Zovio Inc (ZVO) Q1 2020 Earnings Conference Call April 29, 2020 5:00 PM ET
Alanna Vitucci - Vice President of Corporate Communications
Andrew Clark - Founder, President & Chief Executive Officer
Kevin Royal - Chief Financial Officer
Conference Call Participants
Alex Paris - Barrington Research
Ladies and gentlemen, thank you for standing by and welcome to the Zovio Q1 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker today Alanna Vitucci, our VP of Corporate Communications. Thank you. Please go ahead.
Thank you, and good afternoon. Zovio's first quarter 2020 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 Andrew Clark, Founder, President and 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 new enrollment growth, student retention, education partnerships and other programs and services, our ability to meet all required conditions and obtain all required approvals to close on the planned separation and conversion of Ashford University and on our current planned timing to do so, our ability to transition to become an education technology services company, our ability to grow through acquisitions, our abilities to successfully integrate and leverage acquired companies, future revenue growth EBITDA, financial and related guidance and commentary regarding fiscal year 2020 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 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, 2019, as well as our quarterly report on Form 10-Q for the quarter ended March 31, 2020, 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 Founder, President and CEO, Andrew Clark.
Thank you, Alanna, and welcome to our first quarter 2020 earnings call. After I discuss some of the highlights for the quarter, Kevin will review our financial results and key operating metrics. After Kevin concludes, I will offer my closing comments.
Turning to our results for the first quarter of 2020. We reported revenue of $97.9 million and net income of $2 million or $0.06 per diluted share. Excluding restructuring and impairment charges, separation and conversion transaction costs, acquisition costs, as well as tax impacts relating to the CARES Act, our non-GAAP net loss for the first quarter of 2020 was $3.2 million or $0.10 per diluted share.
In line with our expectations, new enrollment for the first quarter of 2020 was down as a percentage by high-single-digits when compared to the same quarter prior year. As of March 31, 2020 Ashford's annual cohort retention rate increased 130 basis points over the prior year to reach 60.7%.
It goes without saying the last two months have been wrought with uncertainty as COVID-19 swept the United States. At the onset of the crisis, we moved quickly to ensure the health and safety of our employees, students and university staff. We transitioned to remote working for our corporate staff, and leveraged our strong online learning platforms to ensure our students saw little, if any disruption in their studies.
In addition, we reached out to a number of universities, offering complementary products to enable them to get online quickly as the environment moved to distance learning nearly overnight, which has led to a number of ongoing conversations for future support.
That said, unlike in historic periods of macroeconomic uncertainty, the COVID-19 pandemic has brought the U.S. economy to a near halt. As a result, predicting the behaviors of current and potential students is incredibly difficult from our standpoint. As we look to recalibrate our new enrollment expectations, there are two primary group's, education partnerships and military students that are likely to be most impacted from a new enrollment and retention standpoint.
We saw continued momentum from our Education Partnership programs during the first quarter, with these students representing nearly 35% of total enrollments compared to approximately 28% of total enrollments as of one year ago. However, two of our top 30 partners have suspended their tuition reimbursement program as part of broader cost-cutting actions early in the second quarter.
As of today, the remainder of our top 30 partners, representing approximately 70% of our FTG students have not taken similar actions. Understandably, there is a general unease among these students that their companies may take a similar path or even reduce headcount in the near term given the current environment.
The second group, our military students were initially impacted by a disruption in the approval process for education benefits, which was not automated across all branches. This issue has been addressed by the military and is slowly improving.
This quarter, we experienced a steady flow of new inquiries. However, in January, we discovered an imbalance of inquiries and resources to process them, which was largely driven by disproportionate amounts of advertising spend. Once identified, we increased recruiting and hiring for enrollment advisers and coaches and now have several new cohorts of advisers and coaches starting in the second quarter.
We expect new enrollment in the second quarter of 2020 to decline mid-teens to 20%. This will be driven by a number of factors. First, the impact of COVID-19 on the broader macroeconomic environment and our FTG student behavior; second, the disruption I mentioned related to the approval process for our military students to receive benefits; and lastly, the operational inefficiencies we identified in the first quarter related to processing of new inquiries.
We are experiencing the most significant impact with our Education Partnership students. Due to the scholarships associated with this group, we expect the impact on net revenue to be partially mitigated.
Turning to some of our newer offerings. Fullstack, TutorMe and Learn at Forbes, all continued to perform well. Fullstack continued to add new partnerships in the first quarter with the addition of Cal State East Bay. Further, their institutional pipeline remains solid and we continue to be optimistic as we move through 2020.
TutorMe added 24 new partners in the first quarter, bringing the total to just shy of 90. Also, given the demand, TutorMe recently expanded its marketing efforts directly to the consumer which has been well received.
Learn at Forbes, continues to gain traction as a self-paced skills-based content platform for the consumer. As a reminder, its platform offers more than 800 courses across categories like business, finance, marketing, personal development, leadership, social media, strategy just to name a few.
During the first quarter, we have added another 600 subscribed individuals. bringing the total to 2600. We have also added five new corporate clients bringing the total to 17. We continue to be very encouraged by the traction thus far as it underscores the strength of the offering.
Before I turn the call over to Kevin, let me provide a brief update on the conversion. In January, we announced we had entered into a nonbinding letter of intent with Ashford University and we continue to work towards a June 2020 closing. However, in light of the unprecedented COVID-19 pandemic and uncertain economic outlook and other recent developments impacting our industry and business, our timing for the closing of the conversion could be delayed.
Now, I will turn the call over to Kevin Royal to review our financial and operating results.
Thank you, Andrew. Let me begin by providing some key financial and operating information for the quarter ended March 31, 2020. Revenue for the first quarter of 2020 was $97.9 million compared to revenue of $109.8 million for the same period in the prior year. The decrease is primarily related to a year-over-year decline in average enrollment, partially offset by an increase in tuition rates year-over-year.
For the first quarter of 2020, instructional cost and services were $46.4 million or 47.4% of revenue compared to $51.9 million or 47.3% of revenue for the comparable prior period. The costs as a percentage of revenue were fairly consistent year-over-year, whereas the decrease in expense in absolute dollars was primarily driven by lower labor costs and a decrease in bad debt expense. Net bad debt expense in the first quarter of 2020 and was $3.3 million or 3.4% of revenue compared to $3.6 million or 3.3% of revenue for the comparable prior year period.
We have experienced meaningful improvement in bad debt expense due to the increased FTG student population. Admissions, advisory and marketing expenses for the first quarter of 2020 were $41.7 million or 42.6% of revenue compared to $49.1 million or 44.7% of revenue for the comparable prior period. These costs decreased as a percentage of revenue due to lower labor cost and decreases in advertising spend.
General and administrative expenses for the first quarter of 2020 were $17.5 million or 17.9% of revenue compared to $15.9 million or 14.5% of revenue for the comparable prior period. The increase as a percentage of revenue was primarily driven by the $3.5 million of amortization and stock comp expenses associated with the acquisitions of Fullstack and TutorMe, as well as the $1.5 million of cost relating to the potential separation and conversion.
Restructuring and impairment charges for the first quarter of 2020 were $2.8 million or 2.8% of revenue, compared to $29,000 for the comparable prior period. The charges in the current period relate to severance costs for wages and benefits due to the reorganization in the fourth quarter of 2019 as well as Q1 2020 severance costs.
During the first quarter of 2020, we recognized a $12.9 million income tax benefit due to the CARES Act, which allows for net operating losses to be carried back in certain situations. Before any of these discrete items, our effective tax rate for the first quarter of 2020 was low single-digits and we anticipate this trend to continue for the remainder of 2020.
Net income for the first quarter of 2020 was $2 million or net income of $0.06 per diluted share. This is compared to a net loss of $6.6 million or a net loss of $0.24 per diluted share for the first quarter of the prior year. Our non-GAAP net loss for the first quarter of 2020 was $3.2 million, or a loss of $0.10 per diluted share, compared to the non-GAAP net loss of $3.3 million, or loss of $0.12 per diluted share for the first quarter of the prior year. The non-GAAP net loss for the first quarter of 2020 excludes restructuring and impairment charges of $2.8 million, separation and conversion costs of $1.5 million, and acquisition-related costs of $3.5 million.
As of March 31, 2020, we had combined cash and cash equivalents of $61.3 million, compared to $69.3 million as of December 31, 2019. We used $6.2 million of cash in operating activities during the year-to-date period ended March 31, 2020. By comparison, we used $16.4 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 the increase in earnings as well as improvements in working capital. The net accounts receivable was $46.7 million as of March 31, 2020, compared to $35 million as of December 31, 2019. The increased balance is consistent with our business cycles and the growth of our Full Tuition Grant enrollment in the first quarter of 2020 as well as acquired receivables.
Capital expenditures for the year-to-date period ended March 31, 2020 were $1.2 million as compared to $6.5 million for the same period last year. One last item I wanted to note is that given the COVID-19 pandemic and all of its uncertainty, we believe we cannot reasonably estimate the impact it will have on our operating and financial results. Due to this continued uncertainty, we are withdrawing our earnings guidance provided during our fourth quarter and full year 2019 earnings call on February 20, 2020.
Now, I will turn the call back over to Andrew for his closing comments.
Thank you Kevin. In summary, we are facing unprecedented times driven by the COVID-19 pandemic. As a result, student behaviors are somewhat unpredictable as many face greater uncertainty in their financial and/or employment status. That said, we continue to deliver programs that are robust, flexible and most importantly today online. As we continue to march towards the conversion of Ashford University as well as our transition to an education technology services company, we believe we are positioning the business for long-term value creation.
At this time, I'll ask our operator to open the phone lines for your questions.
Certainly. [Operator Instructions] Your first question comes from the line of Alex Paris from Barrington Research. Your line is open.
Hi, guys. Hope you are doing well and are safe.
Thank you, Alex. We are. Hope you are doing well and you are safe.
Yep. Thank you. Congrats on the first quarter results, which topped expectations and guidance. I guess my first question will be related to the separation and conversion. Certainly, understandable given COVID and its impact on the economy, it makes the timing of closing, a little bit -- puts it in question I guess. Though you said, you're still driving towards a June conversion separation, which is good news. The question I have I guess there is how about the components of conversion and separation? Where do we stand on the letter of credit? And what is the likelihood that you close in June? And if you don't close in June, do you think it's later this summer or next year? It might be difficult to answer, but I thought I'd throw it out there anyway.
Yes. Thanks, Alex. Well first of all as you noted, we're focused on converting in June and that really is the priority. I think out of an abundance of caution with COVID-19 and a variety of people working remotely including outside folks that we rely on at Zovio as well as from an Ashford perspective, we wanted to make sure and give ourselves some room in case for one reason or another this thing were to -- it would take us a little longer to get through to closing on the conversion.
I don't want to really handicap it for you other than to say that our intent our focus is to convert in June. I certainly -- your comment around next year, I certainly hope that that wouldn't be the case. I don't have any reason to believe at this point that that would be the case. We really are just trying to be cautious, because this is a time that none of us has ever experienced before and we want to make sure and give ourselves enough leeway.
Got you. So it sounds like the concerns around the closing date would be more related to logistics than the uncertainty of COVID. What about the due diligence process for the financial partner that's going to help you provide a letter of credit? Where do we stand on that?
So really no change there and no update to make on that front. I think there'll be obviously a lot more to talk about once we get to the place or to the point where we're ready to announce that we are converting again hopefully in June. But I don't really have any new news on that front.
Okay. Thank you. So two key primary areas of focus this year: get Ashford growing again and complete the conversion and separation. So on to Ashford and growing again, it sounded like the new student enrollment was where you thought it would be in the first quarter or where you guided it to be so to speak. And retention again was up. That's many quarters in a row now of improved retention. It looks like it will take a turn south here in the second quarter based on your prepared comments and given COVID and the uncertainty that that brings as well. You gave some good color with regard to educational partnerships and the military. How about a little bit of an update on your typical recruiting lead flow conversion? Any interruption? Any inquiries? How are things going so far in Q2?
Yes. Sure. So lots of things to comment on there. I think I want to start with retention. As you noted, our retention was up again. One of the highest cohort retention rates we've had in the last several years. So we're really happy to see that. I'm really pleased with that retention rate continuing to increase. We do have a view that new enrollments will be negative in the second quarter between 14% and 20%, primarily driven by ed partnerships and the FTG students, which is a place where we've seen significant disruption. As you know those students are heavily scholarship, so the impact to revenue is somewhat mitigated and offset there.
And to your question about kind of how are things looking in terms of inquiries, which relates back to ed partnerships, we really have had no issue in terms of attracting interested students to Ashford University because of the way in which the university differentiates itself from the standpoint of student satisfaction. If you look at any of the online reviews the Net Promoter Score the university all of those are significantly high and actually outperform many of Ashford's competitors.
So we have no challenges, when it comes to inquiries. And in fact, we've seen strong inquiry flow in the second -- early second quarter here. The COVID-19 caused some disruption, especially in the kind of the last three-or-so weeks of the quarter there. But -- and we weren't quite sure what to expect. But I can tell you that from about early April to present time, we've seen really good performance in terms of inquiries.
Really the opportunity for us, as I spoke to Alex, is to make sure that we have the proper number of enrollment advisers and enrollment coaches, staff to handle all of those inquiries, which is a place we fell short in the first quarter. So we've been hiring since March. Really happy to see former enrollment advisers who once worked for us return. We call them our alumni and want to come back.
And then, of course, because of COVID-19 and the tremendous number of people that have been laid off, we've had no lack of interest in people who want to come work for Zovio in the enrollment adviser, enrollment coach role. We're also hiring in the student success area and it's approximately 200-or-so folks.
So that gives me a lot of confidence around the second half of the year. I'm pretty bullish around kind of what I think we can do there, because student interest is still very strong. And now with the right staffing levels in our enrollment service area, we should be in a really good place in the third and fourth quarter.
That's good news. Any -- I guess, the retention speaks for itself. Any uptick in students dropping out or anything like that taking a six-week period off, or anything like that, given the kids are home and things like that? Or anything to note there?
Yes. No, great question. I mean, we did see an uptick. Now, specifically, again, with our ed partnership students and our FTG students we saw an uptick in the number of students that decided to take a break and either temporarily drop or just said, look, we're going to drop. And, hopefully, when things settle down I can come back to school. We had, what we call, a high number of Academic Leave Requests. And these are students. That's a status a student can take and take some temporary time off from school and come back. And we had a really high rate of what we call ALRs, is the acronym for that.
So I was a little concerned but those students returned last week. And so we were watching carefully to see what that would look like. And they returned at a very high rate. In fact, not quite as good as the return rate we saw in January, but very close to that which pleasantly surprised us.
So I am starting to see here in, kind of, early April some stability taking place in the student base, from both a continuing student retention standpoint, as well as from a new enrollment standpoint. I shifted a lot of resources prior to COVID-19 out of our heavily-scholarshipped students into our non-scholarship students.
And that proved to be very fortuitous, because as luck would have it, we had quite a bit of disruption there in the military and ed partnership group. And fortunately, I already shifted a lot of the resources into our non-scholarshipped student channel. And so, we've actually seen that part of new enrollments perform pretty much at our expectations since, kind of, end of March all the way through present day.
So it sounds like the worsening in the year-over-year decline in new student enrollments is, as you said, pretty much related to the scholarship students and the military student disruption there?
Yes. The military is really starting to stabilize. They got the processing fixed. I think I'm feeling fairly good about that population, Alex, as students. I think the one population that is really uncertain and is dependent upon future actions that companies continue to take is the ed partnership group, FTG students in particular.
The tuition benefit students, who get a lot lower scholarship percentage, appear to be continuing to decide to either start school or stay in school. So it's really that more heavily scholarshipped, 50 to 50, FTG student that's where we're seeing kind of erratic, either continuing student or new student behavior. Although, the continuing students have really -- appear to have kind of settled in here at least in the last week or two.
And so you said, two of the top 30 corporate partners suspended tuition reimbursement in Q2. The remainder 28 is 70% of FTG -- of educational partnerships? Did I get that right?
Yes. They comprise approximately 70% of the FTG students, yes.
So the two that suspended, obviously, they're two of your largest because they account for 30%, right? Because they said, they're suspending it that means their students are not enrolling in the next course until that's resolved?
Yeah. There's kind of two components there. One is their employees who haven't pursued college previously are not pursuing it now, because there's not a benefit to use. And so there's no new enrollments coming in for those particular companies. And if you look at our top 30 companies, I would say that we've seen across the board from the largest contributor to the smallest in that top 30 group, a significant decline in new student interest out of those companies. Again just because of COVID-19 and the uncertainty.
The two companies that did suspend benefits that has an impact also on the students their, employees who are students of ours currently, because obviously now they either need to step out and wait until that benefit is reinstated or they need to find an alternative financial solution, so that they could continue to stay and pursue their college degree.
And could it be just that some of these students lost their jobs, so therefore the benefit is not going to be there, I mean for them?
Yeah, I think there's a – so there's the employer aspect and then there's the employee and learner aspect. And I think -- so employers is one part of the puzzle. Like we've talked about there's been two major employers that have suspended benefits. The rest are hanging in there.
I think the employee/learner has another set of uncertainties. They might not even be thinking about the tuition benefit of their employer per se. They're more concerned about are they going to have a job, have they been -- or might they be laid off in the near future? And I think it's more of that uncertainty. Perhaps they're in a situation where they think they'll have a job, but now they've got kids at home. And they're doing daycare or they're helping their kids learn online ironically. And so they're preoccupied with that and quite simply need to step back for a period of time.
So I think there's a variety of things when you look at the individual learner that probably contribute to them dropping out in the near-term. I think that those folks will come back to school. And the question is when will they come back? And that's hard for us to judge.
Good. And then just to be clear you said that 14% to 20% decline in new student enrollment in the second quarter. It sounds like much of that is from the FTG students. So the impact on revenue is going to be potentially significantly less than that, maybe half of that in terms of the impact of those students not coming back because they're only paying -- their employers' paying basically half the tuition.
Yeah. I mean, it's going to be definitely not 50%. There'll be a little bit of an impact, but it's really not too bad so to speak. It's really -- there's a little bit of an impact but not as much maybe as you're thinking. You have to remember that scholarship's annualized, so quarterly basis the impact's going to be smaller than probably what you're thinking as you try and put a model together.
Got you. I guess my last question will be then, it sounds like Fullstack is adding new corporate partners. What you up to five now I think? Confirm that but also all of these students had to be shifted to online I guess, right? As a result of COVID. Any color there? How did that process go? And does that have an impact on recruiting future students into…
Yes. Thank you. I'm glad you brought that up. So Fullstack, they're up to seven university partners. And they have – many of those partnerships they actually do provide the programs remotely. They provide a fully remote online solution there. And so when they had to take their campus, students in New York and in Chicago and put them online they were able to do that pretty quickly and be – and were able to kind of mitigate disruption.
So Fullstack is effectively all online right now. And they just began recruiting for basically a national online program. Now they wouldn't recruit students where their university partners are. So for example, University North Florida they're not going to be recruiting students in the same geography. But right now they don't have a university partner in Texas. So if there was a student in Texas who wanted to take this national online Fullstack program they could. And so they're currently recruiting for that.
We've actually seen early on strong demand for that program, which has been a really nice surprise. And so I'm kind of cautiously optimistic about how that will go. And I think potentially it's – for Fullstack, they've never had a national online offering. And I think this crisis has made them kind of step back and rethink things. And I think they will probably make that another one of the ways in which aspiring engineering students can access their curriculum, again in a way that protects their university partners.
Very well. Thank you, Andrew for the additional color. Appreciate it. I’ll leave it there.
All right, great. Thanks, Alex. We'd like to thank all of today's callers for your interest in Zovio and for your participation on the call today. Thank you.
That concludes today's conference call. You may now disconnect.