Zovio Inc
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Good morning, and welcome to Bridgepoint Education Third Quarter 2014 Earnings Conference Call. Today's call will be 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. Mr. Goodson, you may begin.

[Paul Goodson:]

Thank you, Caleb, and good morning, everyone. Bridgepoint Education's third quarter 2014 earnings release was issued earlier this morning and was posted on the company's website. Joining me today on the call are Andrew Clark, Chief Executive Officer, Dr. Jane McAuliffe, Chief Academic 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 addressing our expectations regarding enrollments, student persistence, the new Gainful Employment rules, the results of our branding campaign and the timing of our regulatory actions as well as commentary regarding revenue, bad debt and the future performance of our business. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual performance or results to differ materially, including risks that new or total enrollments may underperform our expectations. 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 report on Form 10-Q for the period ended September 30, 2014, to be filed with the SEC, 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 Third Quarter 2014 Earnings Call. After I comment on our progress and plans, Dr. McAuliffe will provide you with highlights about our academic institutions. Then our CFO, Dan Devine, will review our third quarter results and key operating metrics. After Dan speaks, I will offer my closing comments before opening the call for questions. I'm pleased to report that our results in the third quarter reflect the continuation of the progress we saw in the second quarter. On last quarter's call, we reported continued success at attracting high-quality students to our institutions through an expansion of our internal search and branding initiatives. During the third quarter, our success for that effort strengthened as our new student enrollments continued to increase in the mid-single digits even as we maintained our focus on student preparedness and academic performance. This is now the third quarter, out of the last 4, in which we have posted increases in new enrollments. We believe the quarterly success we have had at communicating our institution's value proposition and attracting higher-quality students affirm the effectiveness of our strategy. One of the benefits to building our brand and our numerous student support initiatives is that students are persisting longer. This year, we began reporting the 12-month retention of active students for every quarter, and we compare that to the 12-month retention for students who are actively enrolled in the year-ago quarter. At the end of the third quarter 2014, the 12-month retention for all students who were active on the last day of the third quarter of 2013 was 65.8%, up 490 basis points from last year's third quarter retention, which continues the positive trend we saw in the earlier quarters of 2014. We view these positive results as evidence that the numerous quality and process improvements we have put in place are producing a more committed and better prepared student body that is retaining at higher rates and creating better learning outcomes. We believe this consistently strong retention is evidence that our strategic commitment to a quality education and strong student outcomes is working as intended. Another area of continued strength in the third quarter was Ashford's Forbes School of Business. Last quarter, we reported a mid-double-digit increase in new enrollments for the Forbes school, which was greater than the overall increase we saw in Ashford. I'm pleased to report that we again saw a double-digit increase in new enrollments in the third quarter. We view this as evidence that the Forbes brand is meaningful to prospective students and that the innovation and differentiation around the student experience we have created at the Forbes School are beneficial to students. We are confident that the learning outcomes we are creating are delivering value to students and positioning the Forbes School for future growth. Now I will turn the call of over to our Chief Academic Officer, Dr. Jane McAuliffe.

[Jane L. McAuliffe:]

Thank you, Andrew. I'm pleased to mention that both of Bridgepoint's academic institutions held commencement exercises in October. Ashford University's fall of 2014 graduation ceremonies took place on Sunday, October 5, and were held for the first time in Southern California at the San Diego Convention Center. More than 400 graduates from across the country participated in commencement, which featured keynote speaker, Rear Admiral Bruce Gillingham. Admiral Gillingham, who has served as a medical doctor for over 20 years in the U.S. Navy, shared concepts he had learned from working with high-performing teams, which greatly influenced his thinking as an individual and as a leader of a large military organization. Looking more broadly at Ashford's entire fall graduating class, all 50 states plus 10 countries were represented by the 9,239 fall online graduates, which included 2,867 military graduates. 2 weeks after Ashford's commencement ceremonies on Saturday, October 18, University of the Rockies held its annual commencement ceremony at the Colorado Convention Center in Downtown Denver. Many of the graduates and their guests traveled from across the country to participate in the ceremony and related events. The university has conferred a total of 411 masters and doctoral degrees this year. A few minutes ago, Andrew mentioned the success we are having at the Forbes School of Business, and one of the reasons for that success is the value we are able to bring to students and others through the distinguished speaker series at the Forbes School. We've had 4 outstanding speakers in 2014, including Steve Forbes, Chairman and Editor-in-Chief of Forbes Media; Ken Fisher, Chairman of Ken Fisher Investments and Forbes columnist; Richard Karlgaard, Publisher of Forbes Magazine; and John Tamny, Editor of RealClearMarkets and Forbes Opinion. In order to reach as broader component of students, alumni, faculty and business community leaders as possible, we've conducted the speaker events in various venues, including San Diego, on our campus in Clinton, Iowa, in Los Angeles, and by live stream nationally. Each speaker has provided insightful commentary, stimulating critical thought about the application of academic theory in the real world. Additionally, our faculty has extracted specific concepts from each of these speeches and incorporated these, as appropriate, into our current business curriculum to maximize achievement of our strategic objective of continued excellence in education through the Forbes relationship. This continues to allow the Forbes School of Business to maintain a competitive differentiation in the academic community. Finally, I wanted to share with you an inspiring story about one of Ashford's graduates, Ivan Gutierrez. Ivan is an alumnus from our veteran community who now works at the Department of Homeland Security and is a finalist in the U.S. Office of Personnel Management's Presidential Management Fellowship program. This is a flagship leadership development program for advanced degree candidates, which he qualified for as a result of his Ashford education. About 2 years ago, Ivan enrolled in the Ashford Advocates Program, joining other students and alumni leaders from across the country who advocate on behalf of Ashford at meetings and events involving lawmakers and other leaders. Since that time, he has represented Ashford at 2 Sacramento clients and, most recently, at the Police Academy on Veterans Initiative, a conference held at Cal State Long Beach and hosted by the counsel's [ph] state government. The audience at the Long Beach event consisted of 25 state representatives and education leaders from across the country. There, Ivan shared about the support he received from his Ashford advisers and how important it was that they were veterans as well. As you can imagine, his story is very impactful and touches on so many important issues, from our support to transitioning military students to the value of our degrees in the workplace. We're gratified that our many efforts on behalf of students have made such a difference to Ivan and other alumni like him. Now I'll turn the call over to our Chief Financial Officer, Dan Devine.

[Daniel J. Devine:]

Thank you, Jane. For the third quarter 2014, revenue was $162.7 million compared with $182.8 million for the same period last year. The decrease is primarily due to lower total student enrollment, which was 59,552 as of September 30, 2014 compared with 68,566 in the same period last year. For the first -- third quarter of 2014, instructional costs and services were $79.7 million or 49% of revenue compared with $83.6 million or 45.7% of revenue in the same period last year. The decrease in expense was primarily driven by lower expense in the areas of instructional and academic support labor, primarily offset by higher bad debt expense. Included in instructional costs and services for the quarter is bad debt of $9 million or 5.6% of revenue. Admission advisory and marketing expense for the third quarter 2014 was $56.8 million or 34.9% of revenue, compared with $64.5 million or 35.3% of revenue in the same period last year. The decrease is primarily due to decreased television advertising in the current period and lower compensation expense resulting from fewer admissions personnel, partially offset by increases in direct advertising channels. General and administrative expenses for the third quarter of 2014 were $15.6 million or 9.6% of revenue, compared with $15.2 million or 8.3% of revenue for the same period last year. The increase as a percentage of revenue is primarily due to higher administrative compensation and other administration expenses, corporate support services and IT costs. Included in our 3 main expense categories for the third quarter is approximately $2.8 million related to stock-based compensation expense in the aggregate, compared with $3.3 million for the third quarter of last year. For the third quarter of 2014, operating income was $10.6 million, compared with $19.5 million in the same period last year. Our effective tax rate for the quarter ended September 30, 2014, was 46.1%, compared with 30% in the same period last year. The increase in our effective tax rate is due to the effect of a lower pretax income on relatively constant nondeductible expenses and the release of a $1.9 million tax reserve due to the expiration of statute of limitations in the prior year's quarter. Net income for the third quarter of 2014 was $6.3 million or $0.14 per diluted share, compared with net income of $14.2 million or $0.25 per diluted share for the same period last year. Fully diluted EPS is calculated based on a diluted share count of 46.5 million shares for the third quarter of 2014, compared with 56.4 million shares for the same period in 2013. As of September 30, 2014, we had cash, restricted cash and total investments of $357.4 million, compared with $356.4 million as of December 31, 2013. The company generated $24.6 million of cash from operations for the 9 months ended September 30, 2014, compared with generating $61.8 million for the same period in 2013. Capital expenditures for the 9 months ended September 30, 2014, were $9.6 million compared with $11.7 million for the same period last year. Before I turn the call back over Andrew, I'd like to update the group on 2 items. First, as you know, the rules surrounding Gainful Employment were recently released, and we are in the process of reviewing those regulations and the potential impact on our student enrollment. The new rules are expensive and complicated, and we reserve any comment about them until we have completed our comprehensive review. Additionally, I wanted to remind the group that our Q4 is traditionally a shorter revenue quarter than Q3, and in Q4, we will have 83 revenue days, 9 fewer than in the current quarter. The fewer revenue days will result in lower revenues as compared to Q3, and the lower revenue will be reflected in lower earnings as compared to the current quarter. Now I'll turn the call back over to Andrew for his closing comments.

[Andrew S. Clark:]

Thank you, Dan. We're pleased with our third quarter results, which continue to demonstrate increasing demand for our programs. Our new enrollment growth was higher than the previous quarter and last year. The Forbes School of Business differentiation continues to separate Ashford University from other brands in the market, reflecting the quality of our academics and student-centered focus. The 12-month cohort retention has increased meaningful for the third straight quarter in a row. Collectively, these results provide us with confidence regarding our largest institution, Ashford University, and its differentiated positioning for growth over the next several years. As we have demonstrated over the last 2 years, we are committed to a student-centered focus that leads to improved outcomes for students and all stakeholders. I want to remind everyone that on our fourth quarter earnings call, we will review all of our annual student outcome metrics, as we have done every year since we became a public company. Because of the reasons I've listed today, we anticipate new enrollments will be positive throughout next year, and total enrollments will turn positive in the second half of the year. We currently view 2014 earnings as the bottom. With these positive student outcomes and a continued focus on operational efficiencies, we are focused on improving our operating margins in 2015, and our longer-term goal of EBITDA margin remains in the mid-teens. Throughout 2015, we will continue to review our uses of our cash balances and auctions for enhancing shareholder value, including acquisitions that would meaningfully diversify Bridgepoint Education, share repurchases and other value-creating opportunities. This concludes our opening comments on today's call. At this time, I'll ask our operator to open the phone lines for your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Jeff Silber.

[Jeffrey M. Silber:]

Andrew, I hate to be a little bit cynical, but if I remember correctly, around this time last year, you made somewhat of a similar forecast in terms of seeing some new enrollment growth in 2014, leading to total enrollment growth shortly thereafter. What gives you the confidence that your statement will come true next year?

[Andrew S. Clark:]

Yes, Jeff. I think I've made that comment towards the end of last year. You're correct, and what I didn't have last year that we've experienced this year is obviously the track record I talked to in the opening remarks there, where we've had positive new enrollments, 3 out of last 4 quarters. And we've seen -- we saw new enrollment growth increase in this quarter over what it was in the second quarter. And so the consistency with which we've seen the university perform at, from an operational standpoint over the last 2 quarters, gives us a much different sense than what we have last year about how it has kind of settled in to a certain kind of, I'd say, rhythm and cadence that gives us confidence that, that can continue next year. We've also done quite a bit in terms of operational changes, as we've discussed throughout the year this year. And I said throughout the year this year that, that would be challenging for us in terms of just how it would reflect itself in our overall operational performance, and it has been challenging. But those things now have worked themselves through. And again, I think the fact that we have improved those processes, internally, has led to the positive new enrollment that we've had the last few quarters and really strong retention gains that we've had in all 3 quarters.

[Jeffrey M. Silber:]

Okay. That's very helpful. I appreciate the color. Dan, I guess this one is for you. Thank you for the comments about the sequential -- potential sequential revenue decline. How about on the expense line items, would we see expenses going down on a sequential basis as well?

[Daniel J. Devine:]

No. Basically, the fourth quarter expenses should be relatively flat to what they were in the third quarter, and most of that revenue decline flows through earnings.

[Jeffrey M. Silber:]

Right. And then just one other quick question. In terms of revenue per student, what are you looking for in the fourth quarter in terms of a year-over-year change?

[Daniel J. Devine:]

I would say revenue per student should be about where we are this quarter, which is positive 3%. Jeff, just on -- you've got to kind of do it on a daily basis obviously, right. You have to adjust it for the shorter quarter.

[Jeffrey M. Silber:]

No, I got that, yes -- no. I appreciate that.

[Operator:]

And your next question comes from the line of Jeff Lee [ph].

[Unknown Analyst:]

Can you just talk about how applications and conversion rates trended in the quarter?

[Andrew S. Clark:]

Yes. I would say -- we don't discuss the specifics, Jeff, but I would say at a high level that you saw our application and conversion rates increase in the third quarter. In the past, we've had kind of a -- we've had a significant spread between the growth in applications versus then the conversion into actual new enrollments. We've seen that tighten up and improved in the third quarter versus the second quarter, which is what we had anticipated would occur as we improve upon some of the operational changes that we've made, especially in the admissions area at Ashford.

[Operator:]

And your next question comes from the line of Paul Ginocchio.

[Paul Ginocchio:]

You mentioned the Forbes School of Business up double digits. I think it's about -- or nearly 50% of your enrollment. Could you talk about maybe some of your other larger programs, which I think are education psychology? How are they doing? It sounds like the rest of your business is flat on new enrollments. Is that correct?

[Andrew S. Clark:]

Yes. So just to correct you, Paul, business enrollments at Ashford are about 37% of our total enrollments, not 50%. And we've seen strong demand in our school of education as well as in health care, followed by social sciences, and then IT would probably be, I think, the largest area of opportunity in the future for Ashford University, programmatically.

[Paul Ginocchio:]

Look, I still get -- I can't -- the math doesn't work. If it's up -- if 37% of your business is up double digits, something's got to be flat.

[Andrew S. Clark:]

Yes. I mean, I can't -- I don't have the specific schools broken out in front of me. Look, we were up mid-single digits in new enrollment and double digits again in the Forbes School of Business, both very good things. I'm sure that in some of our programs, probably in IT and some of the other ones, we may be flat, or new enrollments might not be as positive. But overall, we're seeing very good transfer for the university over the last several quarters. In fact, as I said, new enrollment is positive, 3 of the last 4 quarters now.

[Paul Ginocchio:]

Great. And then -- and thanks for the number on retention. We build our model on persistence, and if we put in a sort of 4%, 5% new enrollment growth, it does look like on a year-over-year basis, persistence dropped by about 200 basis points. Is there something else we're missing? And why would there be divergence between the year-on-year trend in persistence and the year-on-year trend in retention?

[Andrew S. Clark:]

Yes. You're also missing the number of graduates. They're coming out of that number. And as you know, Paul, we've had a record number of students graduating from Ashford University. And we've talked about this in the past. It's kind of created a very positive thing, but from a straight persistence standpoint, it can throw your numbers off, but it's created a graduation bubble, so to speak, that's been moving through the population. And so that's probably the reason for why you would see something different, and that's why quite frankly we wanted everybody at the beginning of the year to focus on cohort retention. Cohort retention is much more meaningful for all institutions than the straight persistence number. Cohort retention is telling you specifically the number of students that were active and in class 1 year ago and how many of those students are still active and still pursuing their degree 1 year later, and that's a much more meaningful number.

[Paul Ginocchio:]

Great. And so could you give us the actual number of graduates this year and last year just so we could have it?

[Andrew S. Clark:]

I don't think I have the exact numbers in front of us, but I can tell you that the number of graduates in 2014 is equal to the number of graduates in 2013. So we've given that number out before. I think we gave it out at the end of the year.

[Daniel J. Devine:]

Yes, we did.

[Andrew S. Clark:]

It's in the high 16 to -- 16 5 and 17 5 per year.

[Paul Ginocchio:]

Great. And the final one just on bad debt. It looks like the number kind of spiked up here in the third quarter. Is there -- if you said it earlier in the call, I apologize, but was there a reason for that?

[Daniel J. Devine:]

There's no reason for it. It's pretty much down to timing. We said for the year, we expect bad debt to be about 5%. We still anticipate that. It had to do with basically just the cash application flows between the different quarters. As you remember, Q2 was very low. I think it was 3 1, and this is kind of just a normalization of the trend.

[Paul Ginocchio:]

Great. And then just a last one, maybe, Dan, a little -- just a little help on that. What's the revenue per student looked like on a year-on-year basis? I remember it was up nicely in the fourth quarter because I think some -- of an extra week or an extra start.

[Daniel J. Devine:]

Oh, yes. Well, that's our year-over-year report last week...

[Paul Ginocchio:]

On a reported basis, what's it looked like on a revenue per student?

[Daniel J. Devine:]

For '14, for Q4?

[Paul Ginocchio:]

Please.

[Daniel J. Devine:]

It should be -- there's 1 less week of revenue in '14 than there was in '13.

[Paul Ginocchio:]

Plus the fewer days, does that already include that? Let's say, that's already...

[Daniel J. Devine:]

That's already included, yes.

[Paul Ginocchio:]

In the 9 days, okay.

[Operator:]

And your next question comes from the line of Peter Appert.

[John D. Crowther:]

You've got John Crowther on for Peter. Just kind of following up on that revenue per student question. Correct me if I'm wrong here, but I believe in Q1, you had some days that shifted out, and I thought those were supposed to appear in Q3. So when you reported the 3% revenue per student this quarter on sort of an underlying basis, I guess that's relatively in line with what you've been saying sort of mid-single digit, but I would have thought it'd be more because of extra days in Q3. Maybe you could just kind of help me understand what the underlying pricing trend is and how that -- you expect that to move going forward.

[Daniel J. Devine:]

You're correct. The calendars have shifted here on recent last -- this year and last year. So on a per day basis, which is where we kind of do it internally, year Q3 over prior year Q3 were up 3%. So even when you break it down to days of revenue, we saw a 3% increase in revenue per student in this year's Q3 versus 2013's Q3. So we're -- I think in the previous quarter, we have the same relative growth. I think it was higher than 3%, but I mean, I think 3% is a good number to use for the fourth quarter of 2014.

[Operator:]

And there are no further questions.

[Andrew S. Clark:]

Okay. Well, thank you, operator. I want to thank everybody for your interest in Bridgepoint for participating today. This concludes -- oh, wait. I think we have -- operator, is Corey Greendale on the line there?

[Operator:]

Yes. Your next question comes from the line of Corey Greendale.

[Tom Bakas:]

This is Tom Bakas on for Corey. Just a couple of quick modeling questions for -- did you give any -- I'm sorry if I missed this. Was there any guidance on CapEx for Q4?

[Daniel J. Devine:]

No. We gave no guidance on CapEx for Q4. I think it's going to be probably -- for the year, it should be in a 3% to 3.5% range.

[Tom Bakas:]

Okay. And then in terms of tax rates for Q4, if you could just maybe...

[Daniel J. Devine:]

Yes. Tax rate for Q4 is going to be higher within the quarter. Tax rate is something around -- I totally agree with that. So we think that -- I'll give you an annualized target of 46 3, yes, 46 3, yes, okay. It will be higher -- it would -- I'd like -- it would definitely be higher in the fourth quarter than it was this quarter.

[Andrew S. Clark:]

Okay. All right. If that's it, thank you, operator. I want to thank everybody for your interest in Bridgepoint and for participating in today's call. This concludes our call. Thank you.

[Operator:]

Thank you. This concludes today's call. You may disconnect.