Q2 2022 Zovio Inc Earnings Call

Okay.

Good morning, and welcome to <unk> second quarter 2022 earnings Conference call. Today's call is being recorded at this time I would like to turn the call over to Vicki Xrayed Executive Vice President Chief External Affairs Officer. Please go ahead.

Thank you and good morning, the OBO second quarter 2022 earnings release was issued earlier today and is posted on the company's website at www Dot Zalviso Dot com.

Joining me on the call today are Randy Hendricks, Chief Executive Officer, and Kevin Royal Chief Financial Officer.

We would like to remind you that some of the statements. We make today may be considered forward looking including statements regarding enrollment student retention University partners and other programs and services future revenue growth EBITDA financial and related guidance and commentary.

Terry regarding fiscal year, 2022 and later.

These forward looking statements are subject to a number of risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward looking statements.

Please note that these forward looking statements speak only as of the date of this presentation and we undertake no obligation to update these forward looking statements in light of new information or future events.

To the extent required by applicable securities laws.

On the call today, we will also discuss certain non-GAAP financial measures in our earnings release, you will find additional disclosures regarding these measures, including reconciliations of these measures with U S. GAAP. Please note that these are intended to supplement GAAP financial Inc.

Formation and should not be considered as a substitute for our GAAP results.

Please refer to our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2021, previously filed with the SEC as well as our quarterly report on Form 10-Q for the quarter ended June 32022, which will be filed with the.

SEC in the upcoming days for a more detailed description of the risk factors that may affect our results you.

You may obtain copies from the SEC or by visiting the Investor Relations section of our website at this time. It is my pleasure to introduce our CEO Randy Hendricks.

Thank you Vicky and welcome everyone to our second quarter 2022 earnings call.

We appreciate you getting up early to join us.

And I'll give you a few brief comments here as we get started.

This morning, we announced that we have entered into an agreement with the University of Arizona Global campus to purchase our OPM business.

Which we had used to provide the university services.

As a reminder, in April we announced our intent to pursue strategic alternatives aimed at unlocking shareholder value, which included evaluating potential divestitures.

At the same time, the team and I undertook a comprehensive business review and have taken several actions to address underperforming areas of our business.

We are pleased to have reached this agreement with <unk> and are excited about the university's future.

In May we completed the sale of Tudor me for $55 million and used a portion of those proceeds to repay bridge financing.

This allowed us to satisfy obligations stemming from a decision by the superior Court of California, while we appealed the decision.

Going forward Silvia will support the continued growth and expansion of full stack Academy, while simultaneously exploring strategic alternatives.

Now I'll provide a brief overview of our results for the quarter.

Into Q, we had revenue of 51 4 million and a net loss of $4 7 million or <unk> 14 per diluted share.

Excluding certain items, our non-GAAP net loss for the second quarter of 2022 was $12 3 million or <unk> 36 cents per diluted share.

Over the past quarter, we've experienced significant challenges in recruiting and retaining military affiliated students, which accounts for approximately 29% of UA Gcs total student population.

This is due to issues that you AGC is either worked through or is in the process of working through related to military financial assistance. These.

These matters have had a significant impact on our second quarter revenues.

Turning to full stack Academy the business continued to perform well in the second quarter, we grew revenues by 35% year over year.

Our growth strategy with full stack includes adding new University partners to our existing 19 as well as increasing the number of programs offered.

In the second quarter, we continued our upgraded partnership in India.

In addition, we launched our second cohort for web development with the New York City.

Workforce Development Corporation.

Further we had a number of exciting developments during the quarter, which I'll briefly describe.

First full stack Academy launched a new part time, Grace Hopper program, which allows female and nonbinary students the opportunity to work full time and taken immersive 28 week part time software development program.

For context, the Grace Hopper program has a coding boot camp offered exclusively for women and nonbinding or binary students.

From continuously updating curriculum to personalized mentorship experiences the program encourages women to advance their technology careers.

Additionally, we launched a new full time software engineering program, creating a pathway for students that do not have previous coding experience.

This 19 week program provides the foundation and prepare students to be successful in our immersive boot camps.

We continue to partner with companies to help our students secure meaningful jobs after graduation.

Actively participating in recruiting events and sharing job openings with our students.

This is a key growth area for full stack and we are pleased with the addition of 67, new employers as partners in Q2.

We continue to have high expectations for full stack Academy and our outlook remains strong.

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

Randy.

Looking at the results for the quarter revenue for the second quarter of 2022 was $51 4 million compared to $69 2 million for the same periods in the prior year the.

The decrease is primarily related to the lower average enrollment partially offset by an increase in the zalviso growth segment revenues.

Tutor me was sold on May 23rd 2022.

The revenues relative to that subsidiary are only included through that date.

For the second quarter of 2022 technology and academic services were $17 3 million or 33, 7% of revenue compared to $18 1 million or 26, 1% of revenue for the comparable prior year period.

Expenses in this category are lower overall on an absolute basis due to lower employee costs and bad debt, partially offset by license fees. However expenses are higher as a percentage of revenues due to lower revenues year over year.

Counseling services and support for the second quarter of 2022, or $17 7 million or 34, 5% of revenue compared to $23 2 million or 33, 5% of revenue for the comparable prior year period.

The overall decrease between periods on an absolute basis were primarily due to decreases in employee costs and facilities costs.

Marketing and communication expenses for the second quarter of 2022 were $18 3 million or 35, 6% of revenue compared to $21 7 million or 31, 4% of revenue for the comparable prior year period.

The overall decrease between periods on an absolute basis.

We're primarily due to decreases in advertising and employee costs.

General and administrative expenses for the second quarter of 2022 were $7 8 million or 15, 3% of revenue compared to $8 4 million or 12, 2% of revenue for the comparable prior year period.

Overall decreased between periods on an absolute basis were primarily due to increases in employee costs and professional fees.

Legal expenses of <unk> 9 million were recognized in the second quarter and represents the amounts related to the previously disclosed judgment in the case brought by the California Attorney General as well as the cost associated with appealing that judgment.

As Randy mentioned effective yesterday on July 31, 2022, we entered into an agreement with <unk> to sell all of the assets related to servicing that business in connection with that sale, we paid <unk> $10 5 million, which includes the final minimum residual.

You'll payments owed to them.

In addition, <unk> will take over the leased facility in Chandler, Arizona.

Which has a remaining term of eight years and approximately $20 million in rent payments.

In connection with this sale, we had to reevaluate various assets.

As a result, we recorded impairment expense for the second quarter of 2022 of $35 9 million.

Within restructuring and impairment expense.

This is compared to $2 3 million recorded as restructuring and impairment expense for the prior year period.

The net gain on sale transactions during the second quarter of 'twenty two.

It was.

$45 7 million, which included a gain on the sale of Tudor me, a $51 5 million.

Offset by 5.8.

$8 million loss on the sale of the <unk> net assets.

There were no such gains or losses during the comparable prior year period.

Our net loss for the second quarter of 2022 was $4 7 million.

Our net loss of <unk> 14 per diluted share.

This is compared to net loss of $4 million or net loss of 12 cents per diluted share for the second quarter of the prior year.

Our non-GAAP net loss for the second quarter of 2022 was $12 3 million or a loss of 36 per diluted share compared to the non-GAAP net loss of <unk> 8 million or a loss of <unk> <unk> per diluted share for the second quarter of the prior year.

The non-GAAP net loss for the second quarter of 2022 excludes net gain on sale transactions of $45 7 million legal expense appoint 9 million restructuring and impairment charges of $35 9 million acquisition cost of <unk> 5 million.

Other non-GAAP cost of <unk> 8 million.

As of June 32022, we had unrestricted cash and cash equivalents of $20 8 million as compared to $28 3 million as of December 31, 2021.

In addition, we had restricted cash of $6 1 million at June 32022, as compared to $9 3 million at December 31 21.

During the second quarter, we repaid in full including accrued interest $31 5 million three year term loan due towards capital.

There was $57 2 million of cash used in operating activities. During the year to date period ended June 32022 by comparison, we used $16 $3 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 payment for legal settlement as well as the changes in working capital accounts in the periods presented.

At this time I will ask for 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 one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.

Your first question comes from Alex Paris, with Barrington Research.

Hi, Thanks for taking my questions.

First off this is a unexpected news I realize that the company has been involved in a strategic review process since April 15th and we knew that the U E. G C contract.

It could be sold as well as.

A full safe Academy could be sold.

I am wondering Oh, and I think you alluded to it in your prepared comments, Randy what led to the decision to sell or divest yourself of the U E. G. C contract, obviously university of Arizona will not be able to vertically integrate so to speak but.

It sounds to me like challenges within the military have had an impact on financial projections is that right.

Good morning, Alex Thanks for joining us.

That is definitely part of the decision as we looked at this a diverse looked at the divestiture of our OPM business.

From an overall perspective as we've discussed on prior earnings calls we.

We have looked at the capital and time related to get to a profitable con.

Contract arrangement with our with our client the University of Arizona Global campus and yes with the.

Information, we shared this morning related to challenges on military financial assistance that added to our.

Our thinking about and projections of capital in time, it would take to get to a profitable contract and they're they're just oh.

Isn't enough capital to do that and so we we made a decision in terms of the potential strategic suitors for our OPM business, we felt that the best decision.

Was to work collaboratively with our clients and do this in a in an approach that was in the best interest of our employees our shareholders the company and and also positions I believe the.

The University for a really bright future. So all of that went into our thinking.

As we looked at various strategic alternatives for the OPM business, but.

Sure.

You're framing is correct and as we looked at the time and capital it would take to get to a profitable contract that wasn't something that we are in a position to do.

Understood.

And given that decision.

Uh huh.

What are we left with at this point full full stack Academy, which is doing well revenues up 35% in the quarter.

That subsidiary is still part of the strategic review.

That could be sold in the future.

You have cash of $20 8 million at the end of the year then.

And then expenses.

What is cash.

What can you say about cash.

Beyond June 30th what was cash.

Or to the divestiture of our U AGC or what is cash now that the U E. G C.

Trends transaction has been closed.

Yeah. Alex this is Kevin so as we stated we had just over $20 million at June 30th.

Okay.

During July would have grown that slightly.

But from that then we would have made the payment that we've outlined in the terms of the sale to <unk> of $10 5 million.

So cash will decline by roughly that amount and that's what we would be left with two fund the losses of full stack as we move forward and work to grow that business.

So cash would be.

As of today.

$12 million ish.

That's right and so from that.

We've got some what we referred to as stranded liabilities liabilities associated with running the <unk> business.

You know and that we will need to pay in future months.

Can you quantify that or at least ballpark it.

Straddled liabilities, yes, I don't have those been as we close out the month will we'll be able to.

<unk>.

Okay. So.

So we have 12 or $13 million in cash and the ongoing.

Operations of full stack and the value of full sick.

The.

Are you willing to give a revenue and EBITDA outlook for 2022 for full stack given.

The growth in it in the second quarter.

We're really not prepared to give guidance at this point in time, Alex we've been careful as we go through this time of evaluating our strategic alternatives.

Not to set expectations with respect to performance.

Giving given.

The uncertainty that we face challenges that we face.

Okay.

So I've estimated on a sum of the parts basis that full stack Academy is worth $50 million. That's my estimate that's not yours.

And I don't know, if that's accurate or not but.

That's been my feeling based on private market valuation. If you were to get $50 million for a full stack. If you wound up selling at what would be the tax implication on the gain I'm, assuming it would be a big gain.

So it would be it would be a significant gain the good news is that we do have tax net operating loss carry forwards that we could use to offset 80% of that gain so in a situation where you let's say the entire 15 million.

You know ended up being taxable you would be tax on roughly $10 million of that gain due to the net operating loss carryforwards that we can utilize to offset again, 80% of the game.

Alright, and then I guess last one for me at this point.

Whats the timetable for the completion of the strategic review with regard to I guess the last thing that's in that that that muscle would be a full stack academy what would be the timeline on making some decision whether you keep it or you sell it.

Alex It's Randy will will come to that decision over the next 90 days I mean in our comprehensive strategic review that we've talked about we have looked at all three businesses. We've now.

Divested of two of the three were bullish on the future for full stack Academy, but we're also realistic in terms of how we will operate a public company.

On a on a lower cost run rate and will.

We will come to a decision on that.

Within the next 90 days Alex.

Okay.

So I guess just the last thing in summary that the decision to divest you a G C.

O P M business.

To you a J C.

It is driven primarily by.

An unexpected sort of downturn in enrollment related to military are some of the challenges that had been talked about in the past.

Like the VA issue several months ago that sort of thing but.

Uh huh.

<unk>.

So it sounds like this would be good for University of Arizona, The University of Arizona Global campus that'd be good for your employees.

Assuming it will take over your employees as a result of this transaction. It gets you a G. It gets Zoe are out from under potential liabilities.

Associated with prior indemnification and make whole provisions of the contract and that sort of thing.

Uh huh.

But it seems like the expectation.

Was that the.

The impact on your P&L would be greater than we were thinking say three months ago.

And as such this is probably.

The best decision for shareholders, although disappointing probably the best decision for shareholders at this juncture.

Any.

Comment in response to that.

Thank you summarized it very well Alex.

We certainly have our shareholders top of mind in the strategic decisions we make.

It's unfortunate in terms of that.

Time to get to a profitable arrangement and yes, you've referenced.

The challenges are related to setback.

Setbacks around.

Military financial assistance programs and so yes, we looked at all of it and shareholders employees, our clients and we felt that this is this is.

By far the best decision to make for all stakeholders.

Alright, well, thank you for that and good luck on the balance of the strategic review.

Thank you Alex.

Again, if you wish to ask a question. Please press star one on your telephone keypad.

Thats Star one to ask a question.

Okay.

Yeah.

This concludes our question and answer session I will now turn the call over to Randy Hendrix for any closing remarks.

We'd like to thank all of you for joining US today your interest in <unk> your participation and your continued support and interest in our company. Thank you everyone.

Yeah.

Yeah.

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