Bridgepoint Education's (BPI) CEO Andrew Clark on Q2 2016 Results - Earnings Call Transcript

| About: Bridgepoint Education, (BPI)

Bridgepoint Education (NYSE:BPI)

Q2 2016 Earnings Conference Call

August 2, 2017 5:00 p.m. ET

Executives

Anna Davison - VP, Corporate Communications and IR

Andrew Clark - Chief Executive Officer

Kevin Royal - EVP and CFO

Analysts

Corey Greendale - First Analysis

Peter Appert - Piper Jaffray

Alexander Paris - Barrington Research

Operator

Good afternoon and welcome to Bridgepoint Education’s Second Quarter 2016 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Ms. Anna Davison, VP of Corporate Communications and Investor Relations for Bridgepoint Education. Please go ahead.

Anna Davison

Thank you, Emily, and good afternoon. Bridgepoint Education’s second quarter 2016 earnings release was issued earlier today and is posted on the company’s website at www.bridgepointeducation.com. Joining me on the call today are Andrew Clark, Chief Executive Officer; and Kevin Royal, Chief Financial Officer.

Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking, including statements regarding enrollments, student persistence and graduation rates, bad debt, pending legal matters, other financial and related guidance, the impact of our student support efforts, our ability to manage regulatory metrics and commentary regarding 2016 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 measures. In our earnings release, you will find additional disclosures regarding non-GAAP financial 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 Quarterly Report on Form 10-Q for the period ended June 30, 2016, which was filed with the SEC earlier today, as well as our earnings press release posted today, for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website.

At this time, it is my pleasure to introduce Bridgepoint Education’s CEO, Andrew Clark.

Andrew Clark

Thank you, Anna and welcome to Bridgepoint Education’s second quarter 2016 earnings call. After I discuss our second quarter, our CFO, Kevin Royal will review our second quarter financials and key operating metrics. After Kevin’s speak, I will offer my closing comments.

On our last earnings call, I commented on how pleased I was that 2016 was off to a good start. I am happy to report today that our good start has manifested itself into our third straight quarter of year-over-year improvement in new enrollment. Our new enrollment in the second quarter of 2016 exceeded new enrollment in the same period of the prior year by a low double digit.

We are pleased with our financial performance in the second quarter 2016. The new programs added in 2015 and the first quarter of 2016 are primarily graduate programs and have a total enrollment of almost 1142 as of the end of the second quarter. Total enrollment was down at the end of Q2 2016 from the year ago quarter by 4.2% compared to a decline of 15.5% at the end of Q2 2015 when compared to the year ago quarter.

We also continue to make progress in our leadership development grant, our LDG program. The LDG program is designed to leverage the tuition assistance benefits provided by our corporate partners in order to provide a debt free education to their employees.

During the second quarter of 2016, we added five new LDG partners to the program for a total of 77 at the end of Q2. Student enrollment in the program continues to increase and LDG enrollments have approximately doubled from a year ago quarter.

Turning to retention. Ashford’s cohort retention rate is 62.5% for the second quarter of 2016 which is essentially flat with the 52.7% reported for Q2 2015. We have continued to enhance our efforts around student retention. As a reminder, our historical range is 60% to 66% and we continue to place a strong emphasis on increasing student retention through various initiatives that Ashford has taken to assure student preparedness, raise academic quality and improved student outcome.

As we announced on May 20, 2016 after we received a letter from the Iowa department of education indicating that as a result of the planned closure of Ashford University's campus in Clinton, Iowa, the Iowa State Approving Agency, the ISAA would no longer continue to approve Ashford's programs for GI Bill benefits after June 30, 2016. This affects all students using the GI Bill not only students in Iowa. A few weeks later, the Iowa department of education agreed to stay their decision by 90 days or an appellate [ph] decision was made on our application by California. We believe that Ashford continues to qualify under the applicable rules and continue to work with the Iowa department of education and ISAA to approve our students that utilize the GI Bill. We have ongoing dialogue with the Iowa department of education, the ISAA, and the federal VA.

Our number one priority is to our veteran students and ensuring that their educational benefits are not interrupted or unnecessarily put on hold. In that spirit, we made the voluntary decision to temporarily suspend enrolling new VA students until we resolve the uncertainty regarding the VA approval. We believe that the temporary situation related to the enrollment of VA students had a minor impact on Q2 new student enrollment and total enrollment but could have a more significant impact on new enrollment and total enrollment during the second half of 2016.

As you will recall, we embarked upon a turnaround plan in 2015. I wanted to comment on the status of our turnaround plan and reemphasize that our plan has not changed. As a reminder, first, we are focused on stabilizing and restarting enrollment growth; second, improving admissions and marketing efficiency; and third, increasing shareholder value. I will now provide a brief update on each of these initiatives.

First, enrollments. We continue to focus on diversification of our portfolio of program offerings primarily at the graduate degree level and to cross them [ph] in healthcare and technology. And we continue to seek out opportunities that differentiate our schools, like we have done with the Forbes School of Business. Ashford has added several new programs and others are in various stages of development or in the approval process.

Our strategy for new enrollment growth this year was predicated on strategic broadening of new programs throughout 2016. I commented that we would reinvest marketing efficiencies to support the new programs rollout throughout the year. However a slower new program launch combined with our voluntary decision to temporarily suspend new enrollment of students that utilize GI benefits has dampened our expectations for growth in the second half of the year. In addition, we are further investing in our leadership development grant program as we see promising growth from this program and the return on investment of LDG students is strong.

Second, on the cost side, we're focusing on improving admissions and marketing efficiency as well as effectively controlling costs in all areas. We have been evaluating the excellent mix of advertising spend in our various advertising channels. And as mentioned earlier, we will be concentrating less of our spend in the affiliate channel moving forward.

We continue to utilize data analytics to inform our decisions around marketing efficiency. As a result of these ongoing evaluations, we will be reducing our marketing spend in the affiliate channel with a higher percentage of our prospective student engagement coming from other channels that increase the likelihood of enrolling better prepared students who have a higher propensity to persist toward achieving their academic goal. As a result of this refinement of our strategy, we make these lower near term enrollment and revenues that should ultimately provide better retention and higher return on investment on an individual student basis.

Finally, our desire to improve shareholder return. We continually evaluate how best to accomplish this given our capital structure and the industry environment. I want to reiterate that in all of our deliberations our priority is the long term health of the company and we will not do anything to jeopardize our financial position or compromise our ability to invest in future growth. Moving forward we will continue to implement these initiatives as well as to find others. I look forward to sharing the progress of our efforts with you over the next two quarters.

Now I will turn the call over to Kevin Royal, our chief financial officer to review our financial and operating results.

Kevin Royal

Thank you, Andrew. Let me begin by providing some key operating figures for the quarter ended June 30, 2016. For the second quarter of 2016 revenue was $138 million compared with revenue of $147.1 million for the same period in 2015. The decrease is primarily due to lower average weekly enrollment year over year of 6.6% as well as higher scholarships between periods of approximately $800,000.

As of June 30, 2016 total student enrollment was 48,895 compared to 51,049 as of June 30, 2015. For the second quarter of 2016, instructional costs and services were $66.4 million or 48.2% of revenue compared to $71.4 million or 48.6% of revenue for the second quarter of the prior year. The decrease as a percentage of revenue was primarily driven by a decrease in IT and facilities costs, partially offset by any increase in instructor fees. Included in instructional costs and services for the second quarter of 2016 was bad debt expense of $6.4 million or 4.6% of revenue.

Admissions, advisory and marketing expenses for the second quarter of 2016 were $52.5 million or 38.1% of revenue compared to $48.5 million or 33% of revenue for the second quarter of the prior year. The increase as a percentage of revenue was primarily driven by advertising costs and compensation partially offset by lower support, services and facilities costs period over period.

General and administrative expenses for the second quarter of 2016 were $11.7 million or 8.4% of revenue compared to $13.2 million or 9% of revenue for the second quarter of the prior year. The decrease as a percentage of revenue was primarily driven by lower depreciation, compensation as well as lower facilities costs.

Included in our three main expense categories for the second quarter of 2016 is approximately $2 million related to stock based compensation expense. For the second quarter of 2016, we recorded an additional accrual of $2.3 million for the cost of a joint resolution of previously disclosed investigative subpoenas from the attorney general of the state of California and Civil Investigative Demands from the Consumer Financial Protection Bureau. There were no such charges in 2015.

For the second quarter, we also recorded restructuring and impairment charges of $1.7 million comprised of severance charges as well as lease exit costs and other costs. As a result of the above, the non-GAAP operating income was $7.3 million for the second quarter of 2016 compared to non-GAAP operating income of $13.9 million for the same period in 2015.

The non-GAAP net income for the second quarter of 2016 is $5.8 million or earnings of $0.12 per diluted share compared to non-GAAP net income of $8.4 million or earnings of $0.18 per diluted share for the second quarter in the prior year. As noted above, included in fully diluted earnings per share for the second quarter of 2016 were restructuring charges of $1.7 million and a legal accrual of $2.3 million as well as an income tax impact of approximately $1.6 million.

The effective tax rate used to calculate the income tax for the six months ended June 30, 2016 was 41.6% and included a year to date $6.1 million discrete tax benefit associated with the legal accrual.

As of June 30, 2016 the company had combined cash, cash equivalents, restricted cash and investments of $367.3 million which is compared to $374 million as of December 31, 2015. The company used approximately $700,000 cash in operating activities during the six months ended June 30, 2016 and by comparison the company generated $14.8 million in cash from operating activities during the same period in 2015.

Our net accounts receivable was $29.8 million as of June 30, 2016 compared to $24.1 million as of December 31, 2015. Our capital expenditures for the six months ended June 30, 2016 were $900,000 as compared to $2.2 million in the same period last year.

Now I’ll turn the call back over to Andrew for his closing comments.

Andrew Clark

Thank you, Kevin. I concluded our first quarter call by adding that we see 2016 as a pivotal year both for near and long term growth of Bridgepoint. I noted that focusing on a high quality, well differentiated broader product offerings have produced two straight quarters of new enrollment growth and with our recently completed second quarter, we now have three quarters of new enrollment growth when compared to the prior year quarter.

With our recent decision to partially redirect our advertising spend away from the affiliate channel, we may not be able to continue to grow new enrollment in the near term. We do believe that this decision is the best for the organization over the long term. In addition, we continue to focus on disciplined cost management in the current operating environment. It’s my belief that these actions coupled with strong operational excellence will lead to market share gains over the long term.

At this time, I’ll ask our operator to open the phone lines for your question.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Corey Greendale from First Analysis.

Corey Greendale

So the first question I had is, with the GI Bill, can you give us some sense of how many new veteran students enrolled in Q3 and Q4 of last year so we get a sense of the year-over-year impact?

Andrew Clark

I'd love to quantify that for you, Corey, but there’s some number that I have off the top of my head, we probably have to circle back around. I will have – I have Kevin to look it up while we are talking.

Corey Greendale

Okay, thank you. The fact that you expect more of an impact in Q3, should we read into that your expectation as to timing of getting approval or are you just being cautious?

Andrew Clark

Yes, I think we want to be kind of conservative in our approach these things from a new enrollment and from a revenue standpoint, it doesn't reflect a view on timing necessarily We want to make sure that we're conservative there.

In terms of that of the impact that we would have for veteran student in the second half of the year, I would say that assuming that we didn’t enroll any new veterans in the second half of the year, I'd say the impact would be somewhere around kind of 1500 students or so roughly that that we would normally probably get during that period of time.

Corey Greendale

And as far as continuing students, I can’t remember the story, I think Military Times published an article saying some current students who are vets were wondering whether they should be transferring to other institutions. Have you seen a meaningful impact on retention of current veteran students?

Andrew Clark

Yes. So we did see a little bit of an impact in the second quarter as I mentioned to our total enrollment. But it was not a lot. We really worked hard to make sure that we're communicating as transparently and consistently as possible with our veteran students. And we're certainly -- that will continue throughout the remainder of the year. So I think in those communications, those discussions our student advisors have had we've been able to convey to them what the current status is and their ability to continue to pursue their education under the current status. And hopefully we’re able to resolve it sometime soon and then we'll be able to communicate that as well.

Corey Greendale

And then I hear you Andrew between that and the decision to move away from the affiliate channel, it sounds like you expect new students to be down at least for Q3 and maybe for the rest of the year. Can you give us any sense of order of magnitude just to kind of level set expectation?

Andrew Clark

Well, we don't provide guidance as you know Corey. So it’s kind of hard for me to give you a sense of magnitude. I will say that we are making a meaningful shift in the affiliate channel. And we're doing that gradually between the beginning of the third quarter and the end of the year. So it’s not like we're going to make a dramatic shift quickly at the very beginning of a quarter or something, it will be a gradual decline in the affiliate channel until we reach kind of an optimal level by the end of the year.

Corey Greendale

So does that -- and I understand you can't give guidance but as far as kind of like cadence, does that suggest that new students may be more negative year over year in Q4 than in Q3 and then kind of remain at that level until that you anniversary that starting in the second half of next year?

Andrew Clark

Yes, I think that’s a correct assumption.

Corey Greendale

And then a couple of quick ones on the cost side. I just want to verify – was there any benefit from – cost benefit from closing the Iowa campus in Q2, or do you really start to see that in Q3?

Kevin Royal

Yeah, we will see that in Q3. Actually we did take I think the last of the restructuring charges associated with that closure and you probably saw that in our announcement. It's about $1.7 million related to severances, we exited the campus as well as about $300,000 associated with equipment that we essentially wrote off as a result of closing the campus at the end of the second quarter.

Corey Greendale

And then on G&A, it was the dollars were down relative to a quarterly level recently, is that – I know you ran through some of the points that drove that but is that sustainable?

Kevin Royal

Yes, definitely sustainable. Yes, there wasn’t any one-time item, it’s basically the run rate for the quarter and of course we're always looking to become more efficient and reduce that further.

Corey Greendale

And then just one last one, and I'll turn over. On the admissions, advisory and marketing, as you shift away from the affiliate channel, does that actually essentially reduce admissions, advisory and marketing spend relative to the run rate or increase or – stay kind of at the current level?

Andrew Clark

It should reduce the overall run rate of that line item, Corey, again gradually over the two remaining quarters.

Operator

[Operator Instructions] Your next question comes from the line of Peter Appert from Piper Jaffray.

Peter Appert

Thanks. So Andrew, I was hoping you might give us a little further thought in terms of your process around changes in the marketing approach and to move away from the affiliate channel. I'm asking this in the context of the experience of some of your peer companies that have done similar things in the last couple of years with pretty significant negative implications in terms of the stark trends. So give us the tradeoffs in terms of the puts and takes of why you are making this move?

Andrew Clark

Yes, Peter, so I think again we utilize our data analytics to really determine kind of where our best investments are made. And as I mentioned I've seen a trend for some time now where the affiliate channel, that investment -- that return on that investment is becoming less and less and we find that students, not all students but some students in that channel aren’t able to be as successful, they're not quite as prepared and their propensity to retain and ultimately achieve their educational goal is somewhat less than some of the other channels. So it is a trade off. You're correct. I think one note of caution I would make is that some of our peers have approached this differently. I think some have made a drastic move where they just eliminated their channel entirely. That's not what we're talking about. We're talking about a gradual transition throughout the second half of the year that will take us to an optimal level by the end of the year.

Peter Appert

Do you have a thought in terms of what portion of your new students are going to come from the various channels at this point or target rather?

Andrew Clark

We have some sense of it. I would tell you today that about -- approximately 50% of new students come from channels other than our affiliate channel. And we certainly would like to see that percentage grow and we believe again based on the data analytics work that we've done that the number of new students coming from other channels can grow as we reduce our spend in the affiliate channel and as we reinvest some of that money from the affiliate channel in other channels.

Peter Appert

And in the corporate partnership channel, with leadership grant channel, I assume, would be a significant portion of -- where the growth might come from.

Andrew Clark

Yes, that channel as I noted continues to be a very successful one for us and we are continuing to make investments in that channel. We will for the remainder of the year.

Peter Appert

And I'm not sure if you've talked about this before but can you speak to the relative profitability of the leadership grant offering given the price discounting you have to undertake?

Andrew Clark

Yeah, I mean I would say at a high level, it’s similar to – or competitive with a lot of our other channels that are not affiliate channels because of the high retention rate of that group of students. And there's also a lower cost obviously of acquisition as well in that channel.

Peter Appert

Can you give us an update on the discussions with the CFPB and the California Attorney General, I mean you've made these accruals now for two quarters. Should we anticipate a final settlement sometime soon?

Andrew Clark

Yeah, I don't have any comment on our discussions other than to say we are continuing to have discussions with both of them.

Peter Appert

And then can you remind me -- I think you've given this number before, the annual or the quarterly cost benefit from exiting Iowa?

Kevin Royal

Yeah, the cost benefit is -- I don't have it right in front of me but if my memory serves me it should be about $3 million per quarter savings.

Peter Appert

And then last thing, Andrew, you sort of say the same thing every quarter in terms of cash priorities. But I guess I'm wondering, how long you're willing to sit on these substantial cash balances?

Andrew Clark

Well, I mean, I think you will probably agree with me, Peter, that the external environment is particularly challenging for the sector and I think when the environment is that challenging, it is prudent and it's always prudent to make sure that you're a good steward of your capital. So I think we will continue to visit it as we do every quarter from a management and board perspective. But in this external environment I think a note of caution is appropriate.

Operator

Your last question comes from the line of Alex Paris from Barrington Research.

Alexander Paris

This is Alex Paris. You mentioned previously the slower new program launch, the suspension of the VA students and how these have dampened [indiscernible] and I'm curious if you'll be able to share how this will impact your launch schedule for the second half and moving into 2017?

Andrew Clark

So yeah, you're cutting in and out a little bit there. But I think I got the gist of your question. It is slowing down, as I mentioned the launch of our new programs. And it's kind of hard to say how that will play itself out in the third and fourth quarters and into 2017. But we certainly anticipate at some point or another those programs will have an opportunity to go into play and so it's just hard for us to predict at this point kind of the exact timing.

End of Q&A

Operator

This concludes our Q&A session. I will now turn the call over to Andrew Clark for any closing remarks.

Andrew Clark

Thank you, operator. This concludes our presentation today. Appreciate everybody joining our call and your interest in Bridgepoint Education.

Operator

This concludes today's call. You may now disconnect.

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