Zovio Inc.

Good morning and welcome to Zovio's second quarter 2022 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Vicki Shray, Executive Vice President, Chief External Affairs Officer. Please go ahead.

Thank you and good morning. Zovio's second quarter 2022 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, 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, 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 of the day 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 reconciliation of these measures with U.S. GAAP. Please note that these 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, 2021, previously filed with the SEC, as well as our quarterly report on Form 10-Q for the quarter ended June 30, 2022, which will be filed with the SEC in the upcoming days 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 second quarter 2022 earnings call. We appreciate you getting up early to join us, and I'll give you a few brief comments here as we get started. This morning, we announced that we have entered into an agreement with the University of Arizona Global Campus to purchase our OPM business, which we had used to provide the university services. As a reminder, in April, we announced our intent to pursue strategic alternatives aimed at unlocking shareholder value, which included evaluating potential divestitures. At the same time, the team and I undertook a comprehensive business review and have taken several actions to address underperforming areas of our business. We are pleased to have reached this agreement with UAGC and are excited about the university's future. In May, we completed the sale of TutorMe for $55 million and used a portion of those proceeds to repay bridge financing. This allowed us to satisfy obligations stemming from a decision by the Superior Court of California while we appealed the decision. Going forward, Zovio will support the continued growth and expansion of Full Stack Academy while simultaneously exploring strategic alternatives. Now, I'll provide a brief overview of our results for the quarter. In 2Q, we had revenue of $51.4 million and a net loss of $4.7 million or $0.14 per diluted share. Excluding certain items, our non-GAAP net loss for the second quarter of 2022 was $12.3 million or $0.36 per diluted share. Over the past quarter, we've experienced significant challenges in recruiting and retaining military affiliated students, which accounts for approximately 29% of UAGC's total student population. This is due to issues that UAGC has either worked through or is in the process of working through related to military financial assistance. These matters have had a significant impact on our second quarter revenues. Turning to Full Stack Academy, The business continued to perform well in the second quarter. We grew revenues by 35% year over year. Our growth strategy with Fullstack includes adding new university partners to our existing 19, as well as increasing the number of programs offered. In the second quarter, we continued our UpGrad partnership in India. In addition, we launched our second cohort for web development with the New York City Workforce Development Corporation. Further, we had a number of exciting developments during the quarter, which I'll briefly describe. First, Fullstack Academy launched a new part-time Grace Hopper program, which allows female and non-binary students the opportunity to work full-time and take an immersive 28-week part-time software development program. For context, the Grace Hopper program is a coding bootcamp offered exclusively for women and non-binary students. From continuously updating curriculum to personalized mentorship experiences, the program encourages women to advance their technology careers. Additionally, we launched a new full-time software engineering program, creating a pathway for students that do not have previous coding experience. This 19-week program provides a foundation and prepares students to be successful in our immersive boot camps. We continue to partner with companies to help our students secure meaningful jobs after graduation by actively participating in recruiting events and sharing job openings with our students. This is a key growth area for Fullstack and we are pleased with the addition of 67 new employers as partners in Q2. We continue to have high expectations for Fullstack Academy and our outlook remains strong. I will turn the call over to Kevin Royal to review our financial and operating results. Thank you, Randy.

Looking at the results for the quarter, revenue for the second quarter of 2022 was $51.4 million compared to $69.2 million for the same period in the prior year. The decrease is primarily related to lower average enrollment, partially offset by an increase in the Zovio growth segment revenues. TutorMe was sold on May 23, 2022, and as such, the revenues relative to that subsidiary are only included through that date. For the second quarter of 2022, technology and academic services were $17.3 million, or 33.7% of revenue, compared to $18.1 million, or 26.1% of revenue, for the comparable prior year period. Expenses in this category are lower overall on an absolute basis due to lower employee costs and bad debt, partially offset by license fees. However, expenses are higher as a percentage of revenues due to lower revenues year over year. Counseling services and support for the second quarter of 2022 were $17.7 million, or 34.5% of revenue, compared to $23.2 million or 33.5% 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 second quarter of 2022 were $18.3 million or 35.6% of revenue compared to 21.7 million or 31.4% 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 second quarter of 2022 or 7.8 million or 15.3% of revenue compared to 8.4 million or 12.2% 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 professional fees. Legal expenses of 0.9 million were recognized in the second quarter. and represent the amounts related to the previously disclosed judgment in the case brought by the California Attorney General, as well as the cost associated with appealing that judgment. As Randy mentioned, effective yesterday on July 31, 2022, we entered into an agreement with UAGC to sell all of the assets related to servicing that business. In connection with that sale, we paid UAGC $10.5 million which includes the final minimum residual payment owed to them. In addition, UAGC will take over the leased facility in Chandler, Arizona, which has a remaining term of eight years and approximately $20 million in rent payments. In connection with this sale, we had to reevaluate various assets. As a result, we recorded impairment expense for the second quarter of 2022 of $35.9 million within restructuring and impairment expense. This is compared to $2.3 million recorded as restructuring and impairment expense for the prior year period. The net gain on sale transactions during the second quarter of 22 was $45.7 million, which included a gain on the sale of Tudor Me of $51.5 million offset by $5.8 million loss on the sale of the UAGC net assets. There were no such gains or losses during the comparable prior year period. Our net loss for the second quarter of 2022 was $4.7 million, or net loss of $0.14 per diluted share. This is compared to net loss of $4 million, or net loss of $0.12 per diluted share for the second quarter of the prior year. Our non-GAAP net loss for the second quarter of 2022 was $12.3 million or a loss of $0.36 per diluted share compared to the non-GAAP net loss of $0.8 million or a loss of $0.02 per diluted share for the second quarter of the prior year. The non-GAAP net loss for the second quarter of 2022 excludes net gain on sale transactions of $45.7 million, legal expense of $0.9 million, restructuring and impairment charges of $35.9 million, acquisition costs of $0.5 million, and other non-GAAP costs of $0.8 million. As of June 30, 2022, we had unrestricted cash and cash equivalents of $20.8 million as compared to $28.3 million as of December 31, 2021. In addition, we had restricted cash of $6.1 million at June 30, 2022, as compared to $9.3 million at December 31, 2021. During the second quarter, we repaid in full, including accrued interest, $31.5 million three-year term loan with Blue Torch Capital. There was $57.2 million of cash used in operating activities during the year-to-date period into June 30, 2022. By comparison, we used $16.3 million of cash in operating activities during the same period in the prior year. The year-over-year change in the cash used in operating activities was primarily driven by payment for legal settlement as well as the changes in working capital accounts in the periods presented. At this time, I will ask our operator to open the phone lines for your questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster. Your first question comes from Alex Paris with Barrington Research.

Hi, thanks for taking my questions. First off, this is unexpected news. I realize that the company has been involved in a strategic review process since April 15th, and we knew that the UAGC contract could be sold, as well as Fullstack Academy could be sold. I'm wondering, And I think you alluded to it in your prepared comments, Randy. What led to the decision to sell or divest yourselves of the UAGC contract? Obviously, University of Arizona will not be able to vertically integrate, so to speak. But it sounds to me like challenges within the military have had an impact on financial projections. Is that right?

Good morning, Alex. Thanks for joining us. That is definitely part of the decision as we looked at the divestiture of our OPM business. From an overall perspective, as we've discussed on prior earnings calls, we have looked at the capital and time related to get to a profitable contract arrangement with our client, the University of Arizona Global Campus. And yes, with the information we shared this morning related to challenges on military financial assistance that added to our thinking about and projections of capital and time it would take to get to a profitable contract and there just isn't enough capital to do that and so we made a decision in terms of the potential strategic suitors for our OPM business We felt that the best decision was to work collaboratively with our client and do this in an approach that was in the best interest of our employees, our shareholders, company, and also positions, I believe, the university for a really bright future. So all that went into our thinking as we looked at various strategic alternatives for the OPM business. But your... Your framing is correct as we looked at the time and capital it would take to get to a profitable contract that wasn't something that we were in a position to do.

Understood. And given that decision, what are we left with at this point? Full Stack Academy, which is doing well. Revenue is up 35% in the quarter. That subsidiary is still part of the strategic review that could be sold in the future. You have cash of $20.8 million at the end of the year and then expenses. What is cash or what can you say about cash beyond June 30th? What was cash prior to the divestiture of UAGC or what is cash now that the UAGC transaction has been closed?

Yeah, Alex, this is Kevin. So, as we stated, we had just over $20 million at June 30th. During July, we would have grown that slightly. But from that, then, we would have made the payment that we've outlined in the terms of the sale to UAGC of $10.5 million. So cash would decline by roughly that amount, and that's what we would be left with to fund the losses of Fullstack as we move forward and work to grow that business.

So cash would be, as of today, $12 million-ish? That's right. And so from that,

you know, we've got some, what we refer to as stranded liabilities, liabilities associated with running the UAGC business, you know, and that we will need to pay in future months.

Can you quantify that or at least ballpark it? Stranded liabilities?

I don't have those, but as we close out the month, we'll be able to have that.

Okay, so We have $12 or $13 million in cash and the ongoing operations of Fullstack and the value of Fullstack. Are you willing to give a revenue and EBITDA outlook for 2022 for Fullstack given the growth in the second quarter?

We're really not prepared to give... guidance at this point in time, Alex. We've been careful as we go through this time of evaluating our strategic alternatives not to set expectations with respect to performance, given the uncertainty that we face, the challenges that we face.

Okay. So I've estimated on a sum of the parts basis that Fullstack Academy is worth $50 million. That's my estimate. That's not yours. And I don't know if that's accurate or not, but that's been my feeling based on private market valuations. If you were to get $50 million for Fullstack, if you wound up selling it, what would be the tax implication on the gain? I'm assuming it would be a big gain.

So it would be a significant gain. The good news is that we do have tax net operating loss carry forwards that we could use to offset 80% of that gain. So in a situation where, let's say, the entire $50 million ended up being taxable, you would be taxed on roughly $10 million of that gain due to the net operating loss carry forwards that we can utilize to offset, again, 80% of the gain.

All right, and then I guess last one for me at this point. What's the timetable for the completion of the strategic review with regard, I guess the last thing that's in that bushel would be Full Stack Academy. What would be the timeline on making some decision whether you keep it or you sell it?

Alex, it's Randy. We'll come to that decision over the next 90 days. I mean, in our comprehensive strategic review that we've talked about, we have looked at all three businesses. We've now divested of two of the three. We're bullish on the future for Full Stack Academy, but we're also very realistic in terms of how we will operate a public company on a lower cost run rate. And we'll We'll come to a decision on that within the next 90 days, Alex.

Okay. So I guess this is the last thing. In summary, the decision to divest UAGC, the OPM business to UAGC, is driven primarily by... an unexpected sort of downturn in enrollment related to military, some of the challenges that have been talked about in the past, like the VA issue several months ago, that sort of thing. So it sounds like this would be good for University of Arizona, University of Arizona Global Council. It would be good for your employees. I'm assuming they'll take over your employees as a result of this transaction. It gets Zodio out from under potential liabilities associated with prior indemnifications and make whole provisions of the contract and that sort of thing. But it seems like the expectation was that the impact on your P&L would be greater than we were thinking, say, three months ago. And as such, this is probably the best decision for shareholders, although disappointing, probably the best decision for shareholders at this juncture. Any comment or response to that?

I think you summarized it very well, Alex. We certainly have our shareholders top of mind in the strategic decisions we make. It's unfortunate in terms of the time to get to a profitable arrangement, and yes, you've referenced the challenges related to and setbacks around military financial assistance programs. And so, yes, we looked at all of it, and shareholders, employees, our client, and we felt that this is by far the best decision to make for all stakeholders.

All right. Well, thank you for that, and good luck on the balance of the strategic review.

Thank you, Alex.

Again, if you wish to ask a question, please press star 1 on your telephone keypad. Again, that's star 1 to ask a question. This concludes our question and answer session.

I will now turn the call over to Randy Hendrix for any closing remarks.

We'd like to thank all of you for joining us today, your interest in Xovio, your participation, and your continued support and interest in our company. Thank you, everyone.