Zovio Inc.

Good afternoon and welcome to Zovio's fourth quarter and full year 2021 earnings conference call. Today's call is being recorded and at this time I would like to turn the call over to Vicki Shray, Executive Vice President and Chief External Affairs Officer.

Please go ahead. Thank you and good afternoon.

Zovio's fourth quarter and full year 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 Randy Hendricks, Chief Executive Officer, 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 enrollment, 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 2022 and later. These forward-looking statements are subject to a number of risks and uncertainties, that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statement. 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 law. 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 31, 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 Zovio's new CEO, Randy Hendricks.

Thank you, Vicki, and welcome to Zovio's fourth quarter and full year 2021 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. I'd like to first review our high-level results before I discuss some key business developments at Zovio. For the fourth quarter of 2021, we reported revenue of $54.8 million and a non-GAAP diluted loss per share of $0.23. For the full year 2021, we reported revenue of $263 million and a non-GAAP diluted loss per share of 47 cents. It will come as no surprise to those listening on the call today, 2021 presented significant challenges for Zovio. Since this is my first call as the CEO of the company, I'd like to provide some comments on my background and how I will leverage my experience to position the company to best serve our clients, their students, and create value for our shareholders. Over my career, I have led multiple enterprise-wide transformations through focused execution in challenging and highly competitive market segments. Most recently, as a senior executive at the Huron Consulting Group, I worked with many clients in the higher education industry to help them strategically advance their academic and research missions using technology as an enabler. Prior to that, while at IBM, I was appointed to several senior leadership roles with a mandate to transform underperforming business units. I've also served as an independent director on three boards of U.S. technology companies with an international presence. The combination of my industry experience, technology expertise, and large-scale transformations are relevant experiences I bring to the Zovio team to lead the company. In my first 30 days with Zovio, my focus was to deeply understand the business, what was working and what wasn't. I met with and listened to our key stakeholders, our clients, employees, and investors. On my first day, I met with the CEO and President of the University of Arizona Global Campus. the largest client of Zovio. Within my first two weeks, I met with our major investors and several of the research analysts that follow us. I conducted a review of our operations and completed a talent assessment. I will comment on some of the actions I've taken as a result in a few minutes. In 2021, we were encouraged by improvements in student retention at UAGC. However, as we move through 2021, new enrollment declined at UAGC, ultimately impacting total enrollment. This was a result of a challenging year for Zovio, which was transforming to an ed tech services company and our client who established a new university. After a detailed root cause analysis, we concluded much of the challenge in 2021 was a result of poor execution, which we have moved quickly to address. As such, I have taken swift actions to address the underperforming areas of our business. These actions included several organization changes aimed at stabilizing and growing enrollment and better serving our client, UAGC. This included reducing layers of management, increasing span of control, and selecting leaders I have confidence in. We've also made operational changes which included streamlining functions, improving the student experience, and strengthening our working relationship with UAGC. We've also undertaken a series of cost reductions as we move towards a competitive cost structure more in line with our total revenue. These actions include reducing non-payroll expenses, facilities, and headcount in selective areas. Conversely, we have some really strong businesses within our portfolio. TutorMe and Fullstack Academy are well positioned for the long-term growth and value creation as both operate in large and growing markets. In 2021, our growth segment delivered revenues of $30.2 million, growing 45% year over year. TutorMe and Fullstack Academy provide innovative programs, courses, and resources that help to solve the post-pandemic challenges that educational institutions and companies face. We are proud that TutorMe was named one of the winners of the Tech and Learning 2021 Best Tools for Back to School, as well as one of the 2022 Top EdTech Products by District Administration. Given the dynamic of remote learning, some companies are providing tutoring support as an employee benefit, while educational institutions from K-12 districts to higher education are leveraging TutorMe, which provides on-demand, 24-7 online resources to ensure their students have support when and where they need it. TutorMe continued to execute new partnership agreements during the fourth quarter with universities, corporations, and school districts. The TutorMe total partnership count is now over 330. In the fourth quarter, total customer and student usage continued to increase year over year with over 27,000 students tutored in the quarter. At the end of 2021, full stack has added a total of 19 new university partnerships since the close of the acquisition, including the University of Pittsburgh, which was signed in the fourth quarter. Fullstack currently partners with over 600 companies which actively participate in recruitment events and share job openings with our students, helping them to secure meaningful jobs after graduation. Approximately 1,400 companies have hired Fullstack graduates. In addition, Fullstack continues to expand its curriculum, adding both data analytics and developer operations as part of our portfolio of university-powered boot camps. Further, in partnership with the New York City Department of Small Business Services, Fullstack helped to launch the Data Analyst Training Accelerator, a no-cost training program that aims to equip eligible New Yorkers with high-demand skills. These are just a few of the great things happening at Fullstack Academy. and we remain excited for what lies ahead for our clients and team. Given the opportunities and challenges ahead of us, we believe it's important to take into consideration the interests of all of our stakeholders, including our shareholders. As a result, we are exploring strategic alternatives, including potential divestitures which we believe will unlock the greatest opportunity for value creation. In parallel, we are advancing a turnaround plan aimed at stabilizing and growing new and total enrollment at UAGC. As a result, we do not believe it would be prudent to provide guidance for fiscal year 2022 at this time. In the coming months, I will talk in more detail about our strategy, what you can expect in terms of our performance, and the progress we are making with strategic options for the company. While change is sometimes challenging, we will work tirelessly to ensure we are serving the interests of all of our stakeholders. With that, I will turn the call over to Kevin Royal to review our financial and operating results.

Thank you, Randy. For the fourth quarter of 2021, revenue was $54.8 million compared to $93.1 million for the same period in the prior year. The decrease is primarily due to the shift to the EdTech business model, as well as lower average enrollment, partially offset by an increase in Zovio growth segment revenues. As a reminder, Our business model shifted significantly as a result of the UAGC sale on December 1, 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 that period. On a pro forma basis, revenues for the fourth quarter of 2020 were estimated to be 77.4 million. Technology and academic services for the fourth quarter of 2021 were 17 million, or 31% of revenue, compared to 19.6 million, or 21% of revenue, for the comparable prior year period. Expenses in this category, as well as for 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 fourth quarter of 2020 were estimated to be $18.4 million, or 23.8% of revenue. Counseling services and support costs for the fourth quarter of 2021 were $20.6 million or 37.6% of revenue compared to $25.5 million or 27.3% of revenue for the comparable prior year period. On a pro forma basis, these expenses for the fourth quarter of 2020 were estimated to be $24.5 million or 31.7% of revenue. Marketing and communication expenses for the fourth quarter of 2021 were 16.7 million or 30.5% of revenue compared to 21.6 million or 23.2% of revenue for the comparable prior year period. On a pro forma basis, these expenses for the fourth quarter of 2020 were estimated to be 21.1 million or 27.3% of revenue. General and administrative expenses for the fourth quarter of 2021 were 9.9 million or 18% of revenue compared to 10.9 million or 11.8% of revenue for the comparable prior year period. On a pro forma basis, these expenses for the fourth quarter of 2020 were estimated to be 10.3 million or 13.3% of revenue. We did not have any university related expenses for the fourth quarter of 2021 compared to 16.7 million or 17.9% of revenue for the comparable prior period. These expenses represent two months of costs related to the university prior to the sale in the fourth quarter of 2020. We have legal expense charges for the fourth quarter of 2021 of 14.3 million. These charges represent the additional amount necessary to fully accrue the judge's ruling in the California Attorney General matter. There were no such legal expenses for the prior year period. We did not have any restructuring and impairment charges in the fourth quarter of 2021 as compared to 1.4 million in the fourth quarter of the prior year. The restructuring and impairment charges in the fourth quarter of the prior year related primarily to the termination of a contract. In the prior year, we also recorded $54.8 million as a loss on transaction in the fourth quarter for the transaction completed with the University of Arizona Global Campus in December 2020. we did not have any such charges in the fourth quarter of 2021. The net loss for the fourth quarter of 2021 was 23.6 million, or a loss of 71 cents per diluted share, compared with net loss of 57.2 million, or a loss of $1.75 per diluted share, for the same period in the prior year, which includes the loss on the transaction noted above. Excluding the legal expense charges, acquisition costs, certain stock compensation, other non-GAAP charges, and related tax impacts, the non-GAAP net loss for the fourth quarter of 2021 was $7.7 million, or a loss of $0.23 per diluted share compared to a non-GAAP net income of $0.9 million, or income of $0.03 per diluted share for the same period in the prior year. Regarding the full year results, revenue for the year ended December 31, 2021 was $263 million, compared with revenue of $397.1 million for the year ended December 31, 2020. On a pro forma basis, revenues for the full year 2020 were estimated to be $296.4 million. Net loss for the full year ended December 31, 2021 was $42.3 million or diluted loss per share of $1.27, compared with net loss of $49 million or diluted loss per share of $1.53 for the year ended December 31, 2020. Excluding the legal charges, separation transaction costs, restructuring costs, acquisition costs, certain stock compensation, other non-GAAP charges, and related tax impacts, The non-GAAP net loss for the year ended December 31, 2021 was $15.8 million or a loss of $0.47 per diluted share compared with non-GAAP net income of $8.6 million or income of $0.27 per diluted share for the year ended December 31, 2020. Income tax benefit for the full year ended December 31, 2021 was 129,000. Our effective tax rate before discrete items for 2021 was low single digits, and we anticipate this trend to continue in 2022. The company used $15.4 million of cash in operating activities during the year ended December 31, 2021. By comparison, the company generated $25.3 million of cash in operating activities during the same period in 2020. The decrease in cash provided by operations is due to the increased net loss year over year, excluding the loss on the sale of the University of Arizona Global Campus. Capital expenditures for the 12 months into December 31, 2021 were $1.4 million, as compared to $3.2 million in the comparable period last year. As of December 31, 2021, The company had combined cash and cash equivalents of $28.3 million as compared to $35.5 million as of December 31, 2020. In addition, today we also announced we closed a $31.5 million three-year term loan with Blue Torch Capital. At this time, I will ask our operator to open the phone lines for your questions.

Thank you. And as a reminder, that is star 1 if you would like to ask a question. We will pause for a moment to compile the Q&A roster.

And our first question will come from Terry Vu with Water Tower Research.

Please go ahead.

Good afternoon, Randy and Kevin. How are you?

We're very well on this end, Terry. Nice to hear your voice.

Great. Hey, I think some of the questions you kind of already said you might not be able to comment, so I'll still try a few that I think maybe you'll be able to comment, and we'll see where that goes. The liquidity, Kevin, you mentioned, and it shows on the relief $28.2 million. And you also said that you accrued $14 million of the California judgment. So the $28 million is after the company would have fully accrued for that judgment. Is that correct?

Yes, it is. But the $14 million, Terry, is a non-cash item. It's simply just expense in the period. And so it did not have an impact on cash for the fourth quarter.

Oh, okay. Okay, I see. Nice to see the additional capital raise you were able to do in that context, obviously. I've been reading that there were discussions of U of A taking over UAGC. Can you make any comment on that? Would it have an impact on your relationship with UAGC?

Terry, I'll share my perspective. I've been in conversations with Paul Pasarek and President Robbins on the topic. They're both very excited about the integration of UAGC into the University of Arizona. My personal perspective of working with both of those leaders and daily with Paul is I think it's very exciting in terms of the future for the University of Arizona Global Campus, the support that they receive from the University of Arizona, and I think it only strengthens that as they move forward with their strategic plans. So I find it very exciting in terms of our relationship and the work that we do every day to support UAGC. No, it doesn't change anything. Our client is UAGC and we have 972 people who wake up every day to serve them and the students that they serve. So that's the perspective I would share with you, Terry.

Okay. Obviously, as you said, 2021 was a challenging year. You're doing things on your end to try to improve results. Is a modification of the contract with UAGC one of the things you're looking at, or that's not where the potential solution is in terms of, you know, having better results in 2022?

Well, Terry, we, as you would expect of me having met in my early days, that I would complete a deep root cause analysis of the enrollment decline in 2021. I was here for a mere three weeks, but it didn't take long to see that 2021 was a challenging year. And in the comments I made earlier, it was a transition year for this company, Zovio, moving to be an ed tech services company. And it was a transition year for UAGC becoming a new university and putting together a really strong management team and mission and purpose and values. And so there was a lot going on. We also had a CEO transition. The founder and CEO, Andrew Clark, he completed at the end of the first quarter, as you know, and the board conducted an exhaustive search, and I started at the first week of December. So you have three transitions going on, and I think all of that led to, certainly I'll speak to Zovio, there was some poor execution. Not a market issue. It was poor execution. in terms of the things that needed to be addressed in terms of growing enrollment and supporting students all the way through to their graduation. So with that root cause analysis completed swiftly, a set of initiatives, I put in place a new leadership team that I am confident in, and they lead with compliance, principles, and values, and students first. I'm optimistic about what lies ahead for our client UAGC and our support for them in terms of their enrollment.

So the master contract with UAGC doesn't need major rework? Things under your control can improve the situation?

That's where we start. That is, you look at what you can control. fair amount of outsourcing contract experience and days with IBM both ITO contracts and business process outsourcing contracts we do both for UAGC. It's not unusual when you have a 10 year or in this case a 15 year contract that doesn't require some revisiting from time to time but that's not you know that's not where I start. I don't start with you pull the contract out of the drawer and you say that that's the problem. You look at how do you align with the goals of your client and you address the root causes of what was the result of enrollment decline in 2021. And we're encouraged so far as we're, you know, we're here to talk about 2021, not Q1 of this year, but we're encouraged with what we're experiencing together.

Great. You used to, I think last year you were giving some kind of long-term growth guidance for Zovio Growth, and obviously those two segments have continued to perform very well. Have the expectations changed in terms of the long-term growth potential there, or any color you can give us on those two businesses going forward?

Hi, Terry, it's Kevin. You're referring to the guidance that we gave that we expect, you know, over the five-year period that when we gave the guidance, we expected growth, annual growth of 30% per year at a minimum. And we, while we're not giving overall guidance, that is still very much in line with the trajectory of the revenue for those businesses combined.

That's good to hear. I also saw the full stack announcement for India. Any color you can give us? I mean, that looks like a potentially very large market for full stack.

It is a large market. It's a market where we are licensing a portion of our curriculum to a company that's got a broad reach in India. We're excited. We don't see it as While there will be revenue in calendar 2022, it will be less than 10%. But as that market develops, we think it will be very exciting. And that same partner will be taking us into other geographies as well.

Great. Well, thank you for the comments. And I look forward to to the hard work in 2022 and better results.

Thank you, Terry. Our next question will come from Alex Paris with Barrington Research.

Please go ahead.

Hi, guys. Thanks for taking my call and my questions. Between your overview and Terry's questions, you covered a lot of it, but I have a few more I'd like to dig into if that's okay with you. Obviously, a tough transition year in 2021. Your fourth quarter results were in line with my estimates, though still down year over year, that sort of thing. Zovio growth continued to perform above my expectations. So I'd like to dive a little deeper into university partners. You know, it was a little over a year ago, early December, when the transaction was completed. I think there was some initial positive growth, but it turned negative pretty quickly. Can you talk about the performance of new student enrollment, for example, throughout 2021? I think at one point last year, maybe it was the first quarter, you said new student starts were down along the lines of about 25% year over year. And then sequentially, each of the following quarters, it got a little less negative.

uh but still negative year over year uh what can you say about you know has that trend continued into the fourth quarter and into 2022 yeah unfortunately alex we did have a a tough uh fourth quarter um oh just overall i think you know we had told you we expected uh new enrollment are we given given uh guidance we expected new enrollment to be down around 25 it's down It was down about 22% year over year. And then total enrollment did better than that, but total enrollment came in at about 19% down year over year.

Gotcha. And I know you're not talking about the first quarter or going forward. I think the caps get easier as we move into 2022 and the and the deliberate actions you've taken to improve process and management, would you expect, without giving specific guidance, improvement in enrollment metrics, new enrollment, as well as retention going forward, or continued improvement?

Yeah, so with the changes that were made, Alex, we're very encouraged. We'll see we're projecting positive trends in new enrollment. We think it'll take a little bit of time to translate into total enrollment, but we are expecting that new enrollment will be positive on a year-over-year basis.

As soon as when? Mid-year, Q1, later in the year? Mid-year. Mid-year. Mid-year. Okay, good. And then... Could we talk a little bit about the credit agreement and then the lawsuit? Maybe start with the lawsuit first. In early March, you had a negative outcome, could have been worse. The California Attorney General was looking for not only $100 million, but certain injunctions. I don't think you got, I think the penalty was $22.4 million. There were no injunctions that I know of. And you've asked for a new trial or a vacating of the judgment. What's behind that? What are your thoughts about the ruling? What can you say, obviously? This is an ongoing legal thing, but when should we know about the request for a new trial? And if you don't get that request granted, do you appeal then?

Alex, it's Randy. I'll share just a couple points of view, so it's no surprise to you. It's disappointing. The judge's decision was disappointing, and I'll I'll give you my perspective on where the disappointment really was hard, and that's for the management team and the employees of the company. So we have a new management team in place. We have, if you go, you know, you look today and you looked at the employee roster, there's a lot of new employees if you look at today and compare that to even 2017. And as you pointed out, I think you know it well based on the way you were describing, there was no evidence of any problems or wrongdoing after 2017. So you look at that and say, well, that's a positive. But we've just done a lot of things here to have the employees understand they work for a good company, that this is a matter that dates back a long time ago. And so you want them to keep their chin up and shoulders back and do a great job every day for the University of Arizona Global Campus. And most importantly, the students they serve, they just are very dedicated to serving the students. Now, if you look at a perspective on what Zobio and Ashford and how did we act a long time ago, certainly before I I didn't know anything about this, but I've studied up on it and believe that the team acted appropriately and that the practices complied at all times of California law. Again, very dated matter. You pointed out correctly, we did file a motion asking the judge to reconsider and modify the decision and And that's scheduled for May 13th. So anyone can be hopeful that we could get one or the other of those matters, those outcomes. If that doesn't happen, Alex, we'll just review what our options are, which does include appealing the decision to the California Appellate Court. And there's a part of me that when it's something like this that's troubling to employees of today is you want to get it behind the company so we will look at that in the future and I just share share with you how I think about it as a CEO of this company great that's helpful and then so we'll stay tuned on that and then the credit agreement thirty one and a half million

With Blue Torch, LIBOR plus 9%, I think oftentimes with financial companies like that, there's some upfront payments and that sort of thing. Kevin, what should we expect in terms of impact to the P&L or charges in the, I guess, second quarter probably?

Yeah, you are correct, Alex. There's an upfront fee, and that'll get amortized over the term of the loan. So when you take a look from an expense standpoint, you've got the quarterly interest plus the amortization of that upfront fee. The combination of the two will be an impact of about $900,000 per quarter. Okay.

I guess last but not least in this venue, the strategic review and what's the thought process there? What are you considering? I think there's been speculation about selling one or both of the Zovio growth businesses. There's even been speculation about selling the entire company if that was what was in the best interest of shareholders. So what are you thinking there and what's the timeline there?

Big picture, Alex. As I mentioned in my comments, we're going to look at all the strategic alternatives. That includes divesting. We lead three businesses. The largest one serves UAGC, and you're very familiar with TutorMe and Full Stack Academy. So we're going to look at all three businesses and look at the alternatives. We're very serious about it. Otherwise, I wouldn't have commented on it today in this earnings call. And we're going to look at it... with a sense of urgency in terms of what's best for the company, all the stakeholders, including our shareholders. So we did, just to make a point out of that, we did retain an investment banker, and so that's one indication of taking that seriously.

Okay, gotcha.

Alex, just real quick, you know, I think we, you know, we pointed to it in the call already, but those businesses, you know, have performed nicely. And, you know, we realized that with the trading value of our stock today that, you know, the value of those two businesses is not showing up in our market cap. So I just want to acknowledge that.

Yeah, no, that's great. Pretty clear. Yeah, so that's it. I appreciate that overview, and good luck on 2022 and emerging from this transition year a stronger company.

Alex, thanks for joining us today. And that will conclude our question and answer session.

I will now turn the call back to Zovio for any closing remarks.

Thank you. We'd like to thank all of today's callers for your interest in Zovio and for your participation on the call today. And now it's time to get back to work.

And this will conclude today's call. You may now disconnect.