Zovio Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Zovio Q3 2020 earnings conference call. At this time, participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Elena Vittucci, our VP of Corporate Communications. Thank you. Please go ahead.

Thank you, and good afternoon. Zovio's third quarter 2020 earnings release was issued earlier today and is posted on the company's website at www.zovio.com. Joining me on the call today are Andrew Clark, founder, president, and chief executive officer of 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, and obtain all required approvals to close on the plans regarding Ashford University, and our current plan timing to do so, our ability to transition to become an education technology services company, our ability to grow through acquisition, our ability to successfully integrate and leverage acquired companies, future revenue growth, EBITDA, financial and related guidance, and commentary regarding fiscal year 2020 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 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. 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 31, 2019, as well as our quarterly report on Form 10-Q for the quarter ended September 30, 2020, which we filed with the SEC earlier today for a more detailed description of the risk factors that may affect our results. 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 Zobio's founder, president, and CEO, Andrew Clark.

Thank you, Alana, 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 as the steady flow of new inquiries continues. Retention for the quarter also saw significant improvement, increasing 320 basis points over the prior year, reaching 61.9% as of September 30th, 2020. Ashford's superior offerings and reputation, combined with the initiatives we put in place earlier this year to increase resources, and enhanced 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 of 2020, we delivered reported revenue of $102.2 million and net income of 1.1 million or 3 cents per diluted share. Excluding non-GAAP items, our non-GAAP net income for the third quarter of 2020 was 2.9 million or 9 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 UAGC. This transaction marked a key moment for Zovio's evolution into a world-class education technology services company and also reinforced the strength of Ashford's value proposition to its students. In fact, the university's net promoter score hit a new all-time high. As of the end of the third quarter, Ashford's NPS was 61.3, the highest since we began tracking this metric in January of 2017, and on par with other world-class global education leaders. Further, results from the 2020 National Survey of Student Engagement, or NSSE, 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 NSSE. Ashford students rate their interactions with faculty and academic advising as high quality and say they experience high levels of effective teaching practices. 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 UAGC in support of their vision. Building on the history of superior outcomes for students, UAGC 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 Ashford's accrediting body, WASC. As we discussed last quarter, through our strategic services agreement, we will continue to provide UAGC with our enterprise education technology and services, leveraging our unique advanced data analytics platform to provide personalized and innovative online education that enhances student engagement and improves the likelihood of student success. This agreement marks our inaugural university partnership 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, corporations, and learners. In our pursuit of growth, Zovio 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 Dovio's proprietary predictive analytics platform that provides data-driven insights to enhance our clients' offerings and improve overall results and outcomes. This enables Zovio to develop solutions and engineer workflows that optimize performance metrics from marketing through graduation. The 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 upskill. Zovio could not be better positioned 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 B2B and B2C offerings to empower learners to better connect with in-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 Xovio's offerings. Xovio's subsidiaries, Fullstack, TutorMe, and Learn at Forbes, all continue to perform better than expected. The addition of these services enhances Xovio's ecosystem 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 help enterprise upskill and educate their most important asset, their people. During the quarter, Fullstack continued to outperform the anticipated number of university partnership agreements, with meaningful partnership announcements, including Colorado State University, Emory University, and University of Illinois, Chicago. As an example, Fullstack's partnership with Emory University's non-credit division, Emory Continuing Education, ECE, will offer programs aimed at developing qualified professionals to meet the staffing needs of Atlanta's prospering technology sector, with Emory's impressive reputation across Georgia and its long-standing relationships with Atlanta's most prominent businesses, bringing this accelerated training to the region alongside Emory was a natural fit. As students and experienced professionals continue to look for opportunities to upskill, we are seeing increased opportunity for our offerings. By the end of 2020, we expect Fullstack to have nearly doubled the university partners from our initial expectations, and we remain incredibly optimistic for its prospects as we move forward. In recognition of its superior offering, in September, TutorMe was awarded HowToLearn.com's 2020 Parent and Teacher Choice Award. The Parent and Teacher Choice Award from howtolearn.com are among the most recognized international awards by both parents and teachers. As students, parents, and teachers have pivoted to remote learning, the importance of online educational resources like TutorMe 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 TutorMe to ensure their students have help when and where they need it. In this vein, TutorMe continued to execute new partnership agreements during the quarter from universities to corporations to school districts. In September, TutorMe announced its alliance with the Allendale County School District which will provide over 1,150 K-12 students in the district with access to free online tutoring. Since 2017, Allendale County Schools have been focused on increasing the successful outcomes of the district students, and TutorMe stood out as an effective online tutoring program because the platform gives its students access to a live tutor consistently within 30 seconds. TudorBee 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-paced, 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 2,700 active subscribers, which increased as a percentage in the high teens from the second quarter of 2020. We continue to be very encouraged by the success of this offering, and we remain enthusiastic about the prospects ahead for Learn at Forbes. We are incredibly pleased with the progress and growth we achieved during the third quarter. We delivered a return to new enrollment growth in line with our expectations. Student retention at levels not seen since 2016. And our broader offerings, including Fullstack, TutorMe, and Learn at Forbes, are firing on all cylinders. As we march towards the final step of Xovia's 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 has put Zobio 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 30, 2020. Revenue for the third quarter of 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, instructional 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 costs, partially offset by an increase in bad debt expense. Net bad debt expense in the third quarter of 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 of 2020 were $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 were $14.8 million or 14.5% of revenue compared to 17.4 million or 16.7% of revenue for the comparable prior period. 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 2020 were 0.2 million or 0.2% of revenue compared to 2.5 million or 2.4% of revenue for the comparable prior period. The charges in the third quarter of 2020 relate primarily to relocation costs. During the third quarter of 2020, we recorded an income tax benefit of 0.4 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 of 2020 was $1.1 million, or net income of $0.03 per diluted share. This is compared to a net loss of $7.6 million, or a net loss of $0.25 per diluted share for the third quarter of the prior year. Our non-GAAP net income for the third quarter of 2020 was $2.9 million, or income of $0.09 per diluted share, compared to the non-GAAP net loss of $1.6 million, or loss of $0.05 per diluted share, for the third quarter of the prior year. The non-GAAP net income for the third quarter of 2020 excludes restructuring and impairment charges of $0.2 million, separation and conversion costs of 1.5 million and acquisition costs of 0.5 million. As of September 30, 2020, 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 30, 2020. By comparison, we used $38.2 million of 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 30, 2020, compared to $35 million as of December 31, 2019. The increased balance is consistent with our business cycles. Capital expenditures for the year-to-date period ended September 30, 2020, where $2.6 million was 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 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, Kevin. The third quarter of 2020 was strong. We returned to new enrollment growth. Retention levels were at highs not experienced since 2016. and our subsidiaries, Fullstack, TutorMe, and Learn at Forbes continue to gain momentum. Pending accreditor 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 Zovio's final step in its transformation to a world-class education technology services company. As I have previously said, The future for Xovio 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 incredibly 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. Good afternoon, guys.

Hey, Alex.

First off, I... May we please have Alex Parish press star then one to recue. Once again, Mr. Parish, your line is open.

Thanks. I don't know what happened there, but again, congrats on the quarter. From a P&L 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 would note 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 COVID or rising unemployment? And is it sustainable?

Yeah, sure, Alex. So I don't believe that it was influenced by COVID or rising unemployment. In fact, there's an argument that consumers were kind of heavily distracted by all of that. And I really believe that it was the value proposition that Ashford University brings of quality and convenience and 24-7 support. You've 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 since really the first quarter. And when we bring, you know, our data-driven insights that we have and 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 Q4.

Great. And then once the transaction is completed, subject to your accreditor's 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 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. You know, I would say caution it a little bit because you're rebranding the institution, Alex, you know, from Ashford to UAGC. So, you know, there would be a little bit 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, you know, we do have new enrollment growth occurring at the institution and, you know, handing over Ashford University to University of Arizona and having it become UAGC and having it, you know, growing as it is, is a really wonderful thing. And I think, you know, UAGC will do some wonderful things 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. So what would be the headwinds with the name change? Would it be like Google search terms and things like that kind of reestablishing the university?

Yes, exactly. I can tell you're a cagey veteran in the industry. You've been around for many, many years. So you could probably come in and run marketing at any of the – So, yes, it's Google search terms, right? It absolutely, you know, will be different as UAGC gets populated there in the Google search algorithm. So that's a little bit of a headwind. But I think it's a headwind in the context of, you know, the new enrollment growth won't be quite as robust as it would be in the under what we might call kind of normal circumstances. In other words, once that algorithm catches up and it's 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 in this quarter and what we anticipate to see in the fourth quarter.

That's great. Moving on to the subsidiaries, Full Stack, TutorMe, and Learn at Forbes. I wanted to key in kind of on Full Stack specifically. I think you had said by year end you're going to be double where you thought you would be in terms of university partners. By my count, you're at 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 before the year ends. You're right. We're at 12 currently in our internal plan when we acquired full stack was for them to be at six partners at this point. So they have doubled that expectation. The team there has just done a fantastic job and, you know, really brought on some marquee universities. We mentioned Emory a little earlier in this call. It's just one example. I would expect that they would probably continue 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 two to 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, have you noticed upticks in enrollment on a same program basis as a result of COVID or rising unemployment?

With regards to Fullstack? Yeah. Well, I mean, I'll tell you, the one headwind for Fullstack has been, understandably, their New York location, which has been closed. And so, you know, that's been hard on them. But I would say their part-time online university partner offerings have been, you know, really, you know, pretty fantastic. And we've signed 12. We've launched six of the universities. 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.

How does that launch? Is it one cohort at a time, and then you start a second cohort when that cohort's ending, or do you do monthly starts? How does it work there?

Yeah, no, exactly. We do one cohort at a time, and there's usually kind of two cohorts a quarter. It depends on the quarter and kind of the timing. It can be either strictly 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 sale of Asher University. So we're waiting for WASC approval. They meet next, if I'm not mistaken, on November 4th. When you know if you've got approval, and parenthetically, I would think that the approval would be academic, no pun intended, given you already received WASC approval for your initial plan prior to University of Arizona getting into the mix. If they meet on the 4th, I think the meetings last a couple of days, when will you be notified, and then when will you notify the street, and how will you notify the street?

Yeah, so, you know, I don't know. It's always kind of a guess, but I'd say, you know, a good guess of when we'd be notified would be sometime before Thanksgiving, before the holiday. You know, typically I think, you know, we've seen WASC try to get out all their notifications to the various institutions that were on their agenda out you know, altogether, and it's usually within, I'd say, a couple weeks' time. In terms of how we'd notify folks, we definitely would notify the street as quickly as possible and would do that through an 8K and most likely a press release as well.

Got you. 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 290 to 300 or 290 to 310 in revenue and high single digit adjusted EBITDA margin. Obviously, 2021 is going to be a down year from a revenue perspective, simply because of the structure of the agreement. What are your expectations for Jovio beyond 2021? How fast can you grow Jovio as you pursue diversified growth and as some of the subsidiaries continue to gain momentum?

Well, I think, you know, what our objectives are are to eventually see the company achieve kind of mid-teen revenue growth. And what we'll try and do for everybody at the end of the year, Alex, is pro forma 2020 as though the UAGC transaction had closed on January 1 of 20. So you kind of see, okay, what would 20 look like? And then we'll give you, obviously, a view of 21, and you'll be able to compare then kind of the revenue growth that occurred despite, you know, what you just commented on, which is, you know, 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, you know, high single digits around 22. And 21 on a pro forma basis probably be similar.

that's very helpful i appreciate uh all the additional color i'm uh very pleased and relieved to see the growth in new student starts this quarter we've been waiting for it for a long time uh inflection investing is is a key in this space i i think last time that we went through this your stock doubled in short order uh once you kind of went through that inflection unfortunately it went negative again but 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, no, we've done a lot internally over this last year, and really credit goes to the team internally. They've done a fantastic job. You know, not just our data analytics people, our operational folks, people in IT, 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 the direction the organization is 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.

I just want to thank everybody for joining us on today's call and for your interest in Zovio.

Thank you, everybody, for joining. That concludes today's conference call. You may now disconnect.