Zovio Inc
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

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

[Matthew Mitchell:]

Thank you, Carl, and good afternoon. Bridgepoint Education's third quarter 2015 earnings release was issued earlier today 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; Kevin Royal, Chief Financial Officer; and Dan Devine. 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. 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 measures. In our earnings release you will find additional disclosures regarding non-GAAP measures, including reconciliations of these measures to US GAAP. Also note that these non-GAAP measures are not intended to be a substitute for our GAAP results. Please refer to our SEC filings, including our quarterly report on Form 10-Q for the period ended September 30, 2015, to be filed with the SEC, 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 Matt and welcome to Bridgepoint Education's third quarter 2015 earnings call. I want to begin today’s call by recognizing Dan Devine, our CFO, for the past 11 plus years. As many of you know, Dan started Bridgepoint Education with me in January of 2004. I couldn’t be more grateful to Dan for helping us build an organization that has positively impacted so many lives. Dan has been passionately dedicated to our mission, students and employees. It’s been a real pleasure to work with Dan for over a decade and I wish him all the best in his future endeavours. I’d also like to welcome our new CFO, Kevin Royal. Kevin brings seasoned financial leadership, broad public company experience and a strategic mindset that will provide great value to Bridgepoint Education over the long term. Moving on, after I discuss our third quarter, Kevin will review our third quarter financials and key operating metrics. After Kevin speaks, I'll offer my closing comments. In our second quarter call, I concluded the call by outlining the keys to success in this environment, including product differentiation and strong operational excellence which we believe will lead to market share gains over the long term. Our institutions are executing on plans that when fully implemented will position them to compete in the market. We continue to offer a clear value proposition to students for a 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 included expansion in the number and breadth of programs along with our emphasis on strategic corporate partnership. Included in achieving operational excellence is managing 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. In this quarter, we continued to focus on addressing cost reduction that can be achieved without impairing quality and Kevin will highlight some of our achievements during his comments. Turning to the third quarter, the performance particularly in the area of new enrollment and total enrollment was in line with our internal expectations. New enrollment in the quarter was consistent with prior quarters and declining in the mid single digits as compared to the third quarter of 2014. Student inquiries in the quarter were strong and our conversion was stable throughout the quarter. We still believe that issues surrounding increased verification scrutiny during financial aid processing or students to frame their decision to start in lieu of the strong job market continued to impact our new enrollment potential unfavourably. However our leadership development grant program continues to perform well adding positively to new enrollment. This is 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 third quarter, 8 more companies joined this program. Our student enrollment in this program continues to see strong growth on a year-over-year basis. We are especially proud that the leadership development program affords the opportunity for students to obtain and complete their college education debt three. During the quarter we experienced a decline in our measurement of annual cohort retention as compared to the prior year’s quarter. This decline of approximately 570 basis points to 60.1% was anticipated as we continued to enhance our retention initiative. It appears that a high level of military enrollment on a percentage basis, timing of TA reimbursement levels and expanded DOE student verification practices have impacted retention as compared to the prior year’s quarter. I want to emphasize that our turnaround plan at Bridgepoint Education remains the same despite the soft external environment. As a reminder, we are first and foremost focused on stabilizing and re-starting enrollment growth. Second, we are focused on improving admissions and marketing efficiency which we did accomplish in each quarter of 2015. And third, we are focused on increasing shareholder value. First, enrollment. We continue to focus on diversification of our portfolio of program offerings, primarily at the graduate degree level and across STEM, healthcare and technology. We have launched three graduate programs in the past quarter and plan on implementing 10 new degree programs in 2016. 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. In the quarter we did generate a high single-digit increase in the number of new student inquiries on a lower media spend of approximately 20% as compared to the third quarter of 2014. While total new enrollment did decline in the quarter as I mentioned, we’ve only seen a low single digit decline overall in the first nine months of the year while our media spend for that same period was down 20%. Our applications for the nine months were up mid single-digits further emphasizing the point I made earlier around soft market conditions. Finally, our desire is to improve shareholder return. I want to reiterate what I said last quarter, in all of our deliberations our first priority is always 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. By prioritizing the long-term we do not feel that it is appropriate in 2015 to return capital to shareholders via stock buyback or dividend. We will continue to evaluate best use of our capital as we enter 2016. Now I’d like to turn the call over to our Chief Financial Officer Kevin Royal to provide an update on financial performance during the quarter.

[Kevin Royal:]

Thank you, Andrew. Let me begin by providing some key operating figures for the quarter ended September 30, 2015. For the third quarter 2015 revenue was $140.8 million compared with revenue of $162.7 million for the same period in 2014. The decrease is primarily due to the decrease in enrolments during the period. As of September 30, 2015 total student enrollment was 49,982 compared to 59,552 as of September 30, 2014. For the third quarter of 2015, instructional costs and services were $69.2 million or 49.2% of revenue compared with $79.7 million or 49% of revenue for the third quarter of the prior year. The increase as a percentage of revenue was primarily driven by higher bad debt expense and other support services offset by lower facilities costs. Bad debt expense for the third quarter of 2015 was $8.9 million or 6.3% of revenue compared with $9 million or 5.6% in the same quarter of the prior year. Admissions, advisory and marketing expenses for the third quarter of 2015 were $47.8 million or 34% of revenue compared to $56.8 million or 34.9% of revenue for the third quarter of the prior year. The decrease as a percentage of revenue was primarily driven by lower branding costs offset by higher selling compensation and direct advertising costs. General and administrative expenses for the third quarter of 2015 were $13.3 million or 9.5% of revenue compared to $15.6 million or 9.6% of revenue for the third quarter of the prior year. The decrease in general and administrative cost as a percentage of revenue was primarily driven by lower support services partially offset by professional fees. Restructuring and impairment charges for the third quarter of 2015 were $44.9 million or 31.9% of revenue. These charges were related to the closure of our Clinton, Iowa campus, student transfer costs related to the closure, lease exit costs as well as severance costs and we did not have a structuring charge in the comparative quarterly or year-to-date periods in 2014. Included in our expense categories for the third quarter of 2015 is approximately $1.7 million related to stock compensation expense and $2.8 million in the same period of the prior year. The operating loss was $34.5 million for the third quarter of 2015 compared to operating income of $10.6 million for the same period in 2014. Excluding restructuring costs of $44.9 million, we recorded non-GAAP operating income of $10.4 million for the third quarter of 2015 compared with non-GAAP operating income of $10.6 million for the third quarter of 2014. During the quarter, we recorded a valuation allowance against the portion of the deferred tax assets. This resulted in additional income tax expense of $40.7 million in Q3 2015. The valuation allowance was necessary due to recent net losses which have been caused by restructuring charges and calling the question whether we will be able to realize these deferred tax assets in future periods. Including the restructuring costs of $44.9 million and the valuation allowance charge of $40.7 million, the net loss for the third quarter of 2015 was $62.7 million equalling a loss of $1.37 per diluted share compared to net income of $6.3 million or earnings of $0.14 per diluted share for the third quarter in the prior year. Excluding the restructuring costs and the related tax effect, as well as the deferred tax asset valuation allowance, we recorded non-GAAP net income of $6 million or $0.13 per share for the third quarter of 2015 compared with the non-GAAP net income of $6.3 million or $0.14 per diluted share for the third quarter of 2014. Turning to the balance sheet. As of September 30, 2015 the company had combined cash, cash equivalents, restricted cash and investments of $360.5 million which is compared to $356.5 million as of December 31, 2014. The company generated $16.6 million of cash from operating activities during the nine months ended September 30, 2015. By comparison, the company generated $24.6 million of cash from operating activities during the same period in 2014. Net accounts receivable balance was $30.8 million as of September 30, 2015 compared to $21.3 million as of December 31, 2014. Our capital expenditures for the nine months ended September 30, 2015 were $2.3 million as compared to $9.6 million 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. I want to empathize that management is very focused on our three strategic priorities of new program diversification, reducing our cost structure to better align our expenses with the total enrollmet and revenue of the company while maintaining our priorities on student learning, academic quality and regulatory compliance. As I have stated this afternoon, we believe that these priorities will benefit all of our stakeholders over the long-term. At this time, I will ask that our operator open the phone lines for your question.

[Operator:]

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

[Peter Appert:]

So Andrew, you mentioned strengthening inquiries, I think you said inquiries up year to year, is that correct?

[Andrew Clark:]

I don't think I caught the last part. Did you ask me if the inquiries were up year over year?

[Peter Appert:]

Yes, what I am getting to is, I am just trying to understand if inquiries were up and the start unders [ph] continue to decline, there is a little bit of a disconnect, so I am just wondering if you could address that.

[Andrew Clark:]

I am having a difficult time hearing you, Peter but the student inquiries were up year-over-year. I would say high single-digits and as I mentioned over the nine month period our applications have been up low single digit. So really what’s occurring there is some of the things that I mentioned in my earlier remarks around DOE student verification and just the soft market conditions and how the folks I think apply to enrolled, but then a job opportunity comes available and they defer [indiscernible] to start school.

[Peter Appert:]

In terms of this programmatic expansion you’re talking about, anything you'd call out in terms of particular areas that you think could move the needle in terms of overall performance?

[Andrew Clark:]

Well I think we’ve tried to take a pretty strategic approach in the new program. As I mentioned it’s primarily going to be in the graduate area. We’ve been pretty diversified in the three programs this year. For example, masters in criminal justice, one in psychology, one in accountancy. But if you look at ’16, I think we’re continuing that diversification cohort everything from technology to information systems graduate programs, the graduate programs in education as well as perhaps a bachelor degree program here or there.

[Peter Appert:]

So these programmatic expansions are not driven specifically by the leadership development program, it’s not your corporate partners sort of pushing you in this direction?

[Andrew Clark:]

No, just to be clear, Peer, we did some research with a third-party the end of 2014 looking at market opportunities where Ashford University in particular and University of the Rockies would have an opportunity to take market share. And our take-away from that was really to focus in, in the graduate and in the Rockies case, a doctoral degree program and specifically as I mentioned in STEM, in technology and healthcare.

[Peter Appert:]

The last thing, the shift in mix was little more focused on graduate, is this what's driving the revenue per student number a little bit higher in terms of higher price points on these programs?

[Andrew Clark:]

I think it's pretty similar for us, our revenue per student number that we have, Peter, is pretty consistent, as we look at the second quarter to the third quarter.

[Peter Appert:]

I am thinking about on a year to year basis, I think it is, if I am doing the calculation correctly, I think it’s up just a little bit which -- again in the context of more students in leadership development side, that’s sort of counter-intuitive, and I would think it might be down a little bit.

[Andrew Clark:]

Yes, so I think what you are seeing is we had a tuition increase of about 2% and we saw the revenue per student up almost a point. So kind of the difference there would probably be in the impact that the leadership development grant program is having. End of Q&A

[Operator:]

[Operator Instructions] There are 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 operator. We just like to thank all of you for your interest in Bridgepoint Education and your participation on today’s call.

[Operator:]

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