Zovio Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Sovio Q4 2020 earnings conference call. At this time, all 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, then one on your telephone. If you require any further assistance, please press star, then zero. I would now like to hand the conference over to your speaker today, Elena Vitucci, VP of Corporate Communications.

Thank you and good afternoon. Zovio's fourth quarter and full year 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, 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, university partners, and other programs and services, 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 20, 21, 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. 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 31st, 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, Ilana, and welcome to Zovio's fourth quarter and full year 2020 earnings call. On the call today, Kevin and I will discuss our results as well as other business developments. After our remarks, we will open the call to your questions. We had a strong end to our fiscal 2020. For the fourth quarter of 2020, we reported revenue of $93.1 million and non-GAAP diluted income per share of $0.03. which exceeded expectations. Today marks our first earnings call since completing the sale of the university to the University of Arizona Global Campus, or UAGC. This was a key inflection point for Zovio as a world-class education technology services company. Given the sale of the university, our reporting structure has changed. both from a segment and key metric standpoint, which I will outline in a bit, more detail shortly. That said, during the fourth quarter, we are pleased to report that new enrollment grew more in the fourth quarter of 2020 than the third quarter, and we saw the best one-year cohort retention metric in the fourth quarter in our recent history of tracking this metric. In addition, inquiries, new enrollment, and total enrollment exceeded our expectations for December the first month following the close of the transaction. As an education technology services company, we will begin to report more in line with others in the industry. Therefore, we will not be reporting new and total enrollment in the future. That said, we could not be happier with the progress we have experienced over the last several quarters. To provide investors with a better understanding of Dovia's growth drivers that highlight the unrealized value of our platform and offering, as well as our progress to capture the untapped value creation opportunity for the company, we have aligned our reporting segments to be Zovio Growth and University Partners. In addition, we will be providing key metrics we believe will show our progress against our strategic vision for Zovio. Strategically as an organization, we are aligned to deliver significant growth, the majority of which in the near term will come from what we call Xovio Growth, which includes Fullstack and TutorMe. In 2020, we saw robust growth from Xovio Growth, including accelerating top line, new university partnership acquisitions, and better than anticipated enrollment. For our university partners group, in the coming year, we will be focused on building off the strong foundation we have created to build a robust partner network and drive long-term growth. Before I discuss each segment in more detail, let me touch on what we are seeing in the marketplace today. As we have discussed before, the way learners access education has been changing rapidly and was only accelerated by the COVID-19 pandemic. Universities are feverishly adding and enhancing their online programs to meet learners where they are. And today, that is online. Further, expanding educational opportunities for underrepresented students and nontraditional students who work or parent full-time is driving structural changes in the education landscape. With an ever-growing student population, educators who seek to expand the potential for all students are delivering classes online and embracing new and innovative learning formats. To meet this rapid shift, educators are looking for strong partners that have demonstrated a track record supporting student life cycle and delivering strong student outcomes. Xovio is that perfect partner. Today, we serve more than 200 institutional customers covering 44 states in the Xovio ecosystem, and that number is growing every day. With a differentiated and flexible value proposition that spans the student life cycle, Zovio is a thought leader. We are meeting the growing needs of our current and future partners, both at a graduate level, but even more importantly, at the undergraduate level, where we believe there is relatively untapped opportunity. Turning to our Zovio growth segment, which includes our subsidiaries, Fullstack and TutorMe, continue to perform exceptionally well. In 2020, Zovio Growth delivered revenues of $20.9 million, growing 105% year over year. The services that these subsidiaries provide enhance Zovio'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 enterprises upskill and educate their people. As students and experienced professionals continue to look for opportunities to upskill, we are seeing increased opportunity for our offerings. During the fourth quarter, Fullstack continued to leverage the new partnerships that came online in 2020, including Virginia Tech and Emory University, among many others. In total, Fullstack nearly doubled our expectations for new partnerships, adding eight new universities during the year. For context, the average university partner agreement is five years with an average revenue contribution of $10 million per partner over the term of the contract. The revenue is generated once the class starts, and as a result, it typically takes 18 months from the start of marketing to become profitable. Given the momentum we've seen thus far, combined with the strong institutional pipeline for new partners, we're excited for what lies ahead for full-stack. As students, parents, and teachers continue with 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 educational 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. TutorMe added another 23 partners during the fourth quarter of 2020. bringing the total to 199, an increase of nearly 230% year over year. Further, as the COVID pandemic has driven increased demand, remote learning has continued to support explosive growth for online tutoring services. In the fourth quarter, total customer and partner hours usage increased nearly 400% year over year, continuing the strong momentum we saw earlier in the year. our outlook for Xovia growth remains strong. For 2021, we anticipate full stack adding between seven and 10 new university partners, and TutorMe adding between 50 and 60 new partners. We will continue to invest for growth in this segment, including strategic sales and marketing initiatives to bring our new partners online, while at the same time maintaining our momentum of new partner acquisition. Given these investments for the segment in 2021, we expect Zovio growth revenues to grow approximately 30% year-over-year and anticipate generating an EBITDA loss of between $6 and $8 million. This planned investment will decrease consolidated EBITDA margins in the near term. Longer term, we expect the segment to grow 30% plus through 2025 and be profitable beginning in 2023. Turning to the university partner group, we have a strong foundation from which we plan to pursue diversified growth, providing technology and services to institutions, corporations, and learners. We provide our university clients with our enterprise education technology and services, that leverage our unique advanced data analytics platform to provide personalized and innovative online education that enhances student engagement and improves the likelihood of student success. Zovio remains well-positioned as we bring a clearly differentiated offering to our clients. First, we provide an end-to-end solution that spans the entire student life cycle, marketing and recruitment, to retention and course development tools. Second, our offerings are tailored and flexible and can be unbundled or bundled enterprise solutions. Third, we are aligned to operate at scale to support our clients' rapid growth objectives. Additionally, all of our solutions are powered by signals. Our proprietary predictive analytics platform Signals provides data-driven insight to enhance our clients' offerings and improve overall results and outcomes. This enables OVO to develop solutions and engineer workflows that optimize performance metrics from marketing through graduation. We have also enhanced the leadership of this segment, bringing together a team that will leverage significant leadership to execute a clear roadmap for growth. As such, we will further cultivate an already robust pipeline of potential university partners. For 2021, we expect to bring on one to three new small to medium-sized partnerships before the end of the year. To give you a bit of perspective, the size and scope of our partnerships will vary. At a high level, our small to medium-sized deals are generally under $1 million, and have an engagement length of one year or less. These could include project-based work, such as learner outreach or course development, or strategically targeted deals, including marketing, recruitment, or student support services. Large deals, between one and five million, are typically multi-year deals, but vary in length and could include services from unbundled solutions for launching online programs or enrollment continuity. And lastly, our enterprise deals will utilize Zovia's full end-to-end service offering. These engagements will range between five and seven years with a mature contract value of greater than $5 million annually. Given the strong momentum we have experienced and our continued optimism as we look forward, we are raising our 2021 full-year revenue outlook. On a consolidated basis, we now expect total revenues to be in the range of $305 million to $315 million, and non-GAAP EBITDA margins in the mid-single digits. Zodio is positioned well to continue as a world-class education technology services company, and we are poised for continued growth as we move forward. We have a robust offering to meet the needs of learners. We have built a strong ecosystem of clients and our network of partners is growing rapidly. The shift to a more virtual world has accelerated the opportunity for us. Now, more than ever, it is 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 we remain squarely focused on executing our long-term strategy in order to deliver education services that meet the diverse and large-scale needs of higher education institutions, accelerate growth businesses through ongoing investment to support strong growth expectations and diversification, expand our skills to employment, B2B and B2C offerings, to empower learners to better connect with in-demand jobs leveraging our university partners, and establish our leadership position as a data-driven services provider utilizing signals to offer institutions a technology and data-driven suite of solutions that will further differentiate Xovio's offerings. With that, I'll turn the call over to Kevin Royal to review our financial and operating results.