Q1 2020 Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the Zoghbi. All Q1 2020 <unk> earnings Conference call. At this time, all participants are any listen only mode. After the speakers presentation. There will be a question and answer session to ask your question. During this session. You want me to press Star one on your telephone if you're acquiring.

Further assistance. Please press Star Zero I would now like turn the conference over to your speaker today, a lot of a teaching our VP corporate communications. Thank you. Please go ahead.

Thank you and good afternoon, they'll be owns first quarter 2020, <unk> earnings release was issued earlier today and is posted on the company's website.

W. W. W. Dotcom joining me on the call today, our Andrew Clark founder, President and Chief Executive Officer, and Kevin Reilly, Chief Financial Officer.

We would like to remind you that some of the statements. We made today maybe considered forward looking.

These statements regarding new enrollment growth.

And your attention.

Education partnerships and other programs and services.

Our ability to meet all required conditions and obtain all required approval to close on the planned separation and conversion of Ashford University.

And on our current plans timing to do so.

Our ability to transition to become an education technology services company.

Our ability to grow through acquisition.

Our ability to successfully integrate and leverage acquired companies.

Future revenue growth EBITDA financial unrelated guidance and commentary regarding fiscal year 2020 and later.

These forward looking statements are subject to a number of risks and uncertainties.

Cause actual performance or results to differ materially I mean does expressed or suggested by the forward looking statements.

Note that these forward looking statements speak only as of the data. This presentation and we undertake no obligation to update these forward looking statements in light of new information our future events.

Except to the extent required by applicable securities laws.

On the call today. He will also discuss certain non-GAAP financial measures and our news release, you will find additional disclosures regarding these measures.

Putting a reconciliation of these measures with U.S. GAAP.

No 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 FCC filing.

Our annual report on form 10-K for the year ended December 31st 2019.

As well as our quarterly report on form 10-Q for the quarter ended March 31st 2020, which we filed with the FCC earlier today.

More detailed description of the risk factors that may affect our results.

You may obtain copies from the FCC or by visiting the Investor Relations section on our website.

At this time and it's my pleasure to introduce WMS founder President and CEO Andrew Clark.

Thank you a lotta and welcome to our first quarter 2020 earnings call.

After I discuss some of the highlights for the corner, Kevin will review, our financial results and key operating metrics. After Kevin concludes I will offer my closing comments.

Turning to our results for the first quarter of 2020, we reported revenue of 97 point Ninemillion and net income of 2 million or six cents per diluted share.

Excluding restructuring and impairment charges separation and conversion transaction costs acquisition costs as well as tax impacts relating to the carriers Act our non-GAAP net loss for the first quarter of 2020 was 3.2 million or 10 cents per diluted share.

Inline with our expectations new enrollment for the first quarter 2020 was down as a percentage by high single digits when compared to the same quarter prior year.

As of March 31st 2020 ask for its annual cohort retention rate increased to 130 basis points over the prior year to reach 60.7%.

It goes without saying the last two months had been rock with uncertainty as covered 19 swept the United States.

At the onset of the crisis, we moved quickly to ensure the health and safety of our employees students and University stuff.

We transitioned to remote working for our corporate staff and leveraged our strong online learning platforms to ensure our students saw little if any disruption in their studies.

In addition, we reached out to a number of universities offering complimentary products to enable them to get online quickly as the environment moved distance learning nearly overnight.

Which has led to a number of ongoing conversations for future support.

That said unlike in historic periods of macroeconomic uncertainty. The covered 19 pandemic has brought the U.S. economy to a near halt.

As a result, predicting the behaviors of current and potential students is incredibly difficult from our standpoint.

As we look to recalibrate, our new enrollment expectations. There are two primary groups education partnerships and military students.

Likely to be most impacted from a new enrollment and retention standpoint.

We saw continued momentum from our education partnership programs during the first quarter, where these students representing nearly 35% total enrollments compared to approximately 28% of total enrollments as a one year ago.

However, two of our top 30 partners have suspended their tuition reimbursement program as part of broader cost cutting actions early in the second quarter.

As of today, the remainder of our top 30 partners, representing approximately 70% of our teachers students have not taken similar actions understandably. There is a general unease. Among these students at their companies may take a similar path or even reduce headcount in the near term.

Given the current environment.

The second group our military students were initially impacted by disruption in the approval process for education benefits, which was not automated across all branches. This issue has been addressed by the military and is slowly improving.

This quarter, we experienced a steady flow new inquiries. However in January we discovered an imbalance of inquiries and resources to process them, which was largely driven by a disproportionate amount of advertising spend.

Once identified we increased recruiting and hiring for enrollment advisers and coaches.

And now have several new cohorts of advisors and coaches starting in the second quarter.

We expect new enrollment in the second quarter 2022 declined mid teens, 20%.

This will be driven by a number of factors first the impact of cover 19 on the broader macroeconomic environment and our F. T G student behavior.

Okay. The disruption I mentioned related to the approval process for our military students to receive benefits and lastly, the operational inefficiencies we identified in the first quarter related to processing of new inquiries.

We are experiencing the most significant impact with our education partnership students.

Due to the scholarships associated with this group, we expect the impact on net revenue to be partially mitigated.

Turning to some of our newer offerings full stack tutor me and learn at Forbes all continued to perform well.

In fact continued to add new partnerships in the first quarter with the addition of Cal State East Bay.

Further there institutional pipeline remains solid and we continue to be optimistic as we move through 2020.

Tutor me out of 24, new partners in the first quarter, bringing the total to just shy of 90.

Also given the demand Jeremy recently expanded its marketing efforts directly to the consumer which has been well received.

All right at force continues to gain traction as a self paced skills based content platform for the consumer.

As a reminder, its platform offers more than 800 courses across categories like business financed marketing personal development leadership, social media strategy just to name a few.

During the first quarter, we've added another 600 subscribed individuals, bringing the total to 2600.

We've also added five new corporate clients, bringing the total to 17.

We continue to be very encouraged by the traction thus far as it underscores the strength of the offerings.

Before I turn the call over to Kevin Let me provide a brief update on the conversion in January we announced we had entered into a nonbinding letter of intent with Ashford University and we continue to work towards a June 2020 closing.

However in light of the unprecedented over 19 pandemic and uncertain economic outlook and other recent developments impacting our industry in business our timing for the closing of the conversion couldn't be delight.

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

Thank you Andrew let me begin by providing some chief financial and operating information for the quarter ended March 31 2020.

Revenue for the first quarter 2020 was 97.9 million compared to revenue of 109.8 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 first quarter of 2020.

Structural costs and services were 46.4 million or 47.4% of revenue compared to 51.9 million or 47.3% of revenue for the comparable prior period.

The cost as a percentage of revenue were fairly consistent year over year, whereas the decrease in expense in absolute dollars was primarily driven by lower labor cost and a decrease in bad debt expense.

Bad debt expense in the first quarter, 2000, 23.3 million or 3.4% revenue compared to three point Sixmillion EUR, 3.3% revenue for the comparable prior year period.

We have experienced meaningful improvement in bad debt expense due to the increased TG student population.

Admissions advisory and marketing expenses for the first quarter, 2020, 41.7 million or 42.6% or revenue compared to 49.1 million or 44.7% 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 first quarter, 2020, or 17.5 million or 17.9% revenue compared to 15.9 million or 14.5% of revenue for the comparable prior period.

Increase as a percentage of revenue was primarily driven by the 3.5 million amortization and stock comp expenses associated with the acquisitions, a full stack entry, Germany as well as the 1.5 million costs relating to the potential separation and conversion.

Restructuring and impairment charges from the first quarter 2020, or 2.8 billion EUR, 2.8% revenue compared to 29000 for the comparable prior period.

The charges in the current period relate to severance costs for wages and benefits due to the reorganization in the fourth quarter 2019, as well as Q1 2020 severance cost.

During the first quarter 2020, we recognize a 12.9 million dollar income tax benefit due to the cares Act, which allows for net operating losses to be carried back in certain situations.

Before any of these discrete items, our effective tax rate for the first quarter 2020 was low single digits and we anticipate this trend to continue for the remainder of 2020.

Net income for the first quarter 2020 was 2 million or net income of six cents per diluted share. This is compared to net loss of 6.6 million or a net loss of 24 cents per diluted share for the first quarter the prior year.

Our non-GAAP net loss for the first quarter 2020 was 3.2 million or a loss of 10 cents per diluted share.

Compared to the non-GAAP net loss of 3.3 million or loss of 12 cents per diluted share for the first quarter the prior year.

Non-GAAP net loss for the first quarter 2020 excludes restructuring and impairment charges of 2.8 million separation and conversion costs 1.5 million and acquisition related cost 3.5 million.

As of March 31, 2020, we had combined cash cash equivalents 61.3 million compared to 69.3 million as of December 31, 2019.

We use 6.2 million of cash in operating activities. During the year to date period ended March 31 2020.

By comparison, we used 16.4 million of cash in operating activities.

During the same period in the prior year.

The year over year change in the cash used in operating activities was primarily driven by the increase in earnings as well is improvements in working capital.

The net accounts receivable was 46.7 million as of March 31, 2020.

Compared to 35 million as of December 31, 2019 <unk>.

The increased balances consistent with our business cycles and the growth of our full tuition ground enrollment in the first quarter 2020, as well as acquired receivables.

Capital expenditures for the year to date period ended March 31, 2000, 21.2 million, that's compared to 6.5 million for the same period last year.

One last item I wanted to know is the given the cobot 19 pandemic and all of its uncertainty. We believe we cannot reasonably estimate the impact it will have on an operating and financial results.

Due to this continued uncertainty we're withdrawing our earnings guidance provided during our fourth quarter and full year 2019 earnings call on February 22020.

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

Thank you Kevin in summary, we are facing unprecedented times driven by the kind of in 19 pandemic as a result student behaviors are somewhat unpredictable as many face greater uncertainty and their financial and or employment status.

That said, we continue to deliver programs that are robust flexible and most importantly today online.

As we continue to March towards the conversion of Ashford University as well as our transition to an education technology services company. We believe we are positioning the business for a long term value creation.

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

Certainly at this time I'd like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad. Your first question comes from the line of Alex Paris from Barrington Research. Your line is open.

Hi, guys I hope you are doing well and are safe.

Thank you Alex we are hope, you're doing well and that you're safe.

Yep. Thank you.

Congrats on a.

Results topped expectations and guidance.

I guess my first a question will be related to the separation in conversion you know certainly understandable given cold.

And its impact on the economy. It makes the timing of closing or a little bit up its sitting question I guess.

Though you said, you're still driving towards a good conversion separation.

ER.

Which is good news or the question I have I guess there is.

About the components.

I have a good Virgin separation, you know where do we stand on the letter of credit and Ah what is the likelihood that you close in June and if you don't close in June <unk> tickets later this summer or next year you know what.

Might be difficult to answer, but I thought I taught out there anyway.

Yeah, no. Thanks, Alex well first of all as you noted we're focused on converting in June and that really is a priority I think you know out of an abundance of caution with covered 19, and you know a variety of people working remotely including outside.

Folks that we rely on adobe as well as from an effort perspective.

Yeah, we wanted to make sure and give ourselves some room in case for one reason or another this thing were too you know.

It would take us a little longer to get through to a two closing on the conversion.

I I don't want it really handicap it for you other than to say the you know our intent our focus is to to convert and Jim.

You know I certainly kind of your comment around next year [laughter] certainly out a that wouldn't be the case I don't have any reason to believe.

Yeah at this point that that would be the case I. You know, we really are just trying to be.

Cautious because this is a time that you know none of us as ever experienced before I want to make sure and give ourselves enough we way.

Got you so it sounds like the the concerns around the closing date would be more more related to the logistics in the uncertainty of coal, but what about a the due diligence process for the financial partner, that's going to help you provide a letter of credit where do we stand on that.

So really no change there and no update to make on that front.

I think.

They'll they'll be obviously a lot more to talk about once we get to a place or to the point. We're we're ready to announce that we are converting again hopefully in June but I don't really have any new news on that front.

Okay.

Thank you [noise].

Showed keep right track their primary areas of focus this year.

Hi, good Ashford growing again and complete the conversion and separation. So so on to Ashford and growing again it sounded like the new student enrollment was we're just thought it would be in the first quarter or where you'd guided it to be so to speak.

And retention again was up a that.

Many quarters in a row know improved.

Retention looks like it'll take a a turns out here in the second quarter based on your prepared comments and get encoded any uncertainty that that brings is well.

You gave some good color with regard to educational partnerships and a the military.

How about a little bit of an update on Ah Ah you know your typical recruiting a lead flow conversion any interruption in the inquiry is oh.

Hi, how are things going so far in and out Q2.

Yeah sure so lots of things to comment on there I think I want to start with retention as you noted our retention was was up again one of the highest cohort retention rates. We've had in the last several years. So we're really happy to see that I'm really really.

Pleased with that retention rate continuing to increase you know we do have a view that new enrollments will be negative in the second quarter.

Between 14 and 20%.

Primarily driven by Ed partnerships in the F. teaches students, which is a place where we've seen it you know.

Significant disruption as.

As you know that students are heavily scholarship so the impact revenue is.

It is a somewhat mitigated and offset there into your question about kind of you know how are things looking in terms of inquiries, which relates back to.

ER and partnerships, we really have had.

No issue in terms of a attracting interest in students to Ashford University because of the way in which the University differentiates itself.

From the standpoint of student satisfaction.

Look at any of the online reviews, the net promoter score the University all of those.

Our significantly Hi Inn, and a actually outperformed many of Ashfords competitors.

So we have no challenges when it comes inquiries.

And in fact, we've seen strong inquiry flow.

In the second early second quarter here, the cobot 19 caused some disruption.

Especially in the kind of that last three or so weeks of of the quarter, there, but ER and we weren't quite sure what to expect but I can tell you that you know from about early April to present time, we've seen.

Really good performance in terms of inquiries.

Yeah really the opportunity for us as I spoke to Alex is to make sure that we have the proper number of enrollment advisers and enrollment coaches staff to handle all of those inquiries, which is a place we fell short in the first quarter I'm. So we've been hiring.

Since March I'm really happy to see.

Previously former enrollment advisers.

Who wants workforce, a return we call them Kollmeyer alumni and want to come back.

And then of course.

Because of covered 19, and the tremendous number of people that have been laid off we've had no lack of interest.

And people, who want to come worked for Zalviso and the enrollment advisor role in the coach role. We're also hiring in the student success area and it's approximately 200 or so folks so.

That gives me a lot of.

Confidence around the second half of the year.

I'm I'm pretty bullish around kind of what I think we can do there because a student interest is still very strong and now with the right staffing levels in our enrollment service area, we should be in a really good place in the third and fourth quarter.

That's good news.

Any.

Any <unk> I guess, the retention speaks for itself or any uptick in student stopping out or anything like that you know picking a.

Taking a six week period off or anything like that given the kids are home and things like that there are.

If anything to note there.

Yeah, No great question I mean, we did see an uptick now.

Specifically again with our Ed partnership students and RF TGC ones, we saw an uptick in and the number of students that decided to take a break and either temporarily drop a or just said you know look we're going to drop and you know hopefully when things settle down I can come back to.

School.

We had what we call a high number of academic leave requests and these are students. That's a that's status the student can take.

And and take some temporary time off from school and come back.

And we had a really high rate of what we call ale ours is the acronym for that.

So I was little concerned, but those students returned.

Last week and so we're watching carefully to see what that would look like and they returned at a very high rate in fact, I'm not quite as good as the return rate we saw in January.

Very very close to that which I'm pleasantly surprised us so I am starting to see.

Here and kind of early April some stability taking place in in the student base from both a continuing student retention standpoint, as well as from a new enrollments standpoint, you know our I shifted a lot of research.

This is.

Prior to kind of at 19 out of our heavily scholarships students into our non scholarship students and that proved to be very fortuitous, because and Ah you know as what would have it we had quite a bit of disruption there in the military and.

Partnership crew and Fortunately I already shifted a lot of the resources into our non scholarships student channel.

And so we've actually seen that part of new enrollments performed pretty much at our expectations sense or kind of end of March all the way through a present day.

So it so it sounds like the worst sitting in the year over year decline in new student enrollments is as you said I pretty much related to the scholarship students and the military students the disruption there.

Yeah. The military is really starting to you know stabilize they got the processing fixed I think I'm I'm I'm feeling fairly good about that population Alex's students.

Thank the one population that you know is really uncertain. Then you know is dependent upon.

Future actions that companies continue to take as is the Ed partnership group.

You know MTG students in particular, the tuition benefits students, who get a lot lower scholarship percentage.

Appear to be you know continuing to decide to either start school or stay in school.

So it's really that more heavily scholarship 50 to 50.

If TGC and that's where we're seeing you know kind of erotic either continuing student in newsprint behavior.

Although the continuing students that really.

Appeared to have kinda, you know settled in here or at least in the last week or two.

And so you said two of the top 30 corporate partners suspended tuition reimbursement in Q2, the remainder 28 is 70%.

Oh.

Oh, the FDG of educational partnerships did I get that right.

Yeah, they comprise approximately 70%.

Of the FDG students yes.

So the two that suspended obviously there you are two of your largest because they account for 30% right.

Because they said they're spending it that means their students are not enrolling in the next course until that is resolved.

Yeah. This kind of two components. There. One is you know their employees, who Evan pursued colleagues previously or not you know pursuing it now because there's not a benefit to use and so there's no new enrollments coming in.

For those particular companies and if you look at.

You know our top.

30 companies I would say that you know we've seen across the board from the largest contributor to the smallest in that top 30 group.

A significant decline in new student interest out of those companies again, just because of covered 19 in the uncertainty. The two companies. They did suspend benefits that has an impact also on the students. The their employees who are students of ours is currently because obviously.

We now they either need to step out and wait till that benefit is reinstated or they need to find an alternative financial solutions. So that they could continue to stay here, yeah and pursue there they're a college degree.

And it could it be just a.

Some of these students lost their jobs. So therefore, the benefit it's not going to be there.

I mean.

For them.

Yeah, I think there's a you know so there's that the employer aspect and then there's the employee and learner aspect and I think you know so employers is one part of the puzzle like we've talked about there's been two major employers to suspend it benefits. The rest are hanging in there I think the employee slash.

Dinner has another set of kind of uncertainties they might not even be thinking about the tuition benefit of their employer per say, they're more concerned about are they going to have a job.

You know have they been or might they be laid off in the near future and I think it's more of that uncertainty, perhaps you know there in a situation where they think they'll have a job, but now they've got kids at home and they're doing daycare there, helping their kids learn online.

Oh, hey, radically and so right.

And so there you know there preoccupied with that and quite simply you know need to step back for a period of time. So I think there's a variety of things when you look the individual learner that probably contribute to them.

You know dropping out in the near term I think I think that those those folks will come back to school and kind of the question is when will they come back and and that's kind of hard for us to judge.

Got it and then just to be clear you said that 14% to 20% decline in new student enrollment in the second quarter sounds like much of that is from DFI D. student shot show the impact on revenue is gonna be.

Essentially significantly less than that or you know maybe half of that you know in terms of the impact of students not coming back because the only thing their employers thing basically half the tuition.

Yeah, I mean, it's going to be you know definitely.

No not 50% they'll be a little bit of an impact, but it's really.

Really.

Not not not too too bad so to speak.

It's really a there's a little bit of an impact, but not as much maybe as you're thinking you have to remember that scholarships annualized so on a quarterly basis the impact is gonna be.

Smaller than probably what you're thinking as you try and put a model together.

Got you I guess my last question will be then it sounds like full stack is a adding new corporate partner <unk>. What do you have to five now I think and Oh.

Confirm that but also.

All of these students had to be shifted to online I guess right as a result coal that oh any any color. There how did that process go and it does that have an impact on recruiting future students.

Into all done right yeah, yeah. Thank you I'm glad you brought that up so full stack, they're up to seven University partners.

And they have many of those partnerships they actually do provide.

The programs remotely they provide a a fully a remote online solution there and so when they had to take their campus students in New York and in Chicago and put them online they were able to do that pretty quickly.

And B and were able to kind of mitigate disruption. So so full stack is.

Effectively all online right now and are they just.

Began recruiting for basically a national online program now they they wouldn't recruit students whether university partners are so.

For example, University North, Florida, there, they're not going to be recruiting students in the same geography, but you know right now they don't have a university partner in Texas. So if there was a student in Texas, who wanted to take this national online full stack program, they could and so.

They're currently recruiting for that we've actually seen Oh early on strong demand for that program, which has been a really nice surprise and so I'm kinda cautiously optimistic about how that will go and I think potentially as you know.

For full stack, they've never had a national online offering and and I think you know this crisis is made them kind of step back and we think things and I think they we'll probably make that another one of the ways in which.

Aspiring engineering students can can access their curriculum again in a way that protects their university partners.

Great. Thank you Andrew or for the additional color I appreciate it.

I'll leave it I'll leave it there.

Alright, great. Thanks, Alex.

We'd like to thank all of today's collars for your interest since I've yellen for your participation on the call today. Thank you.

That concludes today's conference call you may now disconnect.

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