Q2 2019 Earnings Call
Good afternoon, and welcome to <unk> second quarter 2019 earnings Conference call. Today's call is being recorded at this time I would like to turn the call over to Ms. <unk> Vice President of corporate Communications. Please go ahead.
Thank you and good afternoon Adobe on second quarter 2019 earnings release was issued earlier today and is posted on the company's website at Www Dot Silvio 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 may be considered forward looking including statements regarding new enrollment growth student retention education partnerships and other programs and services our ability to meet all required conditions in pain, all required approvals to close on the planned separation and conversion of Ashford and its timing and impact.
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 and related guidance and commentary regarding fiscal year 2019, 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, except 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. gap 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 SEC filings, including our annual report on Form 10-K for the year ended December 31, 2019, and our quarterly report on Form 10-Q for the quarter ended June Thirtyth 2019, which we filed with the FCC earlier today for a 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 Sylvio's founder President and CEO Andrew Clark.
Thank you Dorothy and welcome to our second quarter 2019 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'll offer my closing comments.
First and foremost as we announced on July 15th we received approval for Ashford University to return to an independent nonprofit institutions, which represented an important milestone in the process to separate and transform both Ashford and savio.
We have been in discussions with the U.S. Department of education regarding their abbreviated pre acquisition review process.
Through those discussions we discovered that we had mistakenly provided partially incorrect information to the department regarding a portion of the University conversion, we have corrected that error and are working with the department to bring the abbreviated review quickly to conclusion.
We anticipate that the close of the proposed separation and conversion of Ashford should occur sometime between September and the end of 2019.
This step allows the zalviso team to further execute on our strategy to establish the company as a leading education technology services company. Once we have separated the two organizations today, we have made tremendous progress transforming savio into a best in class provider the partners with higher education institutions and employers to deliver innovative personalized solutions help learners achieve their aspirations.
Leveraging on our success in education, we are applying our technologies and capabilities to priority market needs, including recruitment retention and the learner experience, which is creating a long runway for growth.
As such our strategy is centered on three pillars first delivering education services that meet the diverse and large scale needs of educational institutions and corporate enterprises.
Second capitalizing on the middle market opportunities through enhanced programs and services and building our capabilities and third expanding our skills to employment offerings to empower learners to better connect with end demand jobs.
During the first half of the year, we acquired pulls back Academy and immersive coding boot camp and tear me a provider of 24 seven tutoring services.
These businesses along with our organic investments in our team and technologies have established the foundation for its obvious education technology ecosystem.
Which we will continue to build in the coming years.
In addition, both full stack computer me continue to expand their reach through key partnerships.
For example, full stack recently announced partnerships with the University of North, Florida, and the University of San Diego Division of professional and continuing education.
Starting in October we will offer the University of North, Florida coding Boot camp. This program will offer training in crucial programming skills to students seeking competitive in demand technology jobs.
In addition, we have partnered with U.S.D. to develop professionals to fight for global epidemic of cybercrime.
We have also had similar success with Tudor me during the second quarter, we have established more than 10, new partnerships with schools, bringing the total to over 40 partner schools. Among these new relationships as Mcgraw Hill, which partnered with Tudor me to offer on demand tutoring for college students in four course areas, including anatomy and physiology, English math and accounting.
Jeremy will launch a research focus pilot this fall to provide college students with one on one academic support as a natural extension of their digital courseware.
With our strategic investments, while our strategic investments are critical to driving topline growth, we remain steadfast in our commitment to long term profitability as well.
To that end, we have identified and implemented a number of actions that will enhance our operational effectiveness and strategically optimize our cost structure. For example, leveraging our predictive analytics tools to look critically at our business. We concluded that we can deliver superior performance for our customers and partners with fewer internal resources as evidenced by a 100 basis point increase in our net promoter score year over year from 49.8 to 50.8.
We expect these actions to result in cost savings of $8 million in 2019 and $15 million in 2020.
As I've said in the past, we will be disciplined in our pursuit of growth.
Our investments, which we expect to be largely focused internally in the near term will be viewed through the lens of us.
Our strategic imperatives that I outlined earlier.
That said our goal remains to thoughtful execution of our strategy.
Which over a three year period can drive low single digit revenue growth in our core business and will expand to mid single digit growth.
Over the same three year period, as we execute on our strategy and pursue substantial growth through meaningful investments. Our goal is to achieve double digit revenue growth from a profitability standpoint, we anticipate our non-GAAP EBITDA margin to return to low double digits within the three year period.
Turning to our results for the second quarter of 2019, we reported revenue of $107.5 million, a net loss of $17.6 million and the resulting net loss of 58 cents per diluted share.
Excluding restructuring and impairment charges separation conversion transaction costs as well as acquisition costs, our non-GAAP net loss for the second quarter of 2019 was $4.6 million.
Our non-GAAP net loss of 15 cents per diluted share.
New enrollment for the second quarter of 2019 was down as a percentage by low single digits when compared to the same quarter prior year.
While we were successful in generating year over year growth in new student inquiries and applications. We gave these gains back during the first course as students in the course did not retain at similar levels to prior year. We have examined the student experience in the first course and are actively working with the university to enhance the first course with the goal of improving retention at or above prior year levels.
We anticipate this will take us the remainder of the year to complete those enhancements as a result, we expect our new enrollment will be negative in the mid to high single digits throughout the remainder of 2019, peaking in the third quarter.
We continue to drive growth in our education partnership programs as well as with our graduate student population, who both retain at a higher rate as of June Thirtyth 2019, the enrollment in the education partnership programs represented approximately 28% of total enrollments compared to approximately 21% of total enrollments as of one year ago.
New enrollments in the education partnership programs represented approximately 29% of new enrollment for the second quarter of 2019.
The employee sponsorship by these global companies is a testament to the strength and quality of the programs offered through Ashford for example, during the second quarter, We announced Servios partnership with Delta care and scholarship fund to expand education options for Delta airline employees. The program allows eligible delta employees to pursue associate's bachelor's and master's degrees at Ashford University at a discounted rate Delta care and scholarship fund coupled with the tuition assistance benefit offered by Ashford University enables these students to minimize the cost of earning a degree.
As a reminder, our full tuition grant or AFG program continues to outperform our expectations. However, an increase in the student population does lower net revenue, which is a dynamic we saw in the second quarter on a year over year basis.
Establishing a strong foundation for Ashford as an independent self sustaining nonprofit poised to Florida over the long term is a top priority for us.
We have maintained our focus on improving new enrollment and student retention and Ashford through innovative innovation intervention strategies designed to assure student preparedness raise academic quality and improved student outcomes retention has continued its upward momentum as of June Thirtyth 2019, Ashfords annual cohort retention rate was 59.6% as compared to 59.4 for the same period in the prior year Importantly, this was the six consecutive quarter of improvement.
Which is a significant milestone as the consistent improvement in retention has mitigated overall declines in total enrollment and should support a return to flat to positive growth in 2020.
Clearly there is a lot of activity at the company. We're incredibly excited about what lies ahead, we have a strong and growing team in place ready to execute and together we are optimistic about the value creation opportunity for all of our stakeholders.
Now I'll 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 June 32019.
Revenue for the second quarter of 2019 was $107.5 million.
Compared to revenue of $119 million for the same period in the prior year.
The decrease is primarily related to a year over year decline in average enrollment, partially offset by an increase in tuition rates year over year.
For the second quarter of 2019, instructional costs and services were $55.1 million or 51.3% of revenue compared to $54.4 million or 45.7% of revenue for the comparable prior period.
The increase as a percentage of revenue was primarily driven by the acquisitions in the period.
Partially offset by a decrease in bad debt expense.
Our bad debt expense in the second quarter of 2019 was $3.9 million or 3.6% of revenue compared to $5.5 million or 4.6% of revenue for the comparable prior year period.
Admissions advisory and marketing expenses for the second quarter of 2019 were $44.8 million or 41.7% of revenue compared to 39.9 million or 33.5% of revenue for the comparable prior period.
These costs increased as a percentage of revenue due to increased advertising as well as an increase in consulting services.
General and administrative expenses for the second quarter of 2019 were 22.5 million or 21% of revenue compared to $12.5 million or 10.5% of revenue for the comparable prior period.
The increase as a percentage of revenue was primarily driven by higher legal and professional fees, which include approximately $1.8 million of costs relating to the planned separation conversion and approximately $8.3 million of acquisition related expenses.
Restructuring and impairment charges for the second quarter of 2019 for $5.4 million or 5% of revenue compared to $2.7 million or 2.3% of revenue for the comparable prior period.
Net loss for the second quarter, 2019, with $17.6 million or net loss of 58 cents per diluted share.
This is compared to net income of $15.1 million or net income of 55 cents per diluted share for the second quarter of 2018.
From a tax perspective, our annual effective tax rate for the second quarter of 2019 before any discrete items was low single digits and we anticipate this trend will continue through 2019.
Our non-GAAP net loss for the second quarter of 2019 was $4.6 million or a loss of 15 cents per diluted share compared to the non-GAAP net income of $13.3 million or income of 49 cents per diluted share for the second quarter 2018, non-GAAP net loss for the second quarter of 2019 exclude restructuring and impairment charges of 5.4 million separation and conversion costs of $1.8 million acquisition cost of 8.3 million partially offset.
By an income tax benefit of $2.5 million.
As of June 32019, we had combined cash cash equivalents and investments of $107 million compared to 168.4 million as of December 31 2018.
We used $22.1 million in cash in operating activities. During the six month ended June 32019.
By comparison, we used 9.2 million of cash in operating activities. During the same period in 2018.
The year over year increase in the cash used in operating activities was primarily driven by a decrease in earnings partially offset by improvements in working capital.
The net accounts receivable was 33.7 million as of June 32019.
Compared to $27 million as of December 31, 2018.
The increased balance is consistent with our business cycles, the full growth of our full tuition grant.
Enrollment and the addition of the full stack Academy accounts receivable.
Capital expenditures for the year to date period ended June 32019 were 17.8 million as compared to $1.3 million in the same period last year.
From a profitability standpoint, while we expect our core business to be slightly positive our investments in systems people and our three subsidiaries will result in consolidated negative EBITDA margin in 2019.
Now I will turn the call back over to Andrew for his closing comments. Thank you. Kevin we have reached a critical point in Saudi as future and our team couldn't be more excited the approval for Ashford University to return to an independent nonprofit institution.
Was one of the final hurdles to complete the separation of Ashford Savio, both of which are well positioned for the future present Vo. We have made tremendous progress on our transformation to a leading education technology services company. We have experienced many successes as of late with the attractive acquisitions, a full stack Academy and tutor me as well as our organic investments in our team and technologies, we believe through the execution of our strategic priorities, we will create long term growth and meaningful value for all of our stakeholders.
At this time I'll ask our operator to open the phone lines for your questions.
At this time I would like to but participants now in order to ask a question simply press star.
Then the number one on your telephone keypad.
We will pause for just a moment.
To provide.
To allow the Q and a roster to compile.
Once again 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.
Hey, Alex.
Hi, I got most of the calls Cielo I was disconnected and got back on but.
And if I ask anything that you've already answered I apologize in advance.
First I'd say I want to focus on new student enrollment I know a lot of investors focused on that as I measure of health.
We'll know for Ashford University.
Even though it's a rather small number.
In the Grand scheme of things, particularly when you're talking about six consecutive quarters of improvement southern enrich and retention and that sort of thing.
The first quarter was.
Hey, there yet at this point.
Yeah, Alex you recall correctly, so we're still working through those and as I indicated it's going to take to the remainder of the year is really frustrating obviously for us because we outperformed in terms of student inquiries and applications.
Just to give you a sense of things by mid single digits.
So we were doing quite nicely there and then you know tremendously frustrating to give that all back and then a little bit more.
In the first course around that experience so.
The good news to that is we.
No exactly what it is that's kind of standing between us and positive new enrollments in the quarter and.
Everybody the institution as well as other youre focused on.
Correcting that.
We just think it will take some time for that to to for us to get those changes in place and it takes time really for that to kind of manifest in.
And show up and so I think we felt it was.
Appropriate to.
Effectively kind of guide the new enrollments.
Down in the mid to high single digits with probably the peak being in the third quarter.
So does that mean high single digits in the third quarter in mid single digits in the fourth quarter is that the way I should be thinking.
Yeah, I think Thats fair.
Okay.
And then a question hi, semantics I suppose.
You had a mid single digit growth in inquiries and applications did you have a positive.
A positive show rate that was only reduced after first quarter I have reversed course I'm sorry.
Yeah, that's really it was slightly negative in terms of you know students or in the first kind of week of the course, but then.
You know we call. It you call it the show rate we call. It the matriculation rate, which is at the end of the fourth course effectively the same our fourth week excuse me effectively the same thing and yes that was was meaningfully negative and what what gave back all the positive gains that we had.
And as I recall this illustrates the independence of the University versus the Corporation.
Hi, first course is designed and conducted by the University and in order to change. The first course that'd be a decision that Ashford University would have to make as opposed to Zoghbi us management is that correct.
Yeah, that's correct.
But you know we're definitely partners here and you know we haven't in structural design curriculum team that supports the university in its academic decisions and.
Got it and obviously takes their direction. So you know I think it's you know it's incumbent on both both of US have you know as well as the institution to fix the retention issue that we have in this first course.
And we all want to do that there's there's nobody here. That's that's not trying to to get that in a place where it's a better experience students are more successful there's better outcomes in that first course, and obviously that would flow through I mean, the good results Weve had on retention the last six quarters with would be even higher if were able to accomplish that.
And tell me this why would your expectation for new student enrollment growth worsen.
In the back half of this year rather than stay the same.
I think you know it's a lot of Conservativeness on on my part Alex you know.
I've really believed for good reason that we thought we'd see new enrollment growth and a variety of orders over the last kind of three including this quarter or last four quarters.
And you know for one reason or another we haven't and so I think I felt at this point you know it was appropriate to kind of.
You know be more conservative than our in our view.
I'm hopeful that we'll outperform that but I think you know we are better off being conservative at this point.
I agree.
All right I might jump around here, a little bit but.
Well I think it was you Andrew that mentioned cost savings initiatives of 8 million in 19, and 15 million and 20 are these new programs or do they begin January 1st and if so if there are new Oh, we're going to get 8 million in savings in the back half or we've already realized some of those savings in the first half.
Yes, so we had they they are new in the second quarter, Alex There was a slight benefit in the third month of the quarter, but but that $8 million is primarily Q3 Q4 and then the the number that was quoted the $50 million would be the impact to the 2000 and a 20.
Year period, four year period.
Okay, and then while I got you Kevin I think you talked about.
On a consolidated basis, we should expect a negative EBITDA margin for the year I'm already expecting a negative EBITDA margin for the year are we talking a worse than than my estimate I think I have a negative 1.5 million or so a adjusted EBITDA number for the full year.
Yeah, the it will be worse than your number it'll be in the single digits. So.
Okay, so single digit millions.
Correct and we can have a conversation offline as they work through the model.
Okay.
And then.
Free cash flow and obviously, a big user of free cash flow in the first half are using user of cash in the first half.
What's your outlook for the second half Oh, we kind of.
Cash neutral or cash positive in the second half of the year.
So as I as I said, there's a couple of data points I would look at their one is that we will have negative EBITDA and then the second is a you know that we've had a much more significant capital spending and as we complete our new headquarters facility, we will have an additional.
Amount of capital spending in the $7 million to $10 million range.
So seven to 10 million more on top of the 17 million to spend per sale on capex.
That's right.
Okay. So that's a.
24 to 27 million for the full year as a target.
That's right.
Okay.
And then that too.
You know obviously congratulations on getting your approval from wash Scott.
The.
So what what's the timetable you know at one point, we were talking a third quarter, but this could happen. It's looking more like the fourth quarter given the delay of department of education.
Well as I said, Alex and you might have missed this as he mentioned because you got had some difficulties on the up front part of the call yeah.
Technology challenges, there, but we <unk>.
We think it could be anytime between September and the end of the year, we're working with the department actively as we speak so we're having those conversations right now with them. So I you know I just provided a range because you know.
You never know things could take longer for some reason that that that I'm unaware of but but were working expeditiously to try to get the conversion completed.
So to be clear you have your creditors approval you have the IRS approval, we're just waiting for education Department pre approval prior to the transaction occurring yeah. So it's not really technically in a pre approval right. It's they're doing an expedited pre acquisition review process. So they give you their view about a variety of different things and and then you.
You know what the Department's view is and then you know you take that into consideration and I know, there's usually a approximately like a 10 day requirement. After the close where you would then do whatever was required if anything so you know they don't really grant an approval per se.
Got you could you do the transaction without this this education department approval that we're talking about.
Well I mean, yes, technically you could and certainly others have ER as as you know I know you're aware others gone forward without it.
I think its then you know the view of Savio, Andy University that we prefer to have the department's view before we proceed forward.
All right and then one final question I'll, let you go up the.
EBITDA in the single digit EBITDA loss in the single digit millions for the full year.
What are the.
Well, Kevin what are the contributors to that.
A little lower revenues due to the success of the corporate programs revenue per student. The fact that we didn't get new student enrollment positive yet. Although you do have continued growth and retention are these added expenses associated with the spin up offset at least to some degree by cost reduction programs or what are the puts and takes there to get us to our EBITDA bottom line.
Yeah, I think you summarized it well.
It's a little bit lower than revenues than what.
The conversion pre spin.
Like Q3 Q4.
A couple of million dollars a quarter orders of magnitude I guess I'm looking for.
Yeah, I would say that the lion's share of the spending has taken place but.
As we get closer to the conversion we final finalized documents I could see that combine both sides would be you know in the range of half a million to a million as we.
You know as we wrap things up and close the transaction.
Okay. So very little left of that happened late until a million over the balance of the year until the spin occurs.
That's right.
Okay, well, thank you very much I appreciate it.
Thank you.
This concludes our question and answer session I would now like to turn the call back over to Andrew Clark for any closing remarks.
We'd like to thank all of todays callers for your interest in Saudi and for your participation on the call today.
That concludes today's conference call you may now disconnect.