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Summary

  • Bridgepoint’s business has changed dramatically since the Accreditation process.
  • Operational Turnaround is dependent on instructional excellence and student persistence.
  • Heavy Insider Selling does not bode well for operational turnaround.

Bridgepoint Education (NYSE:BPI) provides postsecondary education services through its regionally accredited academic institutions, Ashford University and University of the Rockies. Bridgepoint's institutions deliver programs primarily online. The history of Bridgepoint is a high-growth online for-profit university. The company was formed in 2004 and funded by Warburg Pincus (still the majority owner). In February of 2005, BPI acquired the Franciscan University of the Prairies in Clinton, Iowa. High-growth is a slight understatement, given that the University attendance went from 332 students at the beginning of 2005 when the Warburg company acquired the Franciscan school. Year-end attendance peaked at 86,642 in 2011, equating to an average annual growth from 2005 to 2011 of over 120%

Year

Attendance

12/31/2004

332

12/31/2005

1,063

12/31/2006

4,471

12/31/2007

12,623

12/31/2008

31,558

12/31/2009

53,688

12/31/2010

77,892

12/31/2011

86,642

12/31/2012

81,810

12/31/2013

63,624

This company had an amazing run. In terms of growth in revenues and profitability, it was hard to beat. The operating model lacked the brick and mortar cost infrastructure that saddled the former industry leaders (University of Phoenix, APOL), but was able to attract students, delivering both operating leverage on top of an already high-margin business.

As has been well-documented, Bridgepoint came under increased regulatory scrutiny, most notably by the HELP Committee (HELP committee report) and Senator Harkin (Harkin report). Without debating the merits of the accusations levied against Bridgepoint, this scrutiny came at a time when Bridgepoint applying for regional accreditation from the Western Association of Schools and Colleges (WASC). Initially denied accreditation by WASC in 2012, Bridgepoint went through a dramatic change in their operations to receive approval in 2013.

These changes in the operations of Bridgepoint have created a much different company. The past is gone and the current business of Bridgepoint looks much different.

The new Bridgepoint is less marketing driven and much more instruction driven from an overall cost structure perspective. (Percentages in terms of revenue)

 

Instructional

Marketing

Instructional %

Marketing %

2008

$62,822,000

$81,036,000

28.82%

37.17%

2009

$120,089,000

$145,721,000

26.45%

32.10%

2010

$187,399,000

$211,550,000

26.28%

29.67%

2011

$304,272,000

$297,738,000

32.61%

31.91%

2012

$363,064,000

$338,860,000

37.78%

35.26%

2013

$395,841,000

$235,199,000

51.47%

30.59%

Previously, Bridgepoint spent less than 30% of its revenue dollars on Instruction. In 2013, however, that number increased to 51%. Profit margins have declined from approximately 18% at the peak of 2011 to last year's 5.33%.

Year

Net Margins

2010

17.95%

2011

18.54%

2012

13.22%

2013

5.33%

Marketing and Instructional Dollars on Per Student Basis:

 

2008

2009

2010

2011

2012

2013

Student Attendance

31,558

53,688

77,892

86,642

81,810

63,624

Cost Per Instructional

$1,991

$2,237

$2,406

$3,512

$4,438

$6,222

Cost Per Marketing

$2,568

$2,714

$2,716

$3,436

$4,142

$3,697

The numbers are even more dramatic when you look at Instruction and Marketing dollars spent on a per student basis. In 2008, it cost Bridgepoint a little under $2,000 to teach its population on a per student basis. That numbers has increased to over $6,000. Instead of gaining operating leverage with increased student population, Instructional costs now exceed prior years when Bridgepoint had less operating leverage.

Furthermore, marketing dollars per student have also become more expensive. As a brand name grows in recognition, a company might hope to see decreased customer acquisition costs, however, Bridgepoint has need to spend more to acquire each marginal student. This number, it should be noted, decreased on an per student basis in 2013.

The management team at Bridgepoint is actively pushing the idea that 2013 was a "transtional and pivotal" year for Bridgepoint insofar as the accreditation cloud hanging over them was lifted and they will be able to better focus on cost efficient instructional and marketing spend to improve the company's financials going forward. See quotes from May 12, 2014, last conference call:

"As you'll recall, we have said several times that 2013 would be a transitional and pivotal year for Ashford University. The changes the university made in the fourth quarter of 2012 were deliberate and focused restructuring of the institution's practices from new student inquiries through a student's graduation."

This argument rests on the idea that Bridgepoint has improved its instructional capacity and student services to such an extent that its student are more "sticky" and will be less likely to drop out. Increased persistence for students will lower marketing costs and provide better regulatory protection in the future. We are too early in the game to know which way this conclusion is likely to play out. However, in the meantime, I think it is helpful to look at what insiders think of this argument and the expected outcomes.

Below is a list of Insider transactions since the WASC granted Bridgepoint accreditation. I will summarize: Lots of selling, no buying. Not included in the list below is the largest shareholder, Warburg Pincus, who sold 6,878,646 shares during the Tender Offer that occurred last year at a price of $19.50 per share. This amounted to 20% of Warburg's stake in Bridgepoint.

Insider Sales

Position

Date Sold

Volume Sold

Price

Value of Sold Stock

McAuliffe Jane

EVP, Chief Academic Officer

5/9/2014

9,860

$15.52

$152,990

Woodard Ross

SVP, Chief Marketing Officer

5/6/2014

15,195

$15.53

$235,974

Dackerman Charlene

SVP of Human Resources

5/5/2014

1,557

$15.54

$24,195

Sheng Rodney T.

EVP, Chief Admin. Officer

4/21/2014

37,969

$14.92

$566,490

Ashbrook Thomas

SVP, Chief Information Officer

4/14/2014

4,340

$14.72

$63,877

McAuliffe Jane

EVP, Chief Academic Officer

4/14/2014

9,860

$14.95

$147,453

Woodard Ross

SVP, Chief Marketing Officer

4/7/2014

15,195

$14.96

$227,390

Sheng Rodney T.

EVP, Chief Admin. Officer

3/20/2014

37,969

$14.60

$554,169

McAuliffe Jane

EVP, Chief Academic Officer

3/11/2014

500

$19.06

$9,530

McAuliffe Jane

EVP, Chief Academic Officer

3/11/2014

9,360

$18.20

$170,393

Ashbrook Thomas

SVP, Chief Information Officer

3/10/2014

5,632

$18.92

$106,541

Dackerman Charlene

SVP of Human Resources

3/7/2014

3912

$19.62

$76,743

Craig Ryan

Director

3/6/2014

44,894

$19.03

$854,189

Dackerman Charlene

SVP of Human Resources

2/26/2014

1173

$19.11

$22,410

Sheng Rodney T.

EVP, Chief Admin. Officer

2/18/2014

37,969

$18.30

$694,833

Dackerman Charlene

SVP of Human Resources

2/12/2014

1,182

$17.90

$21,158

Ashbrook Thomas

SVP, Chief Information Officer

2/6/2014

4,340

$16.82

$72,999

McAuliffe Jane

EVP, Chief Academic Officer

2/5/2014

9,860

$16.74

$165,056

Woodard Ross

SVP, Chief Marketing Officer

2/4/2014

15,195

$17.00

$258,315

Dackerman Charlene

SVP of Human Resources

2/3/2014

1,557

$17.05

$26,547

Sheng Rodney T.

EVP, Chief Admin. Officer

1/14/2014

37,969

$17.50

$664,458

Ashbrook Thomas

SVP, Chief Information Officer

1/6/2014

4,340

$16.92

$73,433

Woodard Ross

SVP, Chief Marketing Officer

1/6/2014

15,195

$16.92

$257,099

Woodard Ross

SVP, Chief Marketing Officer

12/5/2013

33,147

$18.25

$604,933

Dackerman Charlene

SVP of Human Resources

12/4/2013

6,316

$18.25

$115,267

McAuliffe Jane

EVP, Chief Academic Officer

12/3/2013

15,270

$18.32

$279,746

Sheng Rodney T.

EVP, Chief Admin. Officer

12/2/2013

51,563

$18.38

$947,728

Pope Brandon

VP, Chief Accounting Officer

12/2/2013

2,537

$18.50

$46,935

Sheng Rodney T.

EVP, Chief Admin. Officer

12/2/2013

51,563

$18.38

$947,728

Craig Ryan

Director

11/19/2013

253

$18

$4,554

Craig Ryan

Director

11/14/2013

55,785

$18.02

$1,005,246

Pope Brandon

VP, Chief Accounting Officer

9/11/2013

3,384

$17.38

$58,814

Total

  

544,841

 

$9,457,191

One other factor that I always like to look at is Executive Compensation. 2011 was a great year for Bridgepoint. 2013 was, however, not as great. You can see below that the following relevant metrics fell substantially, however, the executive compensation metric fell very little.

 

2011

2013

Change

Attendance

86,642

63,624

-26.57%

Net Income

$173,000,000

$41,000,000

-76.30%

Profit Margin

17.95%

5.33%

-70.31%

Free Cash Flow

$177,000,000

$42,000,000

-76.27%

Executive Compensation

$6,745,938

$6,285,548

-6.82%

See Summary Compensation Table in 2014 Proxy Statement for Executive Compensation figures. All executive compensation figures are for the same 5 named executive officers. Figures include salary, bonuses, stock awards, options, non-equity incentive plan compensation and all other compensation.

The main draw for investors at this point is the cash balance downside protection with the operational turnaround as the potential upside. The cash balance is significant (although less so when you consider the current liabilities and large off-balance sheet lease obligations), but the 2014's first quarter operations produced a negative cash flow of approximately $25m. An additional $7m was spent (post Q1) to settle an investigation by the Iowa Attorney General regarding past marketing practices of Bridgepoint. In other words, cash is a fleeting resource that may not provide downside protection for much longer. Personally, I think the cash balance remains high (i.e. no dividend or share buyback announcements) to provide continued share price floor for Insiders to sell their stock. Please see above list of Insider transactions for evidence of such opinion.

I followed Bridgepoint closely during the WASC accreditation process as that event provided one of the clearest binary outcomes in my investing memory. However, the current version of Bridgepoint faces operational challenges as it shifts its business model from less reliance on marketing spend to more of a focus on instructional excellence and persistence among its students. This outcome is less binary and more dependent on operational execution. Operational execution is a very tough factor to ballpark and when those in charge of that execution are selling shares, the odds aren't in your favor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Bridgepoint's Turnaround Based On Operational Execution With Heavy Insider Selling