Q3 2020 Zovio Inc Earnings Call

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I'd now like to hand, the conference over to your speaker today, a lot of MACI, our VP of corporate communications. Thank you. Please go ahead.

Thank you and good afternoon, they'll be a third quarter 2020 earnings release was issued earlier today and is posted on the company's website at www Dot W. Dot com.

Joining me on the call today are Andrew Clark, founder, President and Chief Executive Officer, and Kevin Royal Chief Financial Officer.

We would like to remind you that some of the statements. We make today, maybe considered forward looking including statements regarding new enrollment growth.

Student retention education partnership.

And other programs and services, our ability to meet all required conditions and obtain all required approvals to close on the plans regarding Ashford University and our current plan timing to do so.

Ability you transitioned to become an education technology services company.

Our ability to grow through acquisition, our ability to successfully integrate and leverage acquired companies.

Your revenue growth EBITDA financial and related guidance and commentary regarding fiscal year 2020 and leader.

These forward looking statements are subject to a number of risks and uncertainties that could cause actual performance or results to differ.

Materially from those expressed in or suggested by the forward looking statements.

Please note that these forward looking statements speak only as of the date of this presentation.

And we undertake no obligation to update these forward looking statements in light of new information or future events, except to the extent required by applicable securities laws.

On the call today, we will discuss certain non-GAAP financial measures in our earnings release, you will find additional disclosures regarding these measures, including reconciliations of these measures with the U.S. GAAP NOI.

Note that these non-GAAP financial measures are intended to supplement GAAP financial information and should not be considered as a substitute for our GAAP results.

Please refer to our SEC filings, including our annual report on form 10-K for the year ended December 31st 2019, as well as our quarterly reports on form 10-Q for the quarter ended September Thirtyth 2020, which we filed with the FCC earlier today from.

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 of our website.

At this time it is my pleasure to introduce Adobe as founder President and CEO Andrew Clark.

Thank you a lotta and welcome to our third 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 are incredibly pleased to report a strong third quarter for 2020.

First and foremost in line with our guidance, we delivered low single digit new enrollment growth.

Our team has remained focused and energized just a steady flow of new inquiries continue.

Retention for the quarter also saw significant improvement increasing 320 basis points over the prior year, reaching 61.9% as of September Thirtyth 2020.

Ashford superior offerings and reputation combined with the initiatives we put in place earlier this year to increase resources and enhance overall efficiency supported the best retention since the second quarter of 2016.

As we look to the fourth quarter, we anticipate this momentum at Ashford to continue with new enrollment growth in the mid single digits on a normalized basis.

For the third quarter 2020, we delivered reported revenue of 102.2 million and net income of 1.1 million or three cents per diluted share.

Excluding non-GAAP items, our non-GAAP net income for the third quarter of 2020 was 2.9 million or nine cents per diluted share.

Last quarter, we announced the signing of a definitive agreement with the University of Arizona to acquire Ashford University, creating the University of Arizona Global campus or you HPC.

This transaction marks a key moment preserve those evolution into a world class Education Technology services company and also reinforce the strength of ashfords value proposition to students.

In fact, the university's net promoter score hit a new all time high.

As of the end of the third quarter Ashfords NPS was 61.3.

The highest since we began tracking this metric in January 2017, and on par with other world class Global education leaders.

Further results from the 2020 National survey of student engagement or NFC indicated that Ashford provides an academic challenge that ranks with the top 10% of four year colleges in the United States that participated in the messy.

Ashford students raised their interactions with faculty and academic advising as high quality and say they experienced high levels of effective teaching practices parted.

Participating institutions include bachelor's degree granting colleges and universities, representing a broad diversity with respect to institution type public or private control size and region.

We are incredibly excited to partner with you AGTC in support of their vision.

Building on the history of superior outcomes for students you HTC will further expand access and provide innovative learning solutions to meet students where they are.

We continue to target the transaction closing by the end of the year.

However, this remains subject to approval by Ashfords accrediting body wash.

As we discussed last quarter through our strategic services agreement. We will continue to provide you a GC with our enterprise education technology and services leveraging our unique advanced data analytics platform to provide personalized and innovative online education that didn't have.

It's a student engagement and improves the likelihood of student success.

This agreement marks our inaugural University partnerships client as we transition to a world class Education Technology services company and will create a strong foundation from which we can pursue diversified growth, providing technology and services to other institutions Corporation.

Actions and learners.

In our pursuit of growth Zalviso remains incredibly well positioned.

Leveraging our deep expertise delivering personalized individual learning experiences across all credential levels modalities and disciplines, we bring a clearly differentiated offering to our clients.

First we bring an end to end solution that spans the entire student lifecycle marketing and recruitment to retention and course development tools.

Second our offerings are tailored and flexible.

Third we are aligned to operate at scale to support our clients rapid growth objectives.

And lastly, all of our robust solutions are powered by signals.

Signals is obvious proprietary predictive analytics platform that provides data driven insights to enhance our client offerings and improve overall results and outcomes. This.

This enables us to develop solutions and engineer workflows that optimize performance metrics from marketing through graduation.

This pandemic has of course presented significant challenges for everyone, making it clear that an increasingly virtual world will be our new normal.

Higher education is at the forefront of this trend yet not all institutions are prepared for this accelerated shift.

Now more than ever it will be critical to provide students with a robust online platform that meets them, where they are and enables them to achieve success.

At the same time, the employed and unemployed workforce is seeking opportunities to upscale.

Zalviso could not be better position to leverage these trends and execute our long term strategy, which is centered on a number of key initiatives.

First deliver education services that meet the diverse and large scale needs of higher education institutions.

Second accelerate growth businesses through ongoing investment to support strong growth expectations and diversification.

Third expand our skills to employment b to B and B to C offerings to empower learners to better connect with end demand jobs, leveraging learn at Forbes and education partners.

And fourth establish leadership position as a data first services provider to offer institutions, a technology and data first suite of solutions that will further differentiate servios offerings.

Though the US subsidiaries full staff tutor me and learn at Forbes all continue to perform better than expected.

The addition of these services enhances envios ecosystem to support learners education and career aspirations by building on our existing capabilities could mean police or higher Ed institutions Bridge.

Bridge, the education to employment gap and help enterprise Upskill and educate their most important asset their people.

During the quarter full stack continued to outperform the anticipated number of University partnership agreement with.

With meaningful partnership announcements, including Colorado State University, Emory University, and University of Illinois, Chicago.

As an example, full stacks partnership with Emory University's Noncredit Division Emery continuing education. He will offer programs aimed at developing qualified professionals to meet the staffing needs as Atlanta is prospering technology sector.

With emory's impressive reputation across Georgia, and its long standing relationships with Atlanta is most prominent businesses.

Bringing this accelerated training to the region alongside memory was a natural fit.

As students and experienced professionals continue to look for opportunities to Upskill, we're seeing increased opportunities for our offerings by the end of 2020, we expect full stack to have nearly doubled the university partners from our initial expectations and we remain incredibly optimist.

Stick for its prospects as we move forward.

In recognition of its superior offering in September tutor me was awarded how to learn Dot Coms 2020 parents and teachers Choice Award.

The parents and teachers Choice award from how to learn Dot com are among the most recognized international awards by both parents and teachers and students parents and teachers have pivoted to remote learning the importance of online educational resources like Twod or me.

Have become necessary to support learners.

Given the dynamic of remote learning companies are providing tutoring support as an employee benefit while education institutions from higher education to K 12 districts are leveraging tutor me to ensure their students have help when and where they need it in.

In this vein tutor me continued to execute new partnership agreements during the quarter from universities to corporations to school districts.

In September tutor me announced its alliance with the Allendale County School District, which will provide over 1150 K 12 students in the district with access to free online tutoring.

As 2017, Allendale County schools have been focused on increasing the successful outcomes of the district students and tutor me stood out as an effective online tutoring program because the platform gives its students access to a life tutor.

Consistently within 30 seconds.

Tutor me added another 60 plus partners at the end of the third quarter of 2020, bringing the total to 176, an increase of nearly 280% year over year.

Further as the COVID-19 pandemic has driven increased demand remote learning has continued to support explosive growth for online tutoring services.

In the third quarter total customer and partner usage increased nearly 340% year over year.

Continuing the strong momentum we saw in the second quarter.

As a self pay skills based content platform for the consumer learn at Forbes attracted subscribers at a strong clip.

At the end of the third quarter, we had 2700 active subscribers, which increased as a percentage in the high teens from the second quarter 2020.

We continue to be very encouraged by the success of this offering and we remain enthusiastic about the prospects ahead perlin at Forbes.

We are incredibly pleased with the progress and growth we achieved during the third quarter we.

We delivered a return to new enrollment growth in line with our expectations student.

Student retention at levels not seen since 2016.

And our broader offerings, including pull stat tutor me I've learned at Forbes are firing on all cylinders.

As we March towards the final step of Sofias transition into a world class Education Technology services company, we remain excited for the future.

I want to thank our team for their hard work over the last several years to get us to this point.

It is your commitment to superior student outcomes that is put Silvio on a path to take advantage of the attractive trends in higher education, and deliver long term growth and value creation.

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 key financial and operating information for the quarter ended September 32020 revenue.

Revenue for the third quarter 2020 was 102.2 million compared to revenue of 104.3 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 third quarter of 2020 in structural costs and services were 44.9 million or 44% of revenue compared to 51.4 million or 49.4% 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, partially offset by an increase in bad debt expense.

Bad debt expense in the third quarter, 2020 was 3.4 million or 3.4% of revenue compared to 3 million or 2.9% of revenue for the comparable prior year period.

Admissions advisory and marketing expenses for the third quarter, 2020, or 41.6 million or 40.7% of revenue compared to 40.8 million or 39.2% of revenue for the comparable prior period.

These costs increased as a percentage of revenue primarily due to increases in advertising spend.

General and administrative expenses for the third quarter of 2020 for 14.8 million or 14.5% of revenue.

Compared to 17.4 million or 16.7% of revenue for the comparable prior period the.

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 third quarter of 2000, 24.2 million or <unk>, 0.2% of revenue compared.

Compared to 2.5 million or 2.4% of revenue for the comparable prior period.

The charges in the third quarter 2020 relate primarily to relocation costs.

During the third quarter of 2020, we recorded an income tax benefit of point 4 million.

Our effective tax rate before discrete items for the third quarter of 2020 was low single digits and we anticipate this trend to continue for the remainder of 2020.

Net income for the third quarter 2020 was 1.1 million or net income of three cents per diluted share. This.

This is compared to a net loss of 7.6 million.

Net loss of 25 cents per diluted share for the third quarter of the prior year.

Our non-GAAP net income for the third quarter 2020 was 2.9 million or income of nine cents per diluted share compared to the non-GAAP net loss of 1.6 million or a loss of five cents per diluted share for the third quarter of the prior year.

The non-GAAP net income for the third quarter in 2020 excludes restructuring and impairment charges 2 million separation and conversion cost.

1.5 million.

Acquisition cost <unk> point Fivemillion.

As of September 32020.

We had combined cash and cash equivalents of 86.6 million compared to 69.3 million as of December 31, 2019.

We generated 20.1 million of cash provided by operating activities. During the year to date period ended September 32020.

By comparison, we use 38.2 million 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 39.7 million as of September 32020.

Compared to 35 million as of December 31, 2019.

Increased balance is consistent with our business cycles.

Capital expenditures for the year to date period ended September 32020 for 2.6 million as.

As compared to 27 million for the same period last year.

In terms of our outlook for the fourth quarter.

We expect mid single digit new enrollment growth.

Beyond this we will not be providing financial guidance for the remainder of 2020.

For 2021, we anticipate total revenues to be in the range of 290.

To 310 million in 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.

Thank you Kevin the third quarter of 2020 was strong we returned to new enrollment growth.

Retention levels were at high it's not experienced in 2016, and our subsidiaries full stack tutor me and learn at Forbes continued to gain momentum.

Pending a creditor approval, we continue to target the closing of the sale of Ashford University to University of Arizona by the end of this year, creating University of Arizona Global campus and marking Sylvio's final step in its transformation to a world class Education Technology services company.

As I have previously said the future for Zalviso is bright we have a strong culture with an energized employee base delivering innovative data driven insights to our clients and partners to ensure learners have the tools and resources needed to achieve superior outcomes.

We are.

Credibly excited for what lies ahead of us and the value creation opportunities for our stakeholders.

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

At this time 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.

Afternoon, guys.

Yeah, Alex [noise].

First off I.

Well, we always have our Experis press Star then one to re queue.

Once again Mr. personal line is open.

Thanks, So I don't know what happened there but.

I think again congrats on the quarter.

Hello, BNL perspective, your revenues were in line with my estimate earnings were above expectations, but more importantly, congrats on reaching the inflection point on starts and I was happy to hear that we expect acceleration in that metric in the fourth quarter.

And I I would know this is after eight consecutive quarters of decline. So we've been waiting for this for a while so first off what do you attribute the growth to and was it influenced by co bid or rising unemployment and is it sustainable.

Yeah sure Alex So you know I don't believe that what it was influenced by Cove, it or rising.

Unemployment in fact, you know there's an argument that consumers were kinda heavily distracted by all of that.

And you know I really believe that it was the value proposition that Ashford University brings of quality and convenience and 24 seven support you you heard about the NPS score the best we've ever seen since we started measuring it back in 2017 I think.

And then we combine that with really some very strong internal operational execution.

And some things that we've been working on internally.

Ah sense really that the first quarter and when.

When we bring you know.

Our data driven insights that we have in our capabilities to bear along with that operational capability. We end up with results like this and I'm really proud of our team I think it's definitely sustainable and I would expect us to be in the mid single digits in terms of new enrollment growth for for Q4.

Okay, Great and then once the transaction is completed subject to your credit approval.

Would you anticipate an acceleration in new student enrollment growth given that the university will now be not for profit or more traditional and given the brand name that University of Arizona brings with it.

Well I mean, I think there's a very kind of logical argument for what you. Just said I think you know the affiliation with the University of Arizona. In addition to the value proposition that Ashford already enjoys should incrementally.

Bring I think.

More new students to the institution.

No I would say I caution that a little bit because you're you're rebranding the institution, Alex you know from Ashford to U.H.C. So.

So you know there'd be a little bit of of headwinds there, meaning I think you know new enrollment growth in the first half of the year would probably be you know not too dissimilar from what we're experiencing in the second half of 20 in the third and the fourth quarter.

So I'm really pleased that we do have new enrollment growth occurring at the institution and handing over Ashford University to University of Arizona, and having it become you A. J C and having it growing as it is a is a really wonderful.

Thing and I think.

You like GE Si, we'll do some wonderful.

Things.

Thanks to enhance the university make it even better.

And I think all of that should accrue to the benefit of students which is.

What we're all most focused on.

Absolutely.

What would be the headwinds with the name change will it be like Google search terms and things like that kind of reestablishing the University, yes exactly.

Well I can tell you're a cagey veteran in the industry have been around for many many years. So you you could probably come in and run marketing at at any of the.

Or any of our competitors. So yes, it's Google search terms right it absolutely.

Will be different.

As you age you see gets populated there in the Google.

Search algorithm.

So that's a a little bit of a headwind, but I think it's a headwind in the context of.

The new enrollment growth.

Won't be quite as robust as it would be.

[noise] under what we might call kind of normal circumstances in other words once that algorithm catches up in a similar to what Ashford is today, which I would expect would happen kind of in the back half of the year. Then you would expect new enrollment growth rates that would be kind of more robust than what we're currently seeing oh yeah.

This quarter and what we anticipate to see in the fourth quarter.

That's great.

Moving on to the subsidiaries a full stack Tudor me and learned at Forbes.

One of the key and kind of on full stack specifically I.

I think you had said by year end, you're gonna be double where you thought you would be in terms of University partners by my count.

You're a 12 right now 11 or 12, right now and that's up from one at the time of acquisition.

Are you implying that there would be other university partnership agreements.

Likely to be announced before year end.

Yeah, I think there's the potential for probably one more agreement, but for the year and you're right. We're at 12 currently and our internal plan. When we acquire full stack was for them to be it's at six partners at this point. So they they have doubled that expectation. The team. There has just done a fantastic job.

And you know really brought on some marquee universities, we we mentioned Emery a little earlier in this call.

Just one one example, I would expect that they would probably continue at a similar kind of rate of University partner signings next year Alex.

Probably like what we've seen this year, if you kind of expect them to do to the three partner signings a quarter next year that means by the end of 21, they should be somewhere in the neighborhood of 22, 23 25 University partners.

And then along the same line of questioning or have you noticed.

In enrollment on a same program basis as a result of coal that are rising unemployment.

With regards to full SAP.

Yeah.

Well.

Well I mean, I'll tell you the one the one headwind for full stack was it has been understandably there New York location, which has been closed and so yeah.

That's that's been hard on them, but I would say they are part time online University partner offerings have been.

Really you know pretty fantastic and we.

Weve signed 12, we've launched six of the University. So we don't have all 12 operational at this point, but in the six that we've signed the part time online programs are doing very well.

And how does that launch is it one one cohort at a time and then you started a a second cohort when that cohort ending or did you have monthly starts how does that work there.

Yeah, no exactly we do one cohort at the time and there's usually kind of two cohorts a quarter depends on the quarter and kind of the timing.

You know it can be either strictly you know web development or it could be cyber.

Or it could be both depends on the University partner.

Great and then just a couple of questions on the.

The sale of Ashford University, so were waiting for WASC approval.

They meet next if I'm not mistaken on November 4th when well you know if you got approval in Durham politically I would think that the approval would be academic no pun intended given you already received WASC approval for your initial plan prior to a university.

As shown they're getting into the mix.

If they meet on the forced to exit the meetings last a couple of days when will you be notified.

No. The fight and then we know who you notify the street and how will you notify the street.

Yeah. So you know I don't know why it's so it's kind of a guess, but I'd say you know a.

A good guess of when we'd be notified would be some time before.

Thanksgiving before the holiday.

You know typically I think we've seen a WASC try to get out all their notification. So the variance in institutions that were on their agenda.

Now.

You know altogether and it's usually were then.

I'd say a couple of weeks time.

In terms of how we'd notify folks we're definitely would notify the street as quickly as possible and wouldn't do that.

Through an 8-K and most likely a press release as well.

Got it Yeah, and then I guess my last question and I'll get back in the queue.

Kevin.

Reiterated guidance for next year, assuming successful completion of the transaction to 90 to 300 or two netted to 310 in revenue and high single digit adjusted EBITDA margin.

Obviously 2021 is going to be down year from a revenue perspective, you know simply because of the structure of the agreement.

What are your expectations for jovial beyond 2021, how fast can you grow digital video as you pursue diversified growth and as some of the subsidiaries continue to gain momentum.

Well I think you know.

What our objectives are to eventually see the company.

Achieve kind of mid.

Teen revenue growth.

And you know, what we'll try and do for everybody at the end of the year.

Alex is pro forma 2020.

Though.

The UGC transaction had closed on January one.

Of Twentys. So you kind of see Okay. You know what would what would 20 look like and then then we'll give you obviously a view of 21 and you'll you'll be able to compare than kind of the revenue growth that occurred. Despite what you just commented on which is consolidated revenue being down so.

You'll be able to kind of get a much better sense for that and then from that we'll project out 22 and 23.

I think you know.

You would see kind of a gradual increase in revenue growth over each year with us probably hitting that mid teen number somewhere around 2023, we'd probably be you know in the neighborhood of.

Hi single digits around a 22.

And 21 on a pro forma basis, probably be similar.

Well, that's very helpful. I appreciate all the additional color I'm a.

Very pleased and relieved to see the growth in new student starts this quarter, we've been waiting for it for a long time inflection investing is a key in this space I I think last time that we went through this your stock doubled in short order.

Once you kind of went through that inflection. Unfortunately, it went negative again, but does it.

It just feels a little bit more durable to me here given all the changes that you've made over the last couple of years, including expanding your enrollment advisor workforce.

Yeah, I know we've done a lot internally over this last year and really credit goes to the team internally they've done a fantastic job.

No not just our data analytics people, our operational folks people and it really is a team effort and everybody here has contributed so there's a lot of energy and excitement inside the company just for.

For the direction of the organizations taking to be a world class educational technology services company. So we're very excited about the future. Thank you.

Good thanks.

And I turn the call back to you for closing remarks.

[noise] I just want to thank everybody for joining us on todays call and for your interest in Serbia.

Thank you everybody for joining that concludes today's conference call you may now disconnect.

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