Zovio Inc
Q4 2015 Earnings Call Transcript

Published: 10 Mar 2016

[Operator:]

Good afternoon. My name is Summer, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bridgepoint Education fourth quarter conference call. [Operator Instructions] Thank you. Ms. Gleason, you may begin your conference.

[Laura Gleason:]

Thank you, Summer, and good afternoon. Bridgepoint Education's fourth quarter 2015 earnings release was issued earlier today and is posted on the company's website at www.bridgepointeducation.com. Joining me on the call today are Andrew Clark, Chief Executive Officer; Kevin Royal, Chief Financial Officer; and Dr. Jane McAuliffe, Chief Academic 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 2016 and later. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Please note that these forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. On the call today, we will also discuss certain non-GAAP measures. In our earnings release you will find additional disclosures regarding non-GAAP measures, including reconciliations of these measures with U.S. GAAP. Note that these non-GAAP 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 Annual Report on Form 10-K for the period ended December 31, 2015, which we've 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, Laura, and welcome to Bridgepoint Education's 2015 earnings call. After I discuss last year's performance, our Chief Academic Officer, Dr. Jane McAuliffe will provide you with the results of our annual student and alumni survey. After Jane, our CFO, Kevin Royal will review our full year 2015 results and key metrics. Once Kevin concludes, I'll offer my closing comments. Now, I'd like to provide you an update on the progress that was made in 2015, executing our turnaround plan. While these efforts remain ongoing in 2016, we are encouraged by the results we have achieved during the year. Let me reiterate that our plan has remained unchanged and include stabilizing and restarting enrollment growth, improving admissions and marketing efficiency and increasing shareholder value. While we have been focused on executing our turnaround plans, we have not departed from our operating principle of product differentiation and strong operational excellence, which we believe will lead to market share gains over the long term. Many of the steps we are taking in our turnaround process are complimentary to these operating principles. We are making good progress towards our first goal of stabilizing and restarting enrollment growth. We achieved new enrollment growth in the current quarter, which exceeded the same period in the prior year by low single-digits. We have not seen new enrollment growth since Q1 2015, and it is encouraging to see it return. In addition, while total enrollment in our institutions was down by 12% from yearend 2014, the decline in total enrollment for the first half of the year was only 3.7% and the decline from Q3 to Q4 2015 was just 1.6%. Our cohort retention rate is 61.3% for the quarter of 2015 compared with 65.3% at the end of 2014. During the quarter, we experienced a decline in our measurement of our annual cohort retention as compared to the prior year's quarter. We believe that the continued strong job market as well as increased competition have impacted retention as compared to the prior year's quarter. While our current cohort retention rate is within our historical range of 60% to 66%, we continue to place a strong emphasis on increasing student retention. Our institutions have launched a number of programs in order to help achieve our goal of stabilizing and growing our enrollment. I will provide an update on the progress we are making with the Leadership Development Grant program and our new program initiatives. We continue to see strong performance from our Leadership Development Grant program, which is making a positive contribution to new enrollments. Importantly, this program provides our corporate partners with the opportunity for their employees to pursue and complete a college degree without incurring any student debt. While this program is relatively small in comparison to our total enrollment, it continues to expand. In 2015 we added 29 additional corporate partners and in the fourth quarter alone seven new companies joined. We now have approximately 1,600 students participating in the leadership development program compared with approximately 400 students at the end of 2014. We are hearing positive feedback from our corporate partners, indicating that students are enjoying their learning experience and employer see this program as a benefit that improves retention of their employees. We believe that an important component of our enrollment stabilization in growth is to continue to improve our program offerings. Beginning in 2015, we outlined a plan to develop and launch new programs, which are in high demand. Our combined institutions have successfully launched six new programs in 2015 and are developing 11 additional programs expected to be launched in 2016, once approved by our creditors and the department, with another 12 new programs scheduled for 2017. We have implemented a number of initiatives in order to achieve our second objective of improving admissions and marketing efficiency. While we have made substantial progress in stabilizing our enrollment during 2015, as discussed earlier, we were able to achieve these results, while decreasing our spending by 15% over 2014 levels in advisory, advertising and marketing. We continue to explore and test ways to improve our marketing efficiency, and believe further improvements are possible over the next two years. The third objective in our turnaround plan is to increased shareholder value. Our goal of increasing shareholder value is focused on a number of initiatives. Our core objectives in this area include stabilizing and growing revenues along with improving efficiency and controlling costs. During 2015 we continued to focus on aligning our cost structure with current enrollment levels. Our cost for 2015, excluding restructuring, declined by 11.8%. We implemented a number of cost reduction programs that helped streamline our operations and helped generate positive cash flows. We began the year with $356.5 million of cash and investment resources and ended the year with approximately $374 million of cash and investments on our balance sheet. We generated approximately $26.7 million of cash from operations and invested $2.5 million in property and equipment and another $2.2 million in intangible assets. We have plans for modest capital investment in 2016. We are constantly reviewing our cash requirements and areas to invest in order to improve our shareholders return. This is an area of continued focus and priority for the company, and it is a topic of discussion with our Board on a quarterly basis and received a high amount of attention. While ensuring our cost structure is properly aligned, we are making targeted strategic investments throughout 2016 in areas that we believe will enhance the student experience and improve retention and student learning outcomes. Specifically, investments have been deployed in developing next-generation learning experiences for new programs. Elements within new programs will include increased rich media, simulation, leveraging adaptive learning experiences and the application of real world authentic projects. Furthermore, we continue to build on studies, which indicate the student interventions that have the greatest impact on student success. Lastly, we will be investing in a mobile experience that is seamless across platforms, optimized for the web, and a consistent user interface that is device agnostic. I would now like to turn the call over to Dr. Jane McAuliffe.

[Jane McAuliffe:]

Thank you, Andrew. We've previously shared with you some of the initiatives that Ashford has taken to ensure student preparedness, raise academic quality and improved student outcomes. These include our orientation program before entering the university, the Ashford Promise during the first class, smaller class sizes and higher faculty-to-student ratios. We've also launched a number of initiatives focusing on supporting graduate students and alumni. While we believe these initiatives are exactly what's needed to better support our students and alumni, we are always interested in what our students and alumni think about their experience at Ashford. Now, for the sixth year running, I am pleased to present the 2015 results of Ashford's alumni survey, which we believe, again, demonstrate the university's success of delivering these important outcomes to Ashford graduates. The following results reflect 6,781 alumni who responded to the alumni survey in 2015. Of the 75% of alumni who reported having previously attended a traditional institution, 90% feel the quality of education at Ashford is the same as or higher than other traditional college or university. Of those who responded to the alumni survey, 89% said they would recommend Ashford to others, 86% of our graduates indicted that they were satisfied or very satisfied with their Ashford experience, 86% of our alumni agreed that earning their degree from Ashford gave them the confidence to pursue new job opportunities. And finally, 88% of alumni who responded to our alumni survey in 2015 agreed that earning their Ashford degree was worth the time commitment required to fulfill their educational goals. We also asked our alumni about how they view the return on their investment and their education, as measured by their salary before and after attending Ashford. Based on alumni survey responses collected in 2015 from our bachelor degree earners, we estimate that the average salary of these alumni is 13% greater than the average salary they were earning when they first enrolled at Ashford. Based on alumni survey responses collected in 2015 from our graduate degree earners, we estimate that the average salary of these alumni is 15% higher than their average salary upon first enrolling at Ashford. These survey results continue to reaffirm that an Ashford education is creating a positive return on investment for alumni, and we continue to be pleased with the value proposition offered by an Ashford degree and the benefit it is brining to the lives of our alumni and their families. During 2015 three new Ashford graduate programs and three new University of Rockies graduate programs were approved and launched. Ashford is also actively developing other new graduate and undergraduate degree programs that we believe will be in high demand, as highlighted by Andrew earlier. Now, I'd like to turn the call over to our Chief Financial Officer, Kevin Royal, to review our financial and operating results.

[Kevin Royal:]

Thank you, Jane. Turning to the results for fiscal year 2015, revenue was $561.7 million compared with $638.7 million for 2014. The decrease in revenue was due primarily to a decline in enrollments of 11.9%. As of December 31, 2015, total student enrollment decreased to 49,159 from 55,823 at December 31, 2014. For the year ended December 31, 2015, instructional costs and services were $281.5 million or 50.1% of revenue compared with $315.1 million or 49.3% in the same period last year. The decrease in expense was primarily driven by lower compensation benefits, lower facilities cost and lower instructor fees as well as lower IT spending. Admissions, advisory and marketing expenses for the year ended December 31, 2015, were $197.6 million or 35.2% of revenue compared with $231.1 million or 36.2% of revenue in the prior year. The decrease in these expenses in total and as a percentage of revenue was primarily due to increased efficiency of our marketing efforts, lower headcount and lower facilities cost. General and administrative expenses for the year ended December 31, 2015, were $56.6 million or 10.1% of revenue compared with $61.4 million or 9.6% of revenue for the prior year. Included in our three main expense categories for the fiscal year 2015 is approximately $9.7 million related to stock-based compensation expense in aggregate compared with $10.6 million for the fiscal year 2014. Restructuring cost for the year ended December 31, 2015, were $68.4 million, for the year ended, December 31, 2015, compared with $16.8 million for 2014. The cost were recorded in 2015 were primarily associated with the closure of the Ashford University, Clinton, Iowa campus, as well as lease exit cost for other facilities, which we no longer utilize. Excluding these restructuring charges for the year ended 2015, non-GAAP operating income decreased to $26.1 million from $31.1 million in the year ended 2014. The decline in non-GAAP operating income is driven by lower revenues, partially offset by successful cost reduction initiatives. Non-GAAP net income for the year ended December 31, 2015, was $15.9 million or $0.35 per diluted share compared with $20.2 million or $0.43 per diluted share for 2014. Our effective tax rate for the year ended December 31, 2015, was a negative 75.3%. The negative tax rate is due to income tax expense on a pre-tax loss, which is driven by the deferred tax asset valuation allowance, which was recorded in 2015. As of December 31, 2015, we had cash, cash equivalents, restricted cash and investments of $374 million. Our capital expenditures for the year ended December 31, 2015, were $2.5 million compared with $11.4 million in the prior year. Moving to regulatory items, for the year ended December 31, 2015, Ashford University derived 80.9% of its revenue from Title IV funds versus 83.4% in 2013, calculated according to Department of Education regulations. For the year ended December 31, 2015, University of Rockies derived 86.6% of its revenue from Title IV funds versus 88.3% for 2013, also calculated under the department regulations. Our institutions have managed this metric effectively since their founding, and we expect to continue doing so going forward. Now, I will turn the call back to Andrew for his closing comments.

[Andrew Clark:]

Thank you, Kevin. We are very encouraged by the results that we achieved in 2015 towards our goals. We continue to stay focused on our strategic priorities of new program diversification, reducing cost to align with our current business environment, while maintaining our priority on student learning, academic quality and regulatory compliance. It's our belief that these priorities will benefit all of our stakeholders over the long-term. At this time, I'll ask our operator to open the phone lines for your questions.

[Operator:]

[Operator Instructions] And your first question comes from Corey Greendale with First Analysis.

[Corey Greendale:]

So I had a, first of all, couple of questions that are slightly repetitive. I apologized a missed a couple of intermittent minutes of the call. Could you quantify the new student growth?

[Andrew Clark:]

The new student growth, Corey, was in the low single-digits for the fourth quarter.

[Corey Greendale:]

Could you talk to a couple of pieces of that? So just as an example, can you speak to what the growth was at Forbes? And also interested what's going on within the military population?

[Andrew Clark:]

So our military population remains consistent. Our total population is at about 28% of total enrollment. The Forbes, the business school population came down slightly relative to what it was last year. But we saw most of the growth in that 2%, I would say, primarily from strong operational execution, as well as in our Leadership Development Grant program, and the [ph] interest significant growth that we've had in that particular area.

[Corey Greendale:]

And the fact that you did get back to growth, that's great, and I think you have somewhat -- if you look at the comps that you have some nice negative comps coming up, which will help in 2016. But can you just talk to what your thoughts are now about the sustainability of that and the scalability? So in other words, I don't know what, as you change the channels that you're using to kind of -- the student [ph] inquiry channels, are those channels the kinds of things that are scalable in getting up to a more meaningful growth number on new students or is that a question?

[Andrew Clark:]

Yes. So it's a great question, Corey. I mean, we've been experimenting with the channels throughout the year. And as you can see that had a very beneficial impact, as our entire advisory advertising marketing line dropped by about 15%, while our new enrollment on a year-over-year basis in total were just slightly negative in the low single-digits. So we believe, to answer your question, those channels are scalable and we're very encouraged by the success we had in the fourth quarter, where we continue to experiment in those channels, we've reduced the cost, and we did the new enrollment growth during the quarter.

[Corey Greendale:]

And then on the cost side, I apologize, if I missed this. Is there a goal for 2016 expense reduction, we should be thinking of? And also, wondering how much of the -- at least versus my model, you had lower than expected expense in Q4, how much of that is a pull-forward versus increasing the goals for your cost reduction?

[Andrew Clark:]

I had a hard time hearing you. So let's start with the first question. I think you had a question about cash?

[Corey Greendale:]

No, I misspoke, sorry. Andrew, I said that, but I meant cost. So is there a target for cost reduction in 2016 that we should be thinking about?

[Andrew Clark:]

A target for cost reduction. Well, there is not a specific target, Corey, that I can provide for you. I will tell you, as I said in my opening comments, that we continue to remain very focused on the entire advisory advertising marketing line, creating efficiencies there, specifically, both in the advertising area, as well as in the labor area, I think, within that line. I think our instructional cost and services, as well as our G&A are pretty consistent and will remain pretty consistent.

[Corey Greendale:]

And then the last I had actually was on cash, which is the cash balance actually built nicely in the quarter, just how you're thinking about that now?

[Andrew Clark:]

So I think for the year, both for the quarter and for the year, we did have growth. For the year, it was about $17 million. It was fairly similar for the quarter. And I think looking forward that will obviously be impacted by a number of factors. We do have a tax refund we expect to receive in 2016. And to the extent that we generate positive EBITDA, we would also expect growth. So well, I can't provide exact number, we fully expect to grow cash into 2016.

[Corey Greendale:]

And in terms of uses of that cash?

[Kevin Royal:]

Well, I think the uses are going to be primarily similar to what they were this year, Corey, and we don't have any extraordinary uses of the cash that we're contemplating.

[Corey Greendale:]

So no change in terms of how you're thinking about potential repurchases, for example?

[Kevin Royal:]

Well, at this point, there is no change. I mean, as I've said, when we opened our comments, it's something we take up with our Board every single quarter and receive a very high level of attention, and I expect that to continue.

[Operator:]

And your next question comes from Peter Appert with Piper Jaffray.

[Peter Appert:]

Andrew, the improvement in revenue per student is pretty noteworthy I think in the context of the discounting, obviously, associated with the leadership grant programs. So can you help me better understand what's driving that? I know you did have a price increase, but is there something else going on.

[Andrew Clark:]

That's driving the increase in revenue per student?

[Peter Appert:]

What's driving the revenue per student increase? Is it more than just -- did you do a 2% price increase, I don't recall exactly?

[Andrew Clark:]

Yes. It was approximately 2%. Peter, with the Leadership Development Grant program -- and I don't remember, if we've talked about this before, but those students have a very high retention rate. So despite the discounting that occurs, that group of students doesn't have the kind of impact that you might otherwise think it would from the discounting that occurs.

[Peter Appert:]

So it must be a mix issue then, right, that's driving the revenue per student?

[Andrew Clark:]

I didn't hear that. What did you say?

[Peter Appert:]

I'm trying to understand, how you got to -- if my calculation is correct, I think you had close to 4% growth in revenue per student. So I'm just trying to figure out, what I'm missing here beyond price increase. So I'm assuming its mix?

[Andrew Clark:]

Yes, I'm confident it's the mix of the student population. Our graduate student population is slightly higher, Peter, than it normally is. I think it ran about 13%.

[Peter Appert:]

How should we think about then revenue per student in '16?

[Andrew Clark:]

How do you want to think about revenue per student into 2016 was your question?

[Peter Appert:]

Correct.

[Andrew Clark:]

Well, I think it's probably ought to be slightly higher than it was this year, but kind of in that tuition increase range, I would say.

[Peter Appert:]

And then in terms of -- back to the cash issue. So number one, should we anticipate further restructuring charges in '16?

[Kevin Royal:]

So we don't, at this point in time, have any restructuring charges planned. We worked hard to identify the areas that needed restructuring and take those charges in 2015. So our expectation is that, if we would have any charges, those would be minimal in fiscal 2016.

[Peter Appert:]

And then the second part of that was, I'm just wondering, Kevin, if there is a residual cash flow impact from the charges you took in '15 in terms of cash outlays for leases or additional cost to close down Clinton or is the cash already all out?

[Kevin Royal:]

Well, there will be some cash flow. We had a fairly substantial Tuition Assistance Program for those students that were impacted and that would be in the couple of million range in -- actually it will flow beyond 2016, probably between 2016 and 2017 equally. And that's about it for residual cash outflows.

[Peter Appert:]

And then, I guess, finally, as previously mentioned the inflection in starts to positive territory is quite noteworthy in the context to what we're seeing from your competitors. Is there anything you would read through from that, Andrew, in terms of how you're seeing the competitive dynamics in the market change potentially?

[Andrew Clark:]

Yes. The competitive dynamics are obviously still very strong and it continues to be, I would say, a soft environment. I would give the credit to, the earlier comments I made around the importance that we placed on the student experience and operational execution I think throughout the university and at Ashford and Rockies, as well as, Bridgepoint. Folks are really working hard understanding that there are a lot of different opportunities for students and they're working really hard to differentiate their institutions and make sure the students have the best possible experience. I'm very encouraged, obviously, given the result that we had in the fourth quarter and I'm hopeful that those will continue.

[Peter Appert:]

And actually just one last thing. Andrew is your expectation that the persistence numbers, the way you calculate them, could turn positive in '16?

[Andrew Clark:]

Yes. The way we calculate our cohort retention number that we report each quarter, Peter, yes, it is absolutely our goal to see those numbers turn positive in 2016.

[Operator:]

And at this time, there are no further questions. End of Q&A

[Andrew Clark:]

All right, operator, thanks, I want to thank everybody for attending our call and for your interest in Bridgepoint Education.

[Operator:]

And this does conclude today's conference call. You may now disconnect.