1Q21 Results: Transition to UAGC More Difficult Than Initially Expected; Continued Positive Momentum at Zovio Growth



KEY POINTS
  • After benefitting from some legacy leads early in the quarter, new student acquisition became more difficult and led to meaningful underperformance in the University Partners segment. For the quarter, the segment reported revenues of $69.7 million versus $75.9 million last year.
  • Zovio Growth continues to perform well with revenues of $7.2 million in the quarter versus $4.0 million last year. The company is not changing its 30% revenue growth guidance for the year for Zovio Growth; management expects this segment will generate an EBITDA loss of about $7 million in 2021 but should become profitable by 2023.
  • The company reduced the annual guidance from $310 million in revenue and mid-single-digit EBITDA to $270 million and break-even to slight negative EBITDA. The company announced a meaningful cost-reduction initiative, which should yield $40 million of annualized savings.
  • The military vertical appears to have been most severely affected by the transition to University of Arizona Global Campus (UAGC). Management plans to invest in brand transitioning in that space.
  • There are some initial positives on the geographic front as the new brand appears to elicit positive responses in Arizona, California, and Texas. Even though UAGC is an online school, we have seen other models where an online school can develop a regional following based on an affiliation with a local physical campus.
  • The company is seeing very preliminary signs of stabilization in new student trends but needs more data and time to confirm the improvement.
  • The University Partners segment signed its first agreement outside of the UAGC relationship; while it is a small, one-year agreement, it could well end up being extended both in time and scope.
  • The balance sheet remains very strong with $56.4 million of cash and no debt (half of the market cap in cash). Zovio trades at a 2021 EV/Revenue multiple of 0.2x versus around 3x for the industry. This reflects the uncertainty in the business model transition from running Ashford University to providing a comprehensive range of services to UAGC under a long-term agreement. Any improved visibility in performance in that business could start moving Zovio’s valuation closer to that of its peers.

COMPANY OVERVIEW

Zovio is an education technology company headquartered in Chandler, Arizona. Zovio provides services to universities to help them manage distance learning programs. These services include program development, marketing, and student monitoring and retention. Its current largest university partner is the University of Arizona Global Campus, with about 30,000 students enrolled. Zovio also provides specific services directly to students or in partnership with universities and schools, such as the FullStack Academy (coding and computer security training), and TutorMe (tutoring services).

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