Zovio Inc.

Good afternoon again, and welcome to Zovio's third quarter 2021 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Dika Shrey, Executive Vice President, Chief External Affairs Officer. Please go ahead.

Thank you, and good afternoon. Zovio's third quarter 2021 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 George Pernsteiner, Interim CEO, Office of the CEO, and Board Chair, Chris Bond, Executive Vice President of Operations and Office of the CEO, and Kevin Royal, Executive Vice President, 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 university partners and other programs and services, our ability to grow through acquisition or otherwise, our ability to successfully integrate and leverage acquired companies, future revenue growth, EBITDA, financial and related guidance, and commentary regarding the remainder of fiscal year 2021 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. It 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, 2020, as well as our quarterly report on Form 10-Q for the quarter ended September 30, 2021, 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 our interim CEO, George Pernsteiner.

Thank you, Vicki, and welcome everyone to our third quarter 2021 earnings call. Starting with our results for the third quarter 2021 we had revenue and other revenue of $62.2 million and incurred a net loss of $5.2 million or a loss of 16 cents per diluted share. Excluding non-GAAP items, our non-GAAP net loss for the third quarter of 2021 was $4 million or a loss of 12 cents per diluted share. which was impacted by higher than expected legal and marketing costs. While revenues were in line with our expectations overall, we are striving to achieve improved performance as we move forward. That said, we believe our guidance remains intact for the full year, which Kevin will discuss in more detail shortly. During the third quarter, new enrollment at the University of Arizona Global Campus remained challenging. However, as a result of a number of initiatives we put into place, we saw student retention stabilize. As we mentioned, last quarter, we brought the leaders of Zovio and UAGC together for a two-day in-person summit to develop and approve initiatives to increase enrollment and support strong student outcomes. That event was successful, as together, as partners, we outlined a clear path to enhance new enrollment and improve student outcomes. Our plan is centered on three primary areas. First, expanding the university's grant and aid programs to help enable current students to continue their studies, to re-enroll students who had stopped out, and to re-engage military students. Second, increasing enrollment of new students, which includes greater and more targeted outreach to the military, where historically we have been particularly strong. further building the UAGC brand and finding more corporate and academic partners. And third, maintaining our commitment to superior student outcomes through upskilling and stackable credentials. While it remains early days for these programs, we are working collaboratively and aggressively with UAGC to drive results. In fact, we will be coming together again soon to evaluate and refine each area of focus as well as to develop new initiatives to drive continued success. Sovio's long-term strategy remains unchanged. We are bringing education opportunities to learners where they are. To do this, we will deliver education services that meet the diverse needs of universities, employers, and learners. In addition, we are enhancing our programs and services, and we are expanding our skills to employment offerings to empower learners to better connect with in-demand jobs. We are excited for what the future holds for Zovio and our ability to play an important role in enabling learners to advance their educational goals. Let me provide an update on our search for Zovio's next chief executive officer. Our CEO search committee has narrowed the focus to a few candidates, and we believe we will have an update soon. We have been impressed by the quality and caliber of the individuals who have expressed interest in joining us, as we work to set the company on a growth trajectory to deliver shareholder value for many years to come. With that, let me turn the call over to Chris Spahn to run through the highlights for the quarter.

Thank you, George. Our Zovio Growth segment, which includes our subsidiaries, Fullstack and TutorMe, has continued to perform well. In the third quarter of 2021, Zovio Growth delivered revenues of $7 million, growing 14% for the quarter year-over-year. The services that Fullstack and TutorMe provide enhance Zovio's ecosystem to support learners' education and career aspirations by building on existing capabilities to meaningfully serve higher education institutions, bridge the education-to-employment gap, and help enterprises upskill and educate their employees. Further demonstrating the strength of our Zovio growth segment TutorMe was named one of the winners of the Tech and Learning 2021 Best Tools for Back to School. Tech and Learning launched their new Awards of Excellence program to identify the most impressive products and solutions for all learning environments to help students, parents, and teachers. We are thrilled to have TutorMe recognized in this capacity as it underscores the strength of our offering. In addition, during the third quarter of 2021, TutorMe continued to execute new partnership agreements from universities to corporations to school districts, bringing their total partnership count to over 300, an increase of over 70% year-over-year. In the third quarter, total customer partner hours usage increased over 27% year-over-year. maintaining the strong momentum we have seen in recent quarters. Fullstack also added new partners during the quarter and leveraged new partnerships that came online. In the third quarter, Fullstack added Utah State University to bring tech training boot camps specializing in coding, cybersecurity, data analytics, and DevOps to the state. The live online Utah State Tech Boot Camps will equip students with the skills needed to fill well-paying, in-demand tech jobs in the region. We are excited about the opportunities these universities have to offer. As of the end of the third quarter, this brings Fullstack to 17 new partnerships. Additionally, in early September, Fullstack announced a partnership with Security Advisory Alliance. to create the Fullstack Cyber Advisory Board, which is focused on advancing Fullstack's cybersecurity curriculum to uniquely qualified graduates for entry-level cybersecurity jobs, building the technical and soft skills that cyber employers seek in today's evolving landscape. At the start of the year, we had outlined our expectations for new partnerships for both TutorMe and Fullstack, In total, year-to-date, through the end of the third quarter, for TutorMe, we added over 100 new partners. In Fullstack, we added five new partners. Our outlook for Zovia growth remains strong, with the pipeline for both groups continuing to grow. Turning to our university partner segment, as George mentioned, UAGC enrollment in the third quarter remained challenged, but in line with what we had anticipated. That said, our retention has improved year over year, which tells us that students that are finding UAGC are those students we believe will be most successful. Our relationship with UAGC continues to mature, with leaders of both organizations focused on the initiatives that will drive enrollment, advance programs, and support strong student outcomes. We believe we have a strong action plan and common goals to advance that relationship. Zobio remains well-positioned as we bring a clearly differentiated offering to our clients. We have a robust platform of technology and services that institutions, corporations, and learners clearly value, and we will set the stage for diversified growth. We continue to build an attractive pipeline of opportunities with institutions as many are seeing the value to enhance student engagement improve the likelihood of student success through our services. Now, I will turn the call over to Kevin Royal to review our financial and operating results. Thank you, Chris.

Looking at the results of the quarter, revenue and other revenue for the third quarter of 2021 was $62.2 million compared to $102.2 million for the same period in the prior year. The decrease on a GAAP basis is primarily related to the divestiture of Ashford University and the shift to the EdTech business model, as well as lower average enrollment, partially offset by an increase in the Zovio growth segment revenues. As a reminder, our business model shifted significantly as a result of the UAGC sale in December 2020. As such, for comparability purposes, In addition to providing the GAAP results of the prior year, I will be highlighting certain related pro forma amounts for the period. On a pro forma basis, revenues for the third quarter of 2020 were estimated to be 80.2 million. For the third quarter of 2021, technology and academic services were 16.5 million or 26.5% of revenue compared to $19.1 million or 18.7% of revenue for the comparable quarter of the prior year. Expenses in this category, as well as for the other main income statement line items discussed below, are lower overall on an absolute basis due to cost reduction efforts and lower related activity levels. but higher as a percentage of revenues due to the lower revenues as compared to the corresponding period in the prior year. On a pro forma basis, these expenses for the third quarter of 2020 were estimated to be 18.2 million, or 22.7% of revenue. Counseling services and support for the third quarter of 2021 were 20.4 million, or 32.8% of revenue compared to $24.7 million or 24.1% of revenue for the comparable prior period. On a pro forma basis, these expenses for the third quarter of 2020 were estimated to be $23.8 million or 29.7% of revenue. Marketing and communication expenses for the third quarter of 2021 were 21.1 million or 33.9% of revenue compared to 23.3 million or 22.8% of revenue for the prior year. On a pro forma basis, these expenses for the third quarter of 2020 were estimated to be 22.9 million or 28.6% of revenue. General and administrative expenses for the third quarter of 2021 were $9 million or 14.5% of revenue compared to $11.4 million or 11.2% of revenue for the comparable prior period. On a pro forma basis, these expenses for the third quarter of 2020 were estimated to be $10.6 million or 13.3% of revenue. We did not have any university-related expenses for the third quarter of 2021 as compared to $22.9 million or 22.4% of revenue for the prior year period. These expenses represent costs related to the university prior to the sale in December 2020. Restructuring and impairment charges for the third quarter of 2021 were $0.3 million or 0.5% of revenue as compared to 0.2 million or 0.2% of revenue for the prior year period. During the third quarter of 2021, we recorded an income tax expense of $59,000. Our effective tax rate before discrete items for the third quarter of 2021 was low single digits, and we anticipate this trend to continue for the remainder of the year. As a result, net loss for the third quarter of 2021 was 5.2 million or net loss of 16 cents per diluted share. This is compared to net income of 1.1 million or net income of 3 cents per diluted share for the third quarter of the prior year. Our non-GAAP net loss for the third quarter of 2021 was 4 million or a loss of 12 cents per diluted share compared to the non-GAAP net income of $2.9 million or income of $0.09 per diluted share for the third quarter of the prior year. The non-GAAP net loss for the third quarter of 2021 excludes restructuring and impairment of $0.3 million, separation and conversion costs of $0.1 million, acquisition costs of $0.5 million, and other non-GAAP costs of $0.4 million. As of September 30, 2021, we had unrestricted cash and cash equivalents of $31.6 million as compared to $35.5 million as of December 31, 2020. In addition, we had restricted cash of $9.8 million at September 30, 2021 as compared to $20 million at December 31, 2020. We expect that approximately 2 million of the restricted cash amount will become unrestricted during the remainder of 2021. There was 11.6 million of cash used in operating activities during the year-to-date period ended September 30, 2021. By comparison, we had 20.1 million of cash provided by 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 decrease in earnings, partially offset by changes in the working capital accounts. Capital expenditures for the year-to-date period ended September 30, 2021, were $1.2 million, as compared to $2.6 million for the same period last year. For Zovia growth in 2021, from a revenue perspective, We anticipate the segment's revenues to grow approximately 30% year over year and anticipate generating an EBITDA loss of between 6 to 8 million in 2021. This planned investment will decrease consolidated EBITDA margins in the near term. Longer term, we expect this segment to grow at least 30% annually through 2025 and be profitable beginning in 2023. Throughout the year, we took actions to reduce our cost structure to more appropriately align it with both our revenue expectations and the nature of our new business. Our total year-to-date cost reduction efforts will yield approximately $60 million in annualized savings going forward when compared to original plan spending levels. For 2021, we continue to expect total consolidated ZOVO revenues to be in the range of $265 to $275 million, and non-GAAP EBITDA to be breakeven to slight loss. At this time, I will ask our operator to open the phone lines for your questions.

Thank you. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. Again, to ask a question, simply press star 1 on your telephone keypad. And your first question comes from Alex Perez from Barrington Research. Your line is now open.

Hi, guys. Thanks for taking my call.

Absolutely.

A couple follow-up questions based on what you said in your prepared comments. I'm glad to see retention improve at UAGC. I'd like to dive a little bit more into new enrollment. You said it was challenged. I'm wondering what color you can offer beyond that. For example, was there a sequential improvement in the year-over-year decline? And when might it inflect positive?

To answer the latter part, Alex, again, we've talked about this before in prior calls. We're seeing incremental gains on new enrollment If you go back and look at the prior three quarters and compare each of the quarters, we're seeing improvements on the downstream effect, the conversions, and those things that we measure and we monitor and look at to gauge performance continually to prove they're not where we quite need them to be. But again, there's a stronger momentum that builds a little level of confidence as we look out in the next quarter.

Gotcha. So just to be clear, the greatest decline was earlier in the year and there was sequential improvement in that year-over-year decline in Q2 and Q3?

Yes.

Great. And then That other question, which is begging for guidance. When do you think, you know, based on your summit meeting, based on some of the things that you put into place, when do you think that we will start seeing new student enrollment growth? I know this takes some time. I wouldn't expect it before mid next year, but I was wondering if you could offer any color on that.

Yeah, Alex. You know, as you said, we have not provided guidance in our remarks. You know, in our remarks, George alluded to the fact that we're seeing good progress on the CEO search. And, you know, we would like to have the new CEO on board before we provide guidance for 2022. Okay, great.

And that kind of leads me to my next question, Andrew. Clark, the former CEO, left the company in late March. It's been six, seven months since then. I would assume that we're getting close to the end, which is what you suggested in your overview comments. Do you think we'll have a new CEO named before year end?

That is my hope. I know that the committee has narrowed the focus to a very few candidates yet. And we're very pleased with the quality and caliber of those individuals. But as in any kind of personnel action, until it's done, it's not done. So I'm very hopeful, but that's as much as I could say.

Great. That's fine. I appreciate that. And then back on new student enrollment or just enrollment in general at UAGC, military has been a historic strength of Ashford University. And obviously the brand change had some impact on that workflow, I suppose. What's going on with the military now? And secondarily, have you had any negative impact from the challenges that the Army has had with their tuition assistance portal? Other companies in the space have talked about that.

Yeah, I'll take the latter first, Alex. Our experience of the Army impact has probably been about the same as the other institutions have experienced. With respect to the military, and you mentioned that at one point with the Ashford brand, we had a very strong relationship and a very strong brand and connection with the military. We had started now... uh providing uh you know marketing where we haven't done that and prior to begin to reach out to that particular uh channel and we're starting to see um a little bit of resurgence in that uh in that line with the military uh there's a couple of you know things that are i think preventing us to go a little more um a little stronger i think we're hoping to get those resolved just as you go through some of the compliance stuff but we're seeing We're seeing a re-engagement as a result of some of the steps that we've taken. We've added some additional resources from our recruitment side to help facilitate that new volume that's coming in. And we anticipate that growing stronger in the coming quarters.

That's great. And then final question for me. Given the fact that you produced positive cash flow in the third quarter, as you would expect seasonally, And given that you expect another couple million to come out of restricted cash into cash and equivalents by year-end, is your year-end comfort level still about $40 million in cash and cash equivalents?

Yes, Alex, we're still comfortable with that level.

Great. Well, thank you. I'll get back in the queue.

Thank you.

Thank you.

Your next question comes from . Your line is now open. Coming from Watertower Research.

Yes, good afternoon, Kevin and Chris and George. I just went over some of the questions I had, but maybe to round it up, is the seasonality on zovial growth maybe a little bit different, or can you give us any color there? You are on track for the 30% growth you guided to, but that particular quarter growth was a little bit lower than that. Again, any seasonality or is it just a growth business that is not always completely even?

Yeah, Terry, thanks for the question. So, there is seasonality in the growth business, in particular, as you can imagine with Tudor Me, the summer months tend to be slower. So we are on track for our growth projections, and they will have a very strong Q4.

Okay. That's good to hear. Over the last 18 months or so, we've talked about the impact of COVID on your business, on students, and so on. With, you know, with vaccination this year and COVID, and a bit more experience in this new environment, I was just wondering if you had any kind of general color you could give to us in terms of how it's affecting enrollment and student interest or appetite for enrolling and so on. Just some more thoughts on the impact of COVID on your business.

Yeah, looking at it from a staffing standpoint, You know we we we're pretty much in the same cadence theory that we've been for some times we have a sort of a hybrid work environment where we have staff coming in taking advantage of the office, especially here in Arizona with respect to new student enrollment and retention. we've seen about the same level of engagement as a result of coven I think we saw a little softening which. students and parents challenged going back to school, but I think that was just sort of a week or two of people getting to a regular routine. But as we've said, we've seen a slight uptick in student retention, and that's been great. And we've also seen a little bit of an uptick on reentry, those students that have dropped that have decided to come back to reengage and work toward completing their degree. um you know we'll continue to monitor as everybody is the you know the how pandemics affecting you know business operations how it's affecting uh you know prospective students and making decisions okay and then finally you gave us a bit of color on re-engaging with the military uh any other initiatives um you know we

We talked earlier this year about some geographical challenges and so on. If we go beyond military, are there any other elements that you've learned that you're doing different that are positively impacting enrollment going forward?

Yeah, there's one we just rolled out. So we've done some work with the military. One of the ones that we've done to put us more competitive the graduate level militaries. We've reduced the cost per credit, and I think that's just recently happened here. And that has put us, I think, in a more competitive light in terms of the other institutions that work with the military. So it's early. We're about three weeks in, give or take, here with that. But we anticipate that's going to bode well for the military, those looking to get an advanced degree beyond their bachelor's degree.

Okay, that does it for me. Thank you. Thank you.

Thank you. Your next question comes from Greg Gibas from Northland Securities. Your line is now open.

Hey, good afternoon, guys. Thanks for taking the questions. First, wondering if you're still seeing any changes or shifts in geographic interest based on region or if that's kind of stabilized or if there's any new trends on that front?

We've a great good question. We've talked to that a little bit. As we've said, we've seen geographic shift from prospective students in the West, you know, Arizona, which would certainly make sense, you know, because of the new name, a little bit in California, Nevada, and some in Texas. So there's that shift that we've seen is about in a steady state. We haven't seen it spike beyond the initial spike that we had when we launched the new brand. So we'll continue to monitor that, make sure as we look at how people go about making decisions of where they wanna go to school, make sure that we're aligned with students geographically so we're addressing their needs and things that are important to them.

Great, appreciate the call there. And if I could follow up on the retention comments with UAGC in particular, I think you said it's stabilized and then sounds like was improved sequentially. And then you also talked about it improving year over year. You know, just trying to, I guess, understand the degree of that improvement and, you know, is it pretty notable sequentially or year over year?

Just from a strategic standpoint, you know, in our working with, you know, our partner UAGC, They have taken some steps with I think some of their faculty, right, to, you know, and sort of meet students where they are, especially those that might be struggling and at risk. And I think there's some initiatives that they've, that I know they've deployed that have been very helpful. We've, you know, in our academic services, you know, we look at, you know, a contact strategy that we tweak and adjust now and then to continue to identify students that are at risk, at most risk, right, the fact that we can't get to all of them. And we've made some adjustments on that over this past quarter, and that's helped with our drop percentage. So we've seen an improvement on that, so we're retaining more students. And then we've done some calibration as well on the reentry side that I alluded to a little earlier, that looking at students on when they've stepped out of the program, when's the best time, and how should we reengage with them to get them back on track working toward their degree. So I think a combination of those three things have served our students well, and consequently that has spoke to a better retention effort.

Okay, great. Last one from me on the Zobio growth business. Just wondering if you're seeing any positive or negative changes in interest or demand there for either full-stack or tutor me. Seems like kind of an acceleration of new partners with TutorMe. I think you had 250 at the end of last quarter and now you're over 300. So is that, you know, just confirming the acceleration and any comments on demand or interest?

I think we, you know, we continue to have, I think, a very good pipeline in both of those areas. And, you know, so I think we're going to close out the quarter, you know, sort of meeting what we had stated previously. And I think as we roll into, you know, 22, I think we've got, you know, some good momentum to build on that. So, you know, we've had success in those areas and I think we expect to continue to have the same success.

Okay. Thank you. Thank you. And that concludes today's call. I'll now turn it over to the presenters for any closing remarks.

Well, we'd like to thank all of today's callers for their interest in Xovio and for your participation in today's call. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.