Zovio Inc.

Good afternoon, and welcome to Zovio's first quarter 2022 earnings conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Vicky Shrey, Executive Vice President, Chief External Affairs Officer. Please go ahead.

Thank you, and good afternoon. Zovio's first quarter 2022 earnings release was issued earlier today. and it's 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 statements. Please note that these forward-looking statements speak only as 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. Please 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 filing, including our annual report on Form 10-K for the year ended December 31, 2021, as well as our quarterly report on Form 10-Q for the quarter ended March 31, 2022, 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 CEO, Randy Hendricks.

Thank you, Vicki, and welcome everyone to our first quarter 2022 earnings call. Starting with our results for the quarter, we had revenue of $61.6 million and incurred a net loss of $7.4 million, or a loss of 22 cents per diluted share. Excluding certain items, our non-GAAP net loss for the first quarter of 2022 was 4.5 million, or a loss of 13 cents per diluted share. We recorded an adjusted EBITDA loss, which more closely approximates our cash usage of 2.8 million for the first quarter of 2022 versus a 6.8 million loss for the fourth quarter of 2021. we are starting to see the benefits from the restructuring activities we've recently undertaken to better align our cost structure with our revenues and will continue to carefully manage our expenses until the company is once again profitable. As we discussed on our call a few weeks ago, we are working with UAGC to stabilize and grow new enrollment and improve the student experience. We have also taken actions to address the underperforming areas of our business, which included several organizational and operational changes. We are encouraged by the preliminary results from the changes I discussed on April 15th. For example, for the first time since we completed the strategic transaction with UAGC in December of 2020, ending enrollment for the university grew for the period January 1st through March 31st. It's noteworthy to mention two of our textbooks have received textbook and academic author associations TAA awards. The TAA is a national organization dedicated to supporting textbook and academic authors. These awards recognize our commitment to creating and providing quality educational products. The Forbes School of Business and Technology at the University of Arizona Global Campus utilizes both textbooks to support student learning in their undergraduate business programs. With regard to the judgment that was issued on March 3rd, 2022, we have filed a notice of intention to move for a new trial and or move to vacate the judgment. The motion is currently scheduled for a hearing on May 13th. Turning to our other businesses full stack academy and tutor me continue to perform well in the first quarter with revenues of 9.3 million growing 30% for the quarter year over year tutor me and full stack continue to be well positioned for long term growth and value creation. tutor me continue to execute new partnership agreements during the first quarter of 2022 with school districts and universities. Our TutorMe total partnership count is now over 350. In the first quarter, total student usage continued to increase year over year with approximately 28,000 students tutored in the quarter. Adding to an already robust portfolio of accolades, TutorMe has won EdTech's Digest 2022 award for best tutoring solution. Our team was also recognized as the finalist in the personalized learning solution award category. Turning to full stack. Over the last quarter, we continue to expand our university powered boot camps by adding product management to our growing list of programs. Full stacks growth strategy includes adding university partners, as well as increasing the number of programs offered by our current university partners. During Q1, we grew the total number of programs delivered by university partners by 38% sequentially. In Q1, the first cohort of students in conjunction with our UpGrad partnership in India started cybersecurity and data analytics programs. In addition, we launched our second cohort for web development with the New York City Workforce Development Corporation. Fullstack partners with companies to help our students secure meaningful jobs after graduation by actively participating in recruitment events and sharing job openings with our students. We are committed to expanding the number of companies that we work with and are pleased with the addition of approximately 50 new partners in Q1. We continue to have high expectation for new partnerships for TutorMe and Fullstack, and our outlook for Xovial growth remains strong. Before I turn the call over to Kevin, I want to address our comprehensive review of the business. As I mentioned on the last call, we are assessing strategic alternatives that will create the most value for our shareholders, which includes potential divestitures of all three businesses we operate. I'm pleased with the interest being shown and the progress we are making, and look forward to sharing details with you in the future. Simultaneously, we are executing our turnaround plan for enrollment at UAGC and are capitalizing on opportunities for growth with TutorMe and Fullstack. Now, I will turn the call over to Kevin Royal to review our financial and operating results.

Thank you, Randy. Looking at the results of the quarter, Revenue for the first quarter of 2022 was $61.6 million compared to $76.9 million for the same period in the prior year. The decrease is primarily related to the lower average enrollment, partially offset by an increase in the Zovio growth segment revenues. For the first quarter of 2022, technology and academic services were $18.5 million or 30% of revenue compared to $19.1 million or 24.9% of revenue for the comparable prior year period. Expenses in this category are lower overall on an absolute basis due to cost reduction efforts, lower bad debt, and lower amortization of intangible assets. However, expenses are higher as a percentage of revenues due to lower revenues year over year. Counseling services and support for the first quarter of 2022 were 21.3 million or 34.6% of revenue compared to 25.3 million or 32.9% of revenue for the comparable prior year period. The overall decrease between periods on an absolute basis were primarily due to decreases in employee costs and facilities costs. Marketing and communication expenses for the first quarter of 2022 were $21.9 million or 35.6% of revenue compared to $25.8 million or 33.6% of revenue for the comparable prior year period. The overall decrease between periods on an absolute basis were primarily due to decreases in advertising and employee costs. General and administrative expenses for the first quarter of 2022 were $7.1 million or 11.6% of revenue compared to $15.9 million or 20.8% of revenue for the comparable prior year period. The overall decrease between periods on an absolute basis were primarily due to decreases in employee costs, severance costs and professional fees. Our net loss for the first quarter of 2022 was $7.4 million, or a net loss of 22 cents per diluted share. This is compared to a net loss of $9.5 million, or a net loss of 29 cents per diluted share for the first quarter of the prior year. Our non-GAAP net loss for the first quarter of 2022 was $4.5 million, or a loss of 13 cents per diluted share compared to the non-GAAP net loss of 3.3 million or loss of 10 cents per diluted share for the first quarter of the prior year. The non-GAAP net loss for the first quarter of 2022 excludes acquisition costs of 0.5 million, certain non-GAAP stock compensation of 0.2 million, and other non-GAAP costs of 2.2 million including severance and legal costs. As of March 31, 2022, we had unrestricted cash and cash equivalents of 33.7 million as compared to 28.3 million as of December 31, 2021. In addition, we had restricted cash of 6.1 million at March 31, 2022, as compared to $9.3 million at December 31, 2021. Subsequent to the quarter end, we entered into a $31.5 million three-year term loan with Blue Torch Capital. There was $2.6 million of cash provided by operating activities during the year-to-date period ended March 31, 2022. By comparison, We had 0.8 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 changes in the working capital accounts and the lower net loss. Capital expenditures for the year-to-date period ended March 31, 2022, were $24,000 as compared to 0.2 million for the same period last year. At this time, I will ask the 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 the line of Alex Paris from Banton Research. Your line is open. Please go ahead.

Hi, guys. Thanks for taking my question. A couple questions. Randy, you talked about the fact that you're working with UAGC to stabilize and grow starts, and you've taken actions, several organizational and operational changes. I wonder if you can give us a little bit more color on those changes.

Sure. Hi, Alex, and thank you for joining. First of all, we're really pleased that we're starting to see some outcome of the actions, and that was what I commented on a few minutes ago, that for the first quarter of this calendar year, so January 1 through March 31, that the ending enrollment is greater than the beginning enrollment for the university, and that That follows the four quarters of 2021, which was a rough year, which we talked about. So that's very encouraging to see in Q1 those results. There's a direct relationship to the following. So first, from a set of organizational adjustments that we made early in January, we reduced the size of the management team that serves UAGC with the intent of being more nimble and agile, increasing the span of control, reducing layers, and so that we would be able to be just very high service and responsive to our client. That was one. In terms of operational changes, we made some, here's an example. We made a change where we combined enrollment advisors and enrollment coaches. Those were two separately defined roles. We merged the roles and that created fewer handoffs in the student experience that they have with us throughout the life cycle of their experience with the university and that's going to improve the experience and improving the experience reduces the students in terms of dropping dropping courses or dropping out entirely. Lastly, Alex, I think the selection of the leaders that I've chosen and have confidence in to work with UAGC, to work for UAGC, they are our single largest client. These are a group of leaders that are well-versed in the areas that they lead and they're really They've increased, I believe, the working relationship in a way that there's less friction and just more about getting things done together. We're very aligned in the objectives that UAGC has as a mission and purpose of a university. Those are a few, Alex.

No, that's very helpful. And related, and you referred to this, for the first time since the UAGC transaction in December of 2021, Ending enrollment was up from December 31st to March 31st. I'm wondering if you could break that down a little bit. Where is the turnaround coming from? Is it continuing students? Is it new student starts? Is it both? And when do you foresee a turn in the year-over-year starts growth, which were negatives? throughout 2021. Comp's got to be getting easier, although it's no easy feat to grow new student starts. And then maybe just a little bit of talk about the overall demand environment.

Sure. Alex, this is Kevin. So where we really saw the strength in this quarter was in the improvement in student retention. So new enrollment was lower than a year ago, first quarter. But we did see a pretty significant improvement in the retention of the students. So lower drops and higher re-entries for students who had previously dropped. And then with respect to your second question, we actually believe that our new enrollment will exceed the prior year's new enrollment in our second quarter. So we're beginning to see improvements in new enrollment in the second quarter. And then with respect to overall demand, you know, we are seeing good demand. And with operational changes that Randy has made and the personnel changes, you know, we are starting to see improvement and seeing our ability to capitalize on that demand.

Great. That's awesome color and good news for sure. In your overview of TutorMe and Fullstack, TutorMe said you now have over 350 partnerships with school districts and universities and other, I assume. How many partnership agreements do you have now at Fullstack, partnerships with universities or other? I'm not talking about employers. I'm talking about universities.

Yeah, the answer to your question, Alex, is 19. 19 universities we have partnerships with in our full-stack academy business. And it's a very important part of our go-to-market with those universities.

Okay, great. And then guidance. You didn't mention it, but I'm assuming we're not giving guidance at this point for the full year or beyond?

That's correct, Alex. At this point in time, as Yeah, we continue to implement the changes that you think it's most prudent to withhold and not provide guidance at this juncture.

Okay, fair enough. Thank you so much for answering my questions, and I will save my other questions for offline.

Thank you, Alex.

Thank you so much. And your next question comes from the line of Terry Vu from Water Tower Research. Your line is open. Please go ahead.

Thank you. Good afternoon, Randy. Good afternoon, Kevin.

Hi, Terry.

Well, Alex went over quite a few points. You've made very significant changes in reaction to the to the challenge in enrollment in terms of organizational, some cost cutting, some changes. I was wondering if UAGC or University of Arizona from their end, have they made changes too or has it been really mostly coming from your end?

Well, I don't want to comment on cost-related items in terms of the leadership of UAGC other than I do believe that Paul Pasarek has a really good handle along with his leadership team on keeping university revenues, net tuition revenues and cost in line, which we have confidence in. In terms of our cost reduction initiatives, it was clear, Terry, in terms of getting started in the first week of December that action needed to be taken swiftly to better align our cost structure with our revenues. And as I commented a few minutes ago, we're going to carefully manage our expenses until the company is once again profitable. I'm pleased with the sequential improvement that both Kevin and I mentioned between 4Q 2021 and this first quarter of a new year, 2022.

The overall contract with UAGC and U of A has some increased guaranteed payment to UAGC or to U of A. And I think this was really kind of agreed to in the context of expecting increase in enrollment from the get-go. And unfortunately, that hasn't happened. Do you think there's any room for adjustments on that front?

Well, Terry, it's nothing that I've addressed directly with either Paul Pasreck or President Robbins. I'm fully aware of the business case that was behind the strategic thinking of the University of Arizona and Zovial leadership at the time that included profit guarantees. Unfortunately, the first year, last calendar year, a bit of a rough start for both organizations. As I commented on April 15th, I look at it as a transition year. The enrollment growth in a transition year is the best case example, and it was a tough year for all four quarters. What I've been focused on since having the opportunity to lead this company is that we We address the root cause of enrollment decline, the contributing factors. We do that in partnership with the UAGC's leadership team, which we do every day. And I'm pleased with whether it's identifying the initiatives together, executing those initiatives, and ultimately the results that Kevin and I have shared in terms of improvement in the first quarter of this year. So it's very encouraging. And I can assure you we work in partnership with UAGC. They are our largest client. And it's a very good working relationship. And that's what is required when you're facing challenges as the combined leadership teams are facing after a challenging transition year. But I think the way we should look at it, Terry, is 2021 was a transition year for both Zovio and for the University of Arizona Global Campus becoming a new university?

Well, it's encouraging to see that, as you indicated, the trends in new enrollments seem to clearly be improving both in terms of new enrollments and retention. So I think it feels like there must be some kinks have been worked out and some smooth working relationships have been developed. Maybe one last question. Do you have any time horizon for the strategic review, or is it completely open, or should we expect, you know, three months, six months, nine months, and start there?

I think that time frame is, you laid out a good time frame. Over the next three to six months, it'll become very clear what decisions we make, and we will share them as we make them in terms of one or more divestitures as a part of our commitment to our shareholders to increase the value of the company. We've got many, many shareholders that have invested in Zovio over the years where our market cap today is very low and I'm committed to improving shareholder value and that includes a comprehensive review of the business which we've completed, and I wanted to just be very clear that that does include divestitures where it makes the most sense.

Great. Well, that's it for my question. Thank you very much. Thank you, Terry.

Thank you. This concludes our question and answer session. I will now turn it over to Randy Hendricks for any closing remarks.

Thank you, Operator. I would just like to say to everybody, I thank you for today's callers, for your interest in Xovio and for your participation on the call today. Thank you very much. And now it's back to work.

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