Edited Transcript of ZVO.OQ earnings conference call or presentation 3-Aug-20 12:00pm GMT

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

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Thank you, Alanna, and welcome to our Second Quarter 2020 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. We had a solid second quarter of 2020, which beat expectations. But before I provide more details on the quarter, let me quickly touch on the other exciting news we announced this morning.

Earlier this morning, we announced the signing of a definitive agreement with the University of Arizona to acquire Ashford University. The University of Arizona will create a new nonprofit entity that will bear the name of the University of Arizona Global Campus and will be a fully online university, providing access to affordable, high-quality higher education with flexible opportunities to students from diverse backgrounds to achieve their educational and life objectives. This is a monumental day for Zovio in our transition to a world-class education technology services company.

Two years ago, we announced our intent to return Ashford to its historical nonprofit status the institution held in 2005. Since then, we have been steadfast in the advancement of this process. We are pleased to have unanimous support of Ashford’s Board of Trustees for this transaction. We want to take this opportunity to thank Ashford University’s leadership and its Board of Trustees for their hard work in this endeavor.

We are incredibly excited to partner with the University of Arizona, in support of their vision to expand access and provide innovative learning solutions to meet students where they are while, at the same time, providing excellent education technology services to Ashford University. University of Arizona is one of the 63 AAU-designated universities in the United States, a Carnegie Research 1 designee and the original land-grant university for the state of Arizona, with a mandate and responsibility to educate all classes of students.

The acquisition and rebranding of Ashford University to University of Arizona Global Campus will support the growing number of students turning increasingly to online platforms for higher education. University of Arizona Global Campus will expand on Ashford’s commitment to provide high-quality, accessible, affordable, innovative educational programs that meet the diverse needs of individuals pursuing advancement in their lives, professions and communities.

Under the terms of the agreement, University of Arizona Global Campus will acquire the institutional assets comprising Ashford University and will assume certain specific liabilities relating to those assets. We anticipate the transaction to close by the end of the year, subject to approval by Ashford’s accrediting body, WASC. We have also been in conversations with the Department of Education, but their review and determination will come sometime after the close of the transaction.

The way learners access education has been changing rapidly and was only accelerated by the onset of the COVID-19 pandemic. Now it is clearer than ever that online classes are a necessity if we are to continue expanding educational opportunities to underrepresented students and nontraditional students who work or parent full time. With an ever-growing student population, educators who seek to expand potential for all students are delivering classes online and embracing new and innovative learning formats.

University of Arizona Global Campus will be one of the nation’s most diverse online universities, with approximately 35,000 students and geographic reach across the United States. The promise of high-quality virtual learning, open access and inclusivity will be combined with the University of Arizona’s heritage as a land-grant institution focused on student success. University of Arizona Global Campus will meet students wherever they are in their educational journey and will focus on serving underrepresented and nontraditional students, such as veterans, or those who are need of flexible pathways to advance their education or learn new skills.

For Zovio, this transaction will allow us to complete our transformation into a world-class education technology services company. Zovio will continue to provide its services under a long-term strategic service agreement to the University of Arizona Global Campus.

Under the Strategic Services Agreement, Zovio will continue to provide its enterprise education technology, which uses advanced data analytics to provide personalized and innovative online education, that enhances student engagement and improves the likelihood of student success. This, coupled with our deep expertise delivering personalized individual learning experiences for students, will further bolster the long-term success of University of Arizona Global Campus.

In addition, our Strategic Services Agreement with the University of Arizona Global Campus will create a strong foundation from which we can pursue diversified growth, providing technology and services to other institutions, corporations and learners. Our platform ensures competing life obligations or world events never complicate a person’s path to higher education because they are designed to meet the learner where they are. This is a great step forward for Zovio and University of Arizona Global Campus.

Now turning to our results for the quarter. As I mentioned, we delivered solid results. For the second quarter of 2020, we reported revenue of $103.9 million and net income of $5.1 million or $0.16 per diluted share. Excluding non-GAAP items, our non-GAAP net income for the second quarter of 2020 was $8 million or $0.24 per diluted share. New enrollment came in well ahead of our expectations for the second quarter of 2020. As a percentage, new enrollments was down by 12.6% when compared to the same quarter prior year.

During the quarter, our team has remained focused and energized as we experienced a steady flow of new inquiries and welcome several new cohorts of advisers and coaches. I’m incredibly proud of the dedication of our team as the combination of increased staffing to meet rising demand and improved efficiency has enabled us to usher inquiries through the process, which supported the better-than-expected improvement in new enrollment. As we look to the remainder of the year, we expect new enrollment to return to low single-digit growth in the third quarter of 2020. Further, Ashford’s annual cohort retention continued to improve, increasing 80 basis points over the prior year to reach 60.4% as of June 30, 2020.

As discussed last quarter, our education partnership program was challenged as a result of the COVID-19 pandemic during the quarter. For the second quarter, these students represented nearly 35% of total enrollments compared to approximately 28% of total enrollments as of 1 year ago. While we had certain corporate partners suspending their tuition reimbursement programs, in line with large-scale cost-cutting programs as a result of the uncertainty surrounding the pandemic, this trend has stabilized with some partners reinstating their programs. While this remains an important aspect of our new enrollment growth after many quarters of substantial growth, we do anticipate the velocity of new enrollments from this group to moderate in coming quarters.

Our more expanded offering continues to gain traction as well, with Fullstack, TutorMe and [email protected] all gaining momentum. More than a year ago, we communicated a strategy to focus on enhancing our ecosystem of software and services to support learners’ education and career aspirations by building on our existing capabilities to meaningfully serve higher ed institutions, bridge the education to employment gap and/or help enterprises upskill and educate their most important asset, their people. Fullstack, TutorMe and [email protected] boards are all proving that the strategy is not only the right one but will propel Zovio forward.

Fullstack added 4 new partnerships in the quarter, including Caltech, University of Oklahoma, Virginia Tech and San Jose State, and their institutional pipeline remains solid. As students and experienced professionals continue to look for opportunities to upskill, we are seeing increased opportunity for our offerings.

For example, Virginia Tech will offer online coding and cybersecurity bootcamps to prepare students and experience professionals for new jobs in the tech industry. With policymakers embracing technology disruption and defense agencies constantly seeking more cybersecurity talent, this 26-week bootcamps are designed to teach participants technical skills to prepare them for emerging coding and cybersecurity jobs in Virginia’s workforce.

Fullstack has been a wonderful extension to Zovio’s ecosystem and has continued to outperform. In fact, by the end of 2020, we expect Fullstack to have nearly double the university partners versus our initial expectations.

TutorMe has had a strong quarter as well, adding many new partnerships and delivering revenue well ahead of our expectations. As of the end of the second quarter of 2020, TutorMe had more than 115 university partners. Further, the COVID-19 pandemic is driving increased demand as college students are increasingly taking online classes during the historically slower summer months, which has supported explosive growth for online tutoring services.

In the second quarter, customer usage and partner usage increased 350% and 850% year-over-year, respectively, which accelerated as the global pandemic hit the United States. In addition, following a successful pilot program in 2019, TutorMe is expanding its relationship with McGraw Hill to offer college students using McGraw Hill Connect, a free 60-minute tutoring session, exposing TutorMe to more than 4.3 million students on the McGraw Hill Connect platform today.

As online and blended learning continues to be the new normal for many students, the collaboration between McGraw Hill and TutorMe seeks to ensure that students receive the support they need and remain engaged as their learning environment shifts throughout the ongoing COVID-19 pandemic. TutorMe is bringing an offering to learners that was important before the pandemic, but is now essential in the virtual environment we are in today.

As a self-paced, skills-based content platform for the consumer, [email protected] attracted subscribers at a strong clip. At the end of the second quarter, we had 2,400 active subscribers, which increased nearly 30% from the first quarter of 2020. We continue to be very encouraged by the success of this offering and are putting in place a strategy to significantly expand the subscriber base for this platform. We remain enthusiastic about the prospects ahead for [email protected]

Before I turn the call over to Kevin, let me provide a brief update on our go-forward strategy. The COVID pandemic has presented significant challenges for everyone, making it clear that increasingly virtual world will be our new normal. Higher education is at the forefront of this trend but not all institutions are prepared for this accelerated shift. Now more than ever, providing students an online platform for learning that is not only robust but engaging will prove critical.

At the same time, the employees and unemployed workforce is seeking opportunities to upskill. Zovio could not be better positioned to leverage these trends and execute our long-term strategy, which is centered on 3 main pillars: first, deliver education services that meet the diverse and large-scale needs of universities, employers and learners; second, capitalize on middle market opportunities through enhanced programs and services and building our capabilities; and third, expand our skills to employment offerings to empower learners to better connect with in-demand jobs.

Today’s announcement marks the next chapter in Zovio’s future as an education technology services company. We believe that we have the right team and offering to address the broader secular trends in higher education while, at the same time, expanding our addressable market to meet the needs of learners. We are incredibly excited for the opportunities ahead for Zovio.

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 June 30, 2020. Revenue for the second quarter of 2020 was $103.9 million compared to revenue of $107.5 million for the same period in the prior year. The decrease is primarily related to a year-over-year decline in average enrollment, partially offset by an increase in tuition rates year-over-year.

For the second quarter of 2020, instructional costs and services were $44.9 million or 43.2% of revenue compared to $55.1 million or 51.3% of revenue for the comparable prior period. The cost, as a percentage of revenue, decreased year-over-year and was primarily driven by lower labor cost and a decrease in bad debt expense. Net bad debt expense in the second quarter of 2020 was $3.1 million or 2.9% of revenue compared to $3.9 million or 3.6% of revenue for the comparable prior year period. We have experienced improvement in bad debt expense due to operational efficiencies as well as an increased FTG student population.

Admissions, advisory and marketing expenses for the second quarter of 2020 were $38.8 million or 37.3% of revenue compared to $44.8 million or 41.7% of revenue for the comparable prior period. These costs decreased as a percentage of revenue due to lower labor cost and decreases in advertising spend.

General and administrative expenses for the second quarter of 2020 were $14.5 million or 13.9% of revenue compared to $22.5 million or 21% of revenue for the comparable prior period. The decrease, as a percentage of revenue, was primarily driven by the decrease in acquisition costs from the prior year as well as lower labor and facilities expense.

Restructuring and impairment charges for the second quarter of 2020 were $0.5 million or 0.5% of revenue compared to $5.4 million or 5% of revenue for the comparable prior period. The charges in the second quarter 2020 relate to severance costs for wages and benefits as well as lease exit costs.

During the second quarter 2020, we recognized $0.3 million of income tax expense. Our effective tax rate for the second quarter of 2020 was low single digits, and we anticipate this trend to continue for the remainder of 2020. Net income for the second quarter of 2020 was $5.1 million or net income of $0.16 per diluted share. This is compared to a net loss of $17.6 million or net loss of $0.58 per diluted share for the second quarter of the prior year.

Our non-GAAP net income for the second quarter of 2020 was $8 million or income of $0.24 per diluted share compared to the non-GAAP net loss of $4.6 million or loss of $0.15 per diluted share for the second quarter of the prior year. The non-GAAP net income for the second quarter of 2020 excludes restructuring and impairment charges of $0.5 million, separation and conversion costs of $2.6 million and net income relating primarily to contingent consideration revaluation of $0.6 million.

As of June 30, 2020, we had combined cash and cash equivalents of $75.1 million compared to $69.3 million as of December 31, 2019. We had $6.7 million of cash provided by operating activities during the year-to-date period ended June 30, 2020. By comparison, we used $22.1 million of cash in operating activities during the same period in the prior year. The year-over-year change in the cash provided by operating activities was primarily driven by the increase in earnings, partially offset by changes in working capital.

The net accounts receivable was $42.2 million as of June 30, 2020, compared to $35 million as of December 31, 2019. The increased balance is consistent with our business cycles and the growth of our Full Tuition Grant enrollment in the second quarter of 2020. Capital expenditures for the year-to-date period ended June 30, 2020, were $1.6 million as compared to $17.8 million for the same period last year.

Before I turn the call back over to Andrew for his closing comments, let me briefly provide an overview of the definitive agreement we announced today with the University of Arizona. University of Arizona Global Campus, a nonprofit entity that will be formed and operated in affiliation with the University of Arizona, will purchase the assets of and assume certain specified liabilities of Ashford University. Following the close of the transaction, Ashford University will become University of Arizona Global Campus.

Under the terms of the asset purchase agreement, University of Arizona Global Campus will pay Zovio cash consideration of $1. University of Arizona Global Campus will acquire the institutional assets comprising the Ashford University and assume certain specific liabilities relating to those assets. The assets acquired will include working capital in the amount of $16.5 million in cash. Zovio will make a closing payment to University of Arizona Global Campus in the amount of $37.5 million in cash.

At the closing of the transaction, which is expected by the end of 2020, Zovio and University of Arizona Global Campus will enter into the Strategic Services Agreement. The Strategic Services Agreement with University of Arizona Global Campus will have an initial term of 15 years, with renewals at year 7 and 12. Zovio will receive 19.5% of University of Arizona Global Campus’ annual revenue as well as reimbursement for direct cost.

In terms of our outlook for the rest of the year, we believe, given the expected closing date of the transaction, it is most appropriate to view our results from a consolidated view. As Andrew noted in his comments, we expect new enrollment to return to low single-digit growth in the third quarter of 2020. Beyond new enrollment expectations for the third quarter, we will not be providing financial guidance for 2020.

For 2021, we anticipate total revenues to be in the range of $290 million to $310 million, and non-GAAP EBITDA margin in the high single digits. Please note, this assumes the successful completion of our transaction with University of Arizona by the end of 2020.

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. Today is an important day for Zovio as we take the final steps towards solidifying our position as a world-class education technology services company. University of Arizona has a 135-year record of providing student-centric, high-quality education to all classes of students. Our partnership with this esteemed institution, as it establishes University of Arizona Global Campus, will be a strong foundation to build upon.

University of Arizona Global Campus will be an online learning experience, centered on student success. It will be created with the depth of knowledge, experience, commitment to excellence and mission delivered by a world-class land-grant institution empowered by Zovio’s deep expertise, delivering innovative solutions that personalize each student’s individual learning experience.

As students increasingly turn to online platforms for higher education, the University of Arizona Global Campus will be positioned to meet them wherever they are in their educational journey. We have a clear strategy in place to be a world-class education technology services company that will leverage our core strengths while applying our technologies and capabilities to priority market needs, including recruitment, retention and the learner experience.

Our second quarter results reflected strong execution by our team as well as the strength of our offering, which is robust, flexible and, most importantly, online. Recent trends within higher education have accelerated and continue to support an increasingly optimistic outlook for Zovio and its expanded offering.

With a rapidly growing university partnership network and high-growth industry disruptors, including Fullstack, TutorMe and [email protected], now more than ever, I believe Zovio is well positioned to take advantage of the attractive trends in higher education and deliver long-term growth and value creation.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Alex Paris from Barrington Research.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division – Director of Research and Education & Business Services Analyst [2]

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Congratulations on the announcement this morning of the transaction with the University of Arizona and better-than-expected new student enrollment. I wanted to get a lot of questions, but I’ll start with just a bigger picture sort of question. How did the transaction happen with University of Arizona? Obviously, last year, you were looking at a couple of different scenarios: one, conversion of spin-off with the university; or sale of the university to another university. So obviously, we went with the latter here. How did it come about? Why did it come about? And why is this a superior outcome? In your words, just add additional color.

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

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Yes. Sure. Alex, thank you. So as you know, we made it public that we had a lot of universities interested in acquiring Ashford, private universities, public institutions, just a variety of schools. And this was, of course, before the pandemic. And as we examined those possibilities, we continue to be convinced that the conversion was the best way to go.

And then we began discussions with University of Arizona in March. And it just became increasingly obvious to us, Alex, over that, probably the next 30, 45 days, just what an outstanding public land-grant institution it is. The leadership there is visionary. They’re doing things that, quite frankly, a lot of public universities aren’t doing. And to be affiliated with a university like that was so beneficial to Ashford’s students, the faculty, to staff and even to alumni. And so the Ashford Board of Trustees, in fact, unanimously supported the sale of Ashford to University of Arizona Global Campus.

So it just was a superior outcome, Alex, a fantastic one. We couldn’t be more excited for the institution and for all of its stakeholders. And then it has the added benefit of being a really wonderful outcome for Zovio. From our perspective, to have a chance to partner and work with, again, such a highly respected public institution, it will be fantastic in terms of being a foundational partner that we will then begin to, in the future, work with other university partners to provide other services to other universities.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division – Director of Research and Education & Business Services Analyst [4]

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No. I mean, I agree. Don’t get me wrong. I think this is a great tie-up with an outstanding university, University of Arizona, an excellent partner. Now this looks a lot like the transaction that Purdue did with Kaplan. Am I correct in that assumption? And how is that alike? Or how is it different?

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

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Yes. I mean it is alike, in some regards, contractually. I would say the big difference is that Ashford University, in the conversion, was going to remain a free-standing, nonprofit WASC-accredited entity. And with the University of Arizona World Campus, that continues to be the case. So they have formed a nonprofit entity. That entity is being named University of Arizona World Campus.

That entity is buying the assets or acquiring the assets of Ashford University. So when they receive the WASC approval, then they will — the Ashford name will go away, but it will be a freestanding — continue to be a free-standing, separately accredited institution, with the leadership and faculty, governance structure that it has as well as a Board of Trustees. So that’s a little different than Purdue, a big difference actually.

From a contractual standpoint, I’d say, we approached it similarly. And you’ll recall, Alex, that we said we really thought the Purdue-Kaplan model was one to emulate. So our revenue share is just 19.5%. We’re reimbursed for direct expenses. Purdue’s, of course, was a 12.5%, I believe.

And then the term of the agreement is 15 years. The initial term is 7 years. We are providing the University of Arizona $37.5 million upfront as part of this arrangement. They have the ability to terminate after 7 years, and they would pay, if they did terminate, a trailing 12 months revenue to us for the termination rate.

So there’s similarities there. I don’t have the whole list in front of me, but there’s a lot of similarities to Purdue-Kaplan from just a contractual standpoint. We tried to emulate that in the ways that it made sense. And then we tried to improve on it as well.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division – Director of Research and Education & Business Services Analyst [6]

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Yes. No, it looks great. And it also looks fairly similar to the broad outlines of the contract that you wouldn’t have had, had it been just a conversion and separation with Ashford University as the surviving entity. It doesn’t look too different from what we talked about before, 19.5% direct cost reimbursement, et cetera.

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

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Yes. That’s correct. It’s very similar to the conversion as well, which I think is particularly good. From an accreditor standpoint, the accreditor is not going to be looking at too much that’s different. Really, the only piece, and it’s an important piece that’s different, is that, rather than it being an independent free-standing institution to itself, it is an independent free-standing institution that’s renamed and affiliated with the University of Arizona. And I think that can only be viewed as a very positive addition or change to what the accreditor had already approved for the conversion.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division – Director of Research and Education & Business Services Analyst [8]

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Right. Exactly. And then just from a perspective — student perspective, it’s a heck of a brand — not that Ashford wasn’t, but University of Arizona is a heck of a brand going forward.

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Andrew S. Clark, Zovio Inc – Co-Founder, CEO, President & Director [9]

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Yes. No, they’re a fantastic brand, fantastic institution, great reputation. Again, the leadership there is just really impressive. And we could be more happier. And from just a Zovio perspective, how wonderful it was it that we’re headquartered now, as you know, Alex, in Chandler. So a publicly traded, headquartered company right there in the state of Arizona, able to partner up with one of the premier public institutions in Arizona. So that was just kind of frosting on the cake.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division – Director of Research and Education & Business Services Analyst [10]

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Yes. Well, congratulations, again, on the transaction. It’s been a long 2 years, but I’m very pleased with the outcome. Now as for the closing that you say by year-end, if you got the requisite approvals more quickly, could it be before that? Or we should really just focus on year-end?

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Andrew S. Clark, Zovio Inc – Co-Founder, CEO, President & Director [11]

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Yes. No, I mean it could theoretically be before year-end. It’s really going to be dependent upon the work that University of Arizona and Ashford do with their creditor and kind of that process and how expeditiously that occurs. So it could be earlier, but I think we felt comfortable saying no later than the end of the year.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division – Director of Research and Education & Business Services Analyst [12]

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And then to Kevin’s comments with regard to Q3 new student enrollment guidance, no financial guidance for ’20, but we should consider it consolidated. So in other words, Zovio is going to look like first half Zovio in the second half. And the model will look a little different beginning in 2021, hence, the guidance for 2021.

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Kevin S. Royal, Zovio Inc – CFO & Executive VP [13]

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Yes. That’s correct, Alex.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division – Director of Research and Education & Business Services Analyst [14]

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Okay. Great. And then lastly, I don’t want to be too much of a time hog here, but the new student enrollment outcome in the second quarter was better than expected. I think we had modeled it an 18% decline, and the decline was more like 12%, if I heard that correctly?

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Andrew S. Clark, Zovio Inc – Co-Founder, CEO, President & Director [15]

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Yes, 12 point…

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Kevin S. Royal, Zovio Inc – CFO & Executive VP [16]

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12.6%.

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Andrew S. Clark, Zovio Inc – Co-Founder, CEO, President & Director [17]

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12.6%, to be precise, yes.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division – Director of Research and Education & Business Services Analyst [18]

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Got you. And what did you owe that better-than-expected performance to? And what do you owe the inflection point to growth in new student enrollment in the third quarter?

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Andrew S. Clark, Zovio Inc – Co-Founder, CEO, President & Director [19]

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Yes. So we were really pleased with our new enrollment performance in the quarter. We’ve guided to a negative 14% to negative 20%. You just commented that you had a negative 18%. So we really outperformed that. Really, what it had to come down to were 2 main items: first and foremost, the demand that we’re seeing is significant. We saw significant demand as well in the first quarter, but unfortunately, it didn’t have the resources in order to be able to serve that demand.

We took steps, as we talked about on our last earnings call with you, Alex, to begin hiring. We brought in now at least 200, perhaps over 200 new employees into Zovio. But the thing that I really attribute the outperformance to beyond an increase in demand was just the operational execution of the team. There was a bunch of new work processes put in place, a tremendous — tremendously effective use of data and data analytics and some predictive modeling to make some data-driven decisions around our distribution of resources.

And really, our team just performed really tremendously. I can’t say enough about them, especially in a quarter in which you saw a pandemic, and we moved 100% of our workforce upside remotely. So I was just really proud of that. And it — because the demand of inquiries is strong, and now we see the team doing such a wonderful job on execution, it gives us a lot of confidence about the third quarter and our ability to grow new enrollments.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division – Director of Research and Education & Business Services Analyst [20]

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Well, I’ll leave it at there. I’ll have a follow-up call with you later. Congratulations again.

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Andrew S. Clark, Zovio Inc – Co-Founder, CEO, President & Director [21]

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Yes. Thank you, Alex.

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Operator [22]

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There are no further questions. I turn the call back over to the presenters for closing comments.

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Andrew S. Clark, Zovio Inc – Co-Founder, CEO, President & Director [23]

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We’d like to thank all of today’s callers for your interest in Zovio and for your participation on the call today.

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Operator [24]

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That concludes today’s conference call. Thank you, everyone, for joining, and have a wonderful day.