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Edited Transcript of BPI earnings conference call or presentation 30-Oct-19 9:00pm GMT

Q3 2019 Zovio Inc Earnings Call

San Diego Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Zovio Inc earnings conference call or presentation Wednesday, October 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alanna Vitucci

* Andrew S. Clark

Zovio Inc - Co-Founder, CEO, President & Director

* Kevin S. Royal

Zovio Inc - CFO & Executive VP

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Zovio's Third Quarter 2019 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Ms. Alanna Vitucci, Vice President of Corporate Communications. Please go ahead.

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Alanna Vitucci, [2]

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Thank you, and good afternoon. Zovio's third quarter 2019 earnings release was issued earlier today and is posted on the company's website at www.zovio.com. Joining me on the call today are Andrew Clark, Founder, President and Chief Executive Officer; and Kevin Royal, Chief Financial Officer.

We would like to remind you that some of the statements we make today may be considered forward-looking, including statements regarding new enrollment growth, student retention, education partnerships and other programs and services, our ability to meet all required conditions and obtain all required approvals to close on the planned separation and conversion of Ashford and its timing and impact, our ability to transition to become an education technology services company, our ability to grow through acquisitions, our ability to successfully integrate and leverage acquired companies, future revenue growth, EBITDA, financial and related guidance, and commentary regarding fiscal year 2019 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 financial measures. In our earnings release, you will find additional disclosures regarding these measures, including reconciliations of measures with U.S. GAAP. Note that these non-GAAP financial 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 year ended December 31, 2018, and our quarterly report on Form 10-Q for the quarter ended September 30, 2019, which we filed with the SEC earlier today for a more detailed description of the risk factors that may affect our results. You may obtain copies from the SEC or by visiting the Investor Relations section of our website.

At this time, it is my pleasure to introduce Zovio's Founder, President and CEO, Andrew Clark.

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Andrew S. Clark, Zovio Inc - Co-Founder, CEO, President & Director [3]

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Thank you, Alanna, and welcome to our third quarter 2019 earnings call. After I discuss some of the highlights for the quarter, Kevin will review our financial results and key operating metrics. After Kevin concludes, I will offer my closing comments.

2019 has been a transitional year for Zovio as we made progress on the conversion of Ashford to a not-for-profit entity and repositioned Zovio for the long term as an education technology services company. Let me begin by providing an update on where we are with the conversion process.

In early October, we announced that in response to our request for a pre-acquisition review, the U.S. Department of Education responded with a pre-acquisition review letter for the proposed change in ownership of Ashford University. The department took a conservative approach in viewing the AU nonprofit entity as a new entity, and in lieu of 2 years of audited financial results, its review letter indicated that within 10 days of the change of ownership, it would require Ashford to post an irrevocable letter of credit for approximately 25% of the Title IV funding amount during the fiscal year 2018. This letter of credit would expire on March 31, 2021, unless extended or replaced as determined by the department.

The management team and Board of Directors also continued to evaluate options to best position Zovio and Ashford for future success. To that end, we have also been exploring the sale of the university to other institutions where we would enter into an education technology services agreement with the acquirer.

In addition to pursuing the planned conversion of Ashford, we have been optimizing our profitability in our core business during this transformation. Last quarter, we discussed several actions we have taken to deliver cost savings of $8 million in 2019 and $15 million in 2020, which have already supported an improvement in profitability during the third quarter.

Further, over the last several months, we have outlined a restructuring plan that we believe will drive further cost savings in 2020 by approximately $51 million. These actions, which will result in a fourth quarter restructuring charge of roughly $11 million, were focused on 3 primary areas: first, implementing new processes to improve our overall operational efficiency at both Zovio and Ashford, which results in the need for fewer resources internally; second, maintaining a very disciplined tight control on marketing and general and administrative expenses; and third, significantly improving bad debt expense through a combination of enhanced collection efforts and a more favorable mix of Full Tuition Grant students, where collection efforts are more consistent.

The cumulative savings for 2020 from both our recent actions and those undertaken in June of this year would total $60 million to $65 million. We believe exploring both the conversion and the sale of Ashford to another institution is in the best interest of all stakeholders. However, we wanted to provide a conservative view of our financial performance expectations for next year. Keep in mind, in either scenario, there are a number of components that are not finalized, and we can't fully speculate their final form as there are many variables, including the services agreement with Ashford University if we were to complete the conversion, the services agreement with any potential acquirer of Ashford University and costs associated with the letter of credit as required by the U.S. Department of Education.

With regard to the sale of Ashford to another institution, given the anticipated time to gain regulatory approvals and other customary closing conditions, it would likely take 6 to 12 months from the signing of any definitive agreement. As such, we believe understanding the projected financial performance of Zovio in its entirety is most appropriate.

With that in mind, if you assume Zovio owns Ashford for 2020, assuming flat new enrollment, we expect Zovio to have revenues in the range of $405 million to $420 million with adjusted EBITDA in the range of $30 million to $40 million or adjusted EBITDA margins of approximately 7% to 9%. Adjusted EPS would be expected to be in the range of $0.50 to $0.90. Operating cash flow is expected to be in the range of $28 million to $33 million. We would anticipate normal capital expenditure levels for 2020, and as a result, would expect to end 2020 with unrestricted cash on hand in the range of $80 million to $90 million.

As a point of reference for 2018, Zovio delivered revenues of $443.4 million and adjusted EBITDA margin of 4.2% and adjusted EPS of $0.47. With regard to an expected conversion of Ashford University, we would anticipate adjusted EBITDA margins to be slightly higher than that of the consolidated view on lower revenues, excluding the impact of costs associated with the letter of credit required by the Department of Education. While, of course, our operational goal is to return to new enrollment growth, I want to emphasize that the projected financial performance I just outlined for 2020 assumes flat new enrollment performance in 2020 compared to 2019.

Regardless of our path forward, during this process, our priorities remain the same: ensuring Ashford University has a strong foundation to support its long-term sustainability and position its students for success; and equally important, driving the long-term value creation for all stakeholders. Our goal is to close the proposed separation and conversion or announce the signing of a definitive agreement for the sale of Ashford University by the end of 2019.

Long term, our strategy to reposition the business as an education technology services company is centered on 3 main pillars: first, deliver education services that meet the diverse and large-scale needs of educational institutions and corporate enterprises; second, capitalize on middle-market opportunities through enhanced programs and services and building our capabilities; and third, expand our skills through employment offerings to empower learners to better connect with in-demand jobs.

During the first 9 months of the year, we have made substantial progress on positioning Zovio as a best-in-class education technology services company by partnering with higher education institutions and employers to deliver innovative, personalized solutions to help learners achieve their aspirations.

Fullstack and TutorMe continue to be strong contributors to this strategy. When we acquired Fullstack, our goal was to add 4 new partnerships during 2019, and we are halfway there with the University of North Florida and the University of San Diego Division of Professional and Continuing Education. We are pleased with the development of their institutional pipeline and remain optimistic to achieve our 2019 goal.

With more than 50 partner schools, TutorMe continues to be a welcomed addition to our ecosystem. In the third quarter, we added 9 new institutional partnerships, including a large contract with the Colorado Community College network.

Before I go through our third quarter results, let me briefly touch on capital allocation. At the Board level, we regularly evaluate our capital allocation priorities. And today, we remain focused on investment in the business and conserving cash as we execute the conversion. That said, returning capital to shareholders through share repurchases will be an area we will discuss at our upcoming Board meeting in mid-November.

Turning to our results for the third quarter of 2019, we reported revenue of $104.3 million, a net loss of $7.6 million and a resulting net loss of $0.25 per diluted share. Excluding restructuring and impairment charges, separation and conversion transaction costs as well as acquisition costs, our non-GAAP net loss for the third quarter of 2019 was $1.6 million or a non-GAAP net loss of $0.05 per diluted share.

In line with our expectations, new enrollment for the third quarter of 2019 was down as a percentage by high single digits when compared to the same quarter prior year. As of September 30, 2019, Ashford's annual cohort retention was 58.7%, only slightly lower when compared to 59.1% for the same period in the prior year. For the fourth quarter, we expect our new enrollment will be negative in the mid-single digits.

We continue to drive growth in our education partnership programs as well as with our graduate student population, who both retain at a higher rate. As of September 30, 2019, the enrollment in the education partnership program represented approximately 30% of total enrollments compared to approximately 22% of total enrollments as of 1 year ago.

New enrollments in the education partnership program represented approximately 30% of new enrollment for the third quarter of 2019. The employee sponsorship by these global companies is a testament to the strength and quality of the programs offered through Ashford. As a reminder, our Full Tuition Grant, or FTG, program continues to outperform our expectations. However, an increase in the student population as a percentage of the total student population does lower net revenue, which is the dynamic we experienced in the third quarter on a year-over-year basis.

This is an exciting time for both Zovio and Ashford University, and we believe there is significant value to be created for our stakeholders. Today, our focus remains unchanged, laying a strong foundation for Ashford University while at the same time positioning Zovio for long-term profitable growth as an education technology services company.

Now I will turn the call over to Kevin Royal to review our financial and operating results.

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Kevin S. Royal, Zovio Inc - CFO & Executive VP [4]

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Thank you, Andrew.

Let me begin by providing some key financial and operating information for the quarter ended September 30, 2019. Revenue for the third quarter of 2019 was $104.3 million compared to revenue of $112.8 million for the same period in the prior year. The decrease is primarily related to year-over-year decline in average enrollment, partially offset by an increase in tuition rates year-over-year.

For the third quarter of 2019, instructional costs and services were $51.4 million or 49.2% of revenue compared to $55.1 million or 48.8% of revenue for the comparable prior period. The increase as a percentage of revenue year-over-year was primarily driven by the expenses of Fullstack and TutorMe, partially offset by a decrease in bad debt expense.

Net bad debt expense in the third quarter of 2019 was $3 million or 2.9% of revenue compared to $7.5 million or 6.6% of revenue for the comparable prior year period. We have experienced meaningful improvement in bad debt expense due to improved collection processes and an increased FTG student population.

Admissions, advisory and marketing expenses for the third quarter of 2019 were $40.8 million or 39.1% of revenue compared to $41.9 million or 37.1% of revenue for the comparable prior period. These costs increased as a percentage of revenue due to corporate support services as well as the expenses of Fullstack and TutorMe, partially offset by decreases in advertising costs.

General and administrative expenses for the third quarter of 2019 were $17.4 million or 16.7% of revenue compared to $13.7 million or 12.2% of revenue for the comparable prior period. The increase as a percentage of revenue was primarily driven by the $2.5 million of acquisition-related expenses as well as $1 million of costs relating to the potential separation and conversion.

Restructuring and impairment charges for the third quarter of 2019 were $2.5 million or 2.4% of revenue compared to $1.2 million or 1.1% of revenue for the comparable prior period. Net loss for the third quarter of 2019 was $7.6 million or a net loss of $0.25 per diluted share. This is compared to net income of $1.7 million or net income of $0.06 per diluted share for the third quarter of 2018.

From a tax perspective, our annual effective tax rate for the third quarter of 2019 before any discrete items, was low single digits, and we anticipate this trend to continue for the remainder of 2019. Our non-GAAP net loss for the third quarter of 2019 was $1.6 million or a loss of $0.05 per diluted share compared to the non-GAAP net income of $5.4 million or income of $0.19 per diluted share for the third quarter of 2018. Non-GAAP net loss for the third quarter of 2019 excluded restructuring and impairment charges of $2.5 million, separation and conversion costs of $1 million and acquisition-related costs of $2.5 million.

As of September 30, 2019, we had combined cash, cash equivalents and investments of $81.5 million compared to $168.4 million as of December 31, 2018. We used $38.2 million of cash in operating activities during the 9 months ended September 30, 2019. By comparison, we used $10.7 million of cash in operating activities during the same period in 2018. The year-over-year increase in the cash used in operating activities was primarily driven by a decrease in earnings, partially offset by improvements in working capital.

The net accounts receivable was $35.7 million as of September 30, 2019, compared to $27 million as of December 31, 2018. The increased balance is consistent with our business cycles and the growth of our Full Tuition Grant enrollment as well as acquired receivables.

Capital expenditures for the year-to-date period ended September 30, 2019, were $27 million as compared to $1.7 million for the same period last year.

Now I will turn the call back over to Andrew for his closing comments.

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Andrew S. Clark, Zovio Inc - Co-Founder, CEO, President & Director [5]

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Thank you, Kevin.

In summary, our focus is delivering value for all stakeholders while setting up Ashford and Zovio for future success. Pursuing the conversion of Ashford while evaluating a potential sale of the university as an alternative is the right path forward.

While I'm cognizant that there has been a fair amount of uncertainty over the last year, I want to clearly state, Ashford has a great foundation for their future, and we are positioning Zovio to return to its historical practice of delivering solid profitability and cash flow into 2020.

As I said, our goal is to announce either the close of the conversion or a signed definitive agreement for the sale of the university by year's end. In the interim, we are laser-focused on the continued execution of our strategic priorities as we transition into an education technology services company.

At this time, I'll ask our operator to open the phone lines for your questions.

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Operator [6]

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(Operator Instructions) There are no questions at this time. I would like to turn the call back over to Andrew Clark.

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Andrew S. Clark, Zovio Inc - Co-Founder, CEO, President & Director [7]

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All right. Well, we'd like to thank everybody who listened in on our call today and for your interest in Zovio. Thank you.

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Operator [8]

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This concludes today's conference call. Thank you for your participation. You may now disconnect.