Q2 2020 Zovio Inc Earnings Call
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 wage where they are while at the same time providing excellent education technology services to ask for a university University of Arizona is one of the 63-page you designated universities in the United States A Carnegie research one designee and the original land grant University or 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 a sports 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 we'll assume certain specific liabilities. Remember those assets. We anticipate the transaction to close by the end of the year subject to approval by ashford's accrediting Body wasc month.
We have also been in conversation.
Comes with the Department of Education, but there were no 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 package online classes are a necessity. If we are to continue expanding educational opportunities to under represent students and non-traditional students who work or packed full time with an Ever growing student population Educators who seek to expand potential for all students are delivering classes online and embracing a new and Innovative learning formats.
University of Arizona Club of Campus will be one of the nation's most diverse online universities with approximately thirty-five thousand 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 we'll focus on serving under-represented and non-traditional students such as veterans or those who are need of flexible Pathways to advance their education or learn new skills.
Risotto this transaction will allow us to complete our transformation into a world-class education technology services company zoveel will continue to provide its choices under a long-term strategic service agreement to the University of Arizona Global Campus under the Strategic Services agreement zoveel will continue to provide at Enterprise education technology, which uses Advanced data analytics to provide personalized and Innovative online education that enhances student engagement and improves the likelihood of surgery success. This coupled with our deep expertise delivering personalized individual learning experiences for students will further bolster the long-term success off 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 month.
We can pursue Diversified growth providing technology and services to other institutions corporations and Learners our platform ensure 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 off. This is a great step forward for you and University of Arizona Global Campus.
No 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 off and net income of 5.1 million or 16 cents per diluted share excluding non-gaap items are non-gaap. Net income for the second quarter of 2020 with 8 million months or 24 cents per diluted share.
New enrollment came in well ahead of our expectations for the second quarter of 2020 as the 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 enquiries and welcome several new cohorts of advisors life 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 job 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 2020.
Further Ashford annual cohort retention continue to improve increasing 80 basis points over the prior year to reach 60.4% off as of June 30th 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 the students representing nearly 35% of total enrollments compared to approximately 28% of total enrollments as of one year ago.
Well, we have certain corporate Partners to spending their tuition reimbursement programs in line with large-scale cost-cutting programs as a result of the uncertainty surrounding the pandemic this transaction 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 are more expanded offering continues to gain traction as well with full stack tutor me and learn at Forbes all gaining momentum more than a year ago. We communicated at strategy that focused 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 off.
Enterprise's upscale and educate their most important
a set their people
Bol stats tutor me and learn it for words are all proving that this strategy is not only the right one, but we'll propels OVO forward. Added for Life Partnerships in the quarter including Caltech University of Oklahoma, Virginia Tech and San Jose State and they're institutional pipeline remains solid black 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 cybersecurity boot camps to prepare students and experienced Professionals for new jobs in the tech industry with policymakers embracing technology disruption and defense agencies constantly seeking more cybersecurity Talent these 26 week boot camps are designed to teach participants technical skills to prepare them for emerging.
coding and cyber security jobs in Virginia's Workforce
Both sides has been a wonderful extension to ecosystem and has continued to outperform. In fact by the end of 2020. We expect full stack to have nearly double the university Partners vs. Our initial expectations.
Tutor me 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 2022 to me had more than 115 University Partners further the covid-19 pandemic is driving increased demand wage college students are increasingly taking online classes during the historically slower summer months which has supported explosive growth for online tutoring services and the second quarter off customer usage and partner usage increased 350% and 850% year-over-year respectively, which accelerates as the global pandemic hit the United States.
In addition following a successful pilot program in 2019 tutor me is expanding its relationship with McGraw-Hill to offer college students using McGraw-Hill Connect a free 60-minute tutoring session exposing to order me two more than four point three 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 tutor me seeks to ensure that students received the support they need and remain engaged as they're learning environment shifts throughout the ongoing covid-19 pandemic tutor me is bringing an offering to Learners off that was important before the pandemic but is NOW essential in the virtual environment? We are in today.
as a
Pace skills-based content platform for the consumer learn at Forbes attracted subscribers at a strong clip at the end of the second quarter. We had 2400 active subscribers which increased nearly 30% from the first quarter of 2020. We continue to be very encouraged by the success of this off at are putting in place a strategy to significantly expand the subscriber base for this platform. We remain enthusiastic about the prospects ahead for life before I turn the call over to Kevin. Let me provide a brief update on our go forward strategy.
The cupboard 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 and on life platform for learning that is not only robust. But engaging will prove critical at the same time the employed and unemployed Workforce is seeking opportunities to update zobio could not be better positioned to leverage these Trends and execute our long-term strategy, which is centered on three 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 office 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 zoviet future as in education technology services company. We believe that we have the right team and offering to address 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 Zambia. 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 financial and operating information for the quarter ended June thirty two thousand twenty revenue for the second quarter of 2020 was 103.9 million, the 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 Pub.
Play offset by an increase in tuition rates year-over-year for the second quarter of 2020 instructional cost and services were 44.9 million months or 43.2% of Revenue compared to fifty five point 1 million or 51.3% of revenue for the comparable prior. The cost wage percentage of Revenue decreased year-over-year and was primarily driven by lower labor costs and a decrease in bad debt expense net bad debt expense in the second quarter of two thousand two thousand was 3.1 million or 2.9% of Revenue compared to three point nine million or 3.6% of revenue for the comparable prior-year. We haven't experienced Improvement in bad debt expense due to operational efficiencies as well as an increase ftg student population admissions advisory and marketing job.
expenses for the second
Quarter of two thousand twenty or thirty eight point eight million or 37.3% of Revenue compared to forty four point eight million or 41.7% of revenue for the comparable prior. These costs decreased as a percentage of Revenue do to lower labor costs and decreases in advertising spend money General and administrative expenses for the second quarter of 2020 were fourteen point five million or 13.9% of Revenue compared to twenty two point five million or 21% of revenue for the comparable prior. The decrease as a percentage of Revenue was primarily driven by the decrease in acquisition cost from the prior-year as well as lower labor and Facilities expense.
Restructuring and impairment charges for the second quarter of two thousand twenty five million or 5% of Revenue compared to five point four million or 5% of revenue for the comparable prior. The charges in the second quarter of 2020 relate to Severance costs for wages and benefits as well as least exit costs during a second quarter 2020. We recognize point three million of income tax expense are effective tax rate for the second quarter of 2020 was low single-digits May 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 2020 was 8 million or income of $0.24 per diluted share compared to the non-gaap net loss of four point six million or loss of fifteen cents 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 a point five million separation and conversion costs of two point six million and net income relating primarily to contingent consideration revaluation of birth.
As of June thirty two thousand twenty we had combined cash and cash equivalents of 75.1 million compared to 69.3 million as of December Thirty One 2019. We had six point seven million of cash provided by operating activities during the year to date. Into June 30th 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 wage provided by operating activities was primarily driven by the increase in earnings partially offset By changes in working capital.
the net
Receivable was 42.2 Million as of June 30th 2020 compared to $35 million. As of December Thirty One 2019 to increase 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. Into June thirty two thousand twenty were one point six 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 a University of Arizona.
University of Arizona Global Campus a non-profit entity that will be formed and operated in affiliation with the University of Arizona will purchase the assets and assume certain specified liabilities of Ashford University following the close of the transaction Ashford University will become University of Arizona a Global Campus under the terms of the asset purchase agreement University of Arizona Global Campus will pays OVO 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 zovia will make a closing payment to University of Arizona Global Campus wage.
in the amount of 37.5 million in cash
at the closing of the transaction, which is expected by the end of 2020 zoveel and University of Arizona Global Campus will enter into the Strategic Services agreement with the Strategic Services agreement with University of Arizona Global Campus will have an initial term of fifteen years with renewals at your 7 and 12 a.m. 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 them as Andrew noted in his comments. We expect new enrollment to return to low single-digit growth in the third quarter of two thousand twenty Beyond new enrollment expectations for the third quarter. We will not be providing Financial guidance for 2024 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 to successful completion of that transaction with the University of Arizona by the end of 2020 now, I will turn the call back over to Andrew for his closing comments.
Thank you.
today is an important day for Joe v o as we take the final steps towards solidifying our position as a world-class education technology Services Company University of Arizona has six hundred and thirty-five year record of providing students Centric high quality education to all classes of students our partnership with this esteemed institution as it establishes a University of Arizona Global Campus will be a strong Foundation to build upon
University of Arizona Club of 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 zobha 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 that 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 6:30 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 offer pack, which is robust flexible and most importantly online recent Trends within higher education have accelerated and continue to support and increasingly wage optimistic outlook for video and it's expanded offering
With a rapidly growing University partnership Network and high-growth Industry disruptors, including. Tutor me and learn it for us now more than ever. I believe Zoe as well to take advantage of the attractive Trends in higher education and deliver a long-term growth and value creation.
At this time, I'll ask our operator to open the phone lines for your questions at this time. I would like to remind everyone in order to ask a question, please press star then the number 1 on a telephone keep your first question comes from the line of Alex Paris from Berrington. Research Alex. Your line is live morning guys. Congratulations on the announcement this morning of the transaction University of Arizona and better-than-expected new student enrollment. I went into I got a lot of questions, but I'll I'll start off with just a bigger picture sort of question.
How did the transaction?
Happened with the University of Arizona, you know, obviously last year you were looking at a couple of different scenarios one conversion of spin-off of the University or sale of the university to 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 engineer work, you know just that additional color. Yeah. Sure. Good morning Alex and 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, um, just a variety of schools. And this was of course before the pandemic off and as as we you know examine those possibilities we continue to be convinced that the conversion was the best way to go.
and then we began to
Actions with University of Arizona in in March and um, it just became increasingly obvious to us Alex own know that probably the next 30-45 days. Just what an outstanding public land grant institution. It is the leadership there is visionary off doing things that quite frankly a lot of public universities aren't doing and to be affiliated with the university like that was so beneficial to them ask for students to faculty to staff and and even to to alumni and so bad for Board of Trustees. In fact unanimously supported the sale of Ashford to University of Arizona Global Campus. So it just was a superior outcomes.
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 a really wonderful outcome for Silvio from our perspective to have a chance to partner and work with again. Such a highly respected public institution will be fantastic in terms of being a foundational partner that we will then begin to change the future work with other university Partners to provide other services to other universities.
No, I mean I I agree. Don't get me wrong. I think this is a great tie up with an outstanding university University of Arizona. And now this looks like the transaction that produced it was Kaplan. Am I correct in that assumption? And and how is it a life or how is it different?
Yeah, I mean it is a like in some regards contractually. I would say the big difference is that Ashford University Jack in the conversion was going to remain a free-standing non-profit wasket credit identity in in in with the University of Arizona World Campus Life continues to be the case. So they have formed a non-profit entity that entities be named University of Arizona World campus that end. He's buying the assets are acquiring the assets of Ashford University. So when they received the WASP, uh approval then then they will pass will go away, but it will be a free-standing continue to be a free-standing separately accredited institution with the leadership dead.
and in 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, you know, we took it is similarly and you'll recall out so that we said we really thought the the Purdue Kaplan model was one to emulate. So our Revenue share is just make up and half percent. We're reimbursed for direct expenses produce of course was twelve and a half percent of leave. And then the term of the agreement is 56 years. The initial term is seven years. We are providing the University of Arizona 37 and 1/2 million dollars come back up front as as part of this Arrangement. They have the ability to terminate after seven years and they would pay if they did terminate dead.
A trailing 12-month Revenue to us for the termination rate. So there's similarities there. There's you know, I don't have the whole list in front of me, but there's a lot of similarities to age Kaplan from a just a contractual standpoint. We we we tried to emulate that in in the ways that it made sense and then we tried to to improve on it as wage.
Yeah, I know. It looks great. And it also looks fairly similar to the broad outlines of the contract that you would have had had it been just a conversion in in separation with wage University. It's the surviving yet. It doesn't look too different from what we talked about before nineteen and half percent direct cost reimbursement etcetera.
Yeah, that's correct. It's very similar to the conversion as well, which I think you know is particularly good from an accreditor standpoint W creditors not going to be looking at too much that's different really the the only piece and it's an important piece is different is that rather than being an independent free-standing institution unto itself. It it is it is an independent free-standing institution that's renamed and affiliated with the University of Arizona. And and I think that can only be viewed as a very positive addition or changed to to what the accreditor had already approved for the converging right exactly and then just from a from a perspective student perspective. It's it's a heck of a brand to not that bastard wasn't but but you know the heck of a game.
Going forward there are fantastic brand fantastic institution. Great reputation. Again, the leadership there is is just bought a really impressive and we could be more happier and and and from just as audio perspective, you know, how wonderful it wasn't that, you know, we're headquartered now as you know, how it's Chandler so, you know publicly traded headquarter company right there in the state of Arizona able to partner up with one of the Premier public institutions in Arizona. So that that was just kind of frosting on the cake. Oh, yeah. Well, congratulations again on the transaction. It's been a long two years, but I'm very pleased with the outcome. Now as for the closing date you say by year-round give you got the approvals for quickly. Could it be before that? We should really just focus on your end.
Yeah, I mean it could theoretically be before year-end.
You know, it's really going to be dependent upon the work that University of Arizona and asper do with their creditor and kind of that process and and how expeditiously that occurs so, you know could be earlier but I think we felt comfortable saying, you know no later than the end of the year off and then to Kevin's comments with regard to 4 to 3 used to have been Roman guidance milk Financial guy is 4:20, but we should consider a Consolidated. So in other words Silvio's going to look like first-half Silvio in the second half and the model will look a little different beginning in 2021. Hence the guidance from 2021.
That that's correct Alex. Okay, great. And then lastly I didn't want to be too much of a Time hook here, but the U student enrollment outcome in the second quarter was better than wage. But I think we get models in and 18% declined and the decline was more like 12% if I heard that correctly. Yeah 12 to 6 % to be precise. Yeah, I got you. And what do you owe that better than expected performance to and what do you owe the inflection point to growth, you know a new student enrollment in the third Court? Yeah. So we've, you know, we were really pleased with our new enrollment performance and 1/4 we'd guided to -14 to -20 just commented that you had a 2018. So we have really upped performed that you know, really what it had to come down to were kept two million items first and foremost the demand that we're dead.
Is significant we saw a significant demand as well in the first quarter, but unfortunately didn't didn't have the resources in order to be able to serve that demands. We 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 200,000 new employees into his OVO. Um, but but the thing that I really attribute that performance 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 usage and data analytics and some predictive modeling to make some data-driven decisions around our distribution of resources and and really are dead.
Name just performed some really tremendously. I I can't say enough about them, especially in a quarter in which you saw a pandemic and and we moved 100% of our Workforce off-site remotely. So I was just really proud of that and it because the demand of inquiries is strong. And and now we see the team, you know doing such a wonderful job on execution. It gives us a lot of confidence about the third quarter in our ability to grow new enrollments.
Great. Well, I'll leave it at their I'll have a follow-up call with you later. Thank you very much. And congratulations again.
Yeah, thank you Alex.
There are no further questions. I turn the call back over to the presenters for closing comments.
We'd like to thank all of today's callers.
for your
today that concludes today's conference call. Thank you everyone for joining and have a wonderful day.
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