charges in Q2. That was before the campus announcement, so this relates to other actions and can you just talk about what those actions were and whether the costs that you saw in Q2, that’s a good run rate or that could come down in Q3?

[Dan Devine:]

Yes, so that is correct. It was not inclusive of the campus. This related to a facility primarily that we had, 13.7 million was assets and lease impairment for a facility. 700,000 was severance charges of the 14.4. The Q3 go forward number is which is probably about $1 million a month on the lease expense pick up, and then you annualized salaries of the severance that we applied was approximately 2.3 million. So that would be 5.75 a quarter.

[Corey Greendale:]

And so you’ve got – you did not get the run rate of those savings in Q2, so it should lower our Q3 numbers?

[Dan Devine:]

Those expenses would not be included in Q3 and beyond.

[Corey Greendale:]

Okay, good. Thank you.

[Operator:]

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

[Adrian Colby:]

Hi, it’s Adrian Colby for Paul Ginocchio. I was wondering if you could comment on the retention trends. You had mentioned that they came in below expectation. I was wondering if you could comment if you believe that’s related to increase in students dropping out for jobs. Last quarter you had mentioned that weaker retention levels were seen at the graduate level versus undergrad, so wondering if that persisted into the second quarter.

[Andrew Clark:]

Yeah, sure Adrian. So I will start with the second part of your question first. The retention decline was slightly higher for grads than it was for undergrads. So we saw a decline in retention at both the undergrads and graduate level in the second quarter. It was primarily driven I think by the military as we look at our military students. The good part about that is the students are half stick rates [ph], they do drop out and leave the institution temporarily, but typical do return at some point. So we would expect most of those students to come back.

[Adrian Colby:]

That’s helpful. And I was wondering to – I know in the past we have talked about how retention in our positions as we measured is also inclusive of graduation rates, just to know if you could comment on what trends were like in second quarter versus the first quarter and what your expectations are going into the second half?

[Andrew Clark:]

In terms of graduation rate, number of students graduating has pretty much, I’d say stabilized in terms of the total number. For 2000 -- are you comparing it to 2014?

[Adrian Colby:]

Just any sense relatively year-over-year would be helpful.

[Andrew Clark:]

Our graduate rate has declined year-over-year probably by the mid-teens, about 10% to 12% -- I am sorry, 12% to 15% and you can see that that rate has remained constant for the first two quarters of 2015 and we don’t expect any changes for the rest of the year. We expect that rate on a year-over-year basis to remain about the same.

[Adrian Colby:]

Thank you.

[Operator:]

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

[Peter Appert:]

Thanks, good morning. So Dan, you or Andrew mentioned a 6% EBITDA gain by 2017, so I just want to confirm you’re referencing a 600 basis point improvement in the EBITDA margin, is that correct?

[Dan Devine:]

Against the margin of – against the cost of 2014 as a percentage, which was approximately 37, yes.

[Peter Appert:]

Okay, so costs – I am sorry, I am not following, the EBITDA margin –

[Dan Devine:]

Cost as a percentage of revenue for 2014 was 37% for admission and advisory. As Andrew said, our goal is to get that down to what, approximately 31% by 2017.

[Peter Appert:]

Okay, so you were not specifically saying you expect a 600 basis point increase in your EBITDA margin by 2017?

[Dan Devine:]

We expected that that improvement in cost of admissions and marketing, everything else would remain the same, would relate to an increase – similar increase in EBITDA. We are adjusting that particular area as we think is our – is an area of focus for us to get it down and more in-line with our peer as we think.

[Peter Appert:]

Got it. So what – in terms of your expectations for enrolment numbers over the next couple of years, Andrew, you’re talking about getting starts back to possum’s [ph] territory by 2016. By 2017, do you think you will be positing enrolment games?

[Andrew Clark:]

I think we will. I mean, you’re asking me to look quite a ways into the distance, but I think basically our strategy, Peter, around expanding graduate program in stem [ph] that Jane mentioned previously, and the success we have had in corporate partnerships is specifically what I spoke to the eight new partners of over 400% increase. I think those efforts further differentiation like we have done with the Forbes brand, combined it makes sense that even if a top market were to process that those strategic efforts should lead to positive enrolment trends as you look into 2017. I want to emphasize, Peter in the first half of this year, our admissions counselor staffing was down by about 8% over last year and we were able to lower our cost per acquisition by about 13%, while we effectively for that first six-month period have flat new enrolment on year-over-year basis. So I think that’s a good indication that even in a soft challenging market, we are beginning to make steps that should help us achieve the strategic goals that we have set for ourselves for 2016 and 2017.

[Peter Appert:]

Andrew, can you talk a little bit more about the economics of the leadership development grant program, maybe how big it is currently in terms of enrollments? What kind of pricing you have to offer to drive it and are there margin implications associated with it?

[Andrew Clark:]

Yeah. So, I think it’s about roughly -- approximately 2% of total enrollments right now. So, as I mentioned Peter in the script, still small, but growing significantly. We’ve taken a look at the economics that the acquisition costs for those students is very low and the retention of those students is much higher than the retention we have for the rest of the student body. So, economically then, it does make sense for us to continue to grow that program over the long-term.

[Peter Appert:]

Okay. And then just one last thing. The average revenue per student, can you remind me what you’ve done from a pricing perspective recently and what we should think about in terms of revenue per student going forward?

[Dan Devine:]

Sure. Peter, this is Dan. It looks like to me our year-over-year revenue per student in the quarter based on average number of enrollments was up approximately 1% and that’s primarily driven by the fact that we did a -- I think 2.5% increase beginning in May 1. So, you got some of that in the quarter. And then, you have a little higher year-over-year military population, which would lower that getting the full effect of the 2.5%. So, we came in at about 1% based on my calculation year-over-year and that should stay about steady going forward.

[Peter Appert:]

Okay, great, thank you.

[Operator:]

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

[Henry Chien:]

Hi, it’s Henry Chien, calling in for Jeff. I was wondering if you might be able to breakout or talk a little bit about what percentage of starts or maybe the more normalized starts comes from to leadership development grants.

[Andrew Clark:]

I don’t have -- Henry, I appreciate the question. I don’t have that number in front of me. So, I can’t -- I’ll have to get back to you.

[Henry Chien:]

Okay. And do you have an estimate of approximately what are the total expense reductions from the campus closure for ’15 or ’16 as it will commence?

[Dan Devine:]

Henry, this is Dan. We’re still working on the valuation of the assets out there. So, basically, we’re going to -- that chart will be recorded in the third quarter of 2015. As we said, that campus is going to continue to operate through May of 2016. So, your basic -- your run rate of expense will remain through May of 2016 at where it is today. Following that, we’ll have some adjustments to the campus as we wind it down. So, from a high level, you have some pickup in expense in 2016, but you won’t really see the benefit of the campus closure from a financial perspective until 2017. I think we’ve said that loss has been running at less than $1 million a month but probably about $750,000 per month.

[Henry Chien:]

Got it. Okay, perfect. All right, thank you.

[Operator:]

And your last question comes from the line of Corey Greendale with First Analysis. Your line is open.

[Corey Greendale:]

Thanks for taking the follow-up. I just had a couple real quick things. Following up on my previous question about the cost savings, Dan, could you just give us a sense, the savings on the least end on salaries, can you break that out between ICS and admissions advisory and G&A?

[Dan Devine:]

I can follow-up with you on the breakout of the -- I can follow-up with you. I apologize, I had it and then we’ve moved it to restructuring stand-alone. So, I don’t have that in front of me right now, but I can get back to you with that.

[Corey Greendale:]

It’s fine. And the other question is, in our discussions either on the last call or other discussions, I had the sense you were more actively thinking about what to do with the cash balance and I realize given kind of volatility and enrollment trends, that may differ that, but just any thoughts on the cash balance and timing on making some decisions about what to do with it?

[Andrew Clark:]

Yeah. We continue Corey to be active in highlighting our capital structure and how best to return that to shareholders. I can't give you any color on timing, but I can assure you that we're very active in that evaluation with our board.

[Corey Greendale:]

Okay, great. Thanks.

[Operator:]

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

[Andrew Clark:]

Yeah. I want to thank everybody for your interest in Bridgepoint Education and your participation on the call today.

[Operator:]

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