Description

A Brief History

Zovio Inc. (ZVO) is an education technology services company founded in 1999 by private equity owner Warburg Pincus as Bridgepoint Education, Inc. (BPI). Its core asset, for-profit (“FP”) college Ashford University, carved a niche for itself in bachelor degree completion and was among the first colleges to migrate fully online. At its peak, Ashford boasted enrollment of 90K+ students. In the late 2000s - early 2010s, the Obama Department of Education (“DoE”) targeted FP education with tight requirements on reporting, student outcomes, etc. and helped drive massive industry contraction, including the demise of ITT, Corinthian, and other for-profits. During this time, BPI/Ashford gained a reputation as an aggressive marketer, drawing negative press and challenges from regulators, state AGs, and under-pressure accreditors, among other stakeholders. Ashford ultimately survived, yet has seen prolonged enrollment declines to its current level of 36K students.

Company Transformation

To diversify away from FP education and the associated regulatory burden, ZVO announced in March 2018 that it would seek to spin Ashford into a not-for-profit (“NFP”) entity and become an online program manager (“OPM”) to Ashford, providing central operational support (recruitment, financial aid, counseling, tech platforms, etc.) in exchange for a long-term services contract — the educational equivalent to a sale-leaseback. The proposed transaction emulated the ‘self-conversion’ sought by peer Grand Canyon Education (LOPE) beginning in 2016. As an OPM, ZVO could compete with LOPE, 2U (TWOU), and numerous other OPMs (e.g., Academic Partnerships, Wiley’s OPM, Pearson’s OPM, Noodle), many of which, like ZVO, seek to capitalize its “University Partners” with white-boxed degree programs and related services as they attempt to combat budget shortfalls with scalable online programs.

After nearly 2 years of jumping regulatory hurdles at its accreditor, WASC, and the DoE, ZVO announced in August 2020 that it will partner with University of Arizona to form the NFP entity University of Arizona Global Campus (“UAGC”). This resembled the other major, non-LOPE OPM/NFP conversion occurring in recent years when Kaplan University sold to Purdue University to form Purdue Global in 2018.

The abridged terms:

• UAGC provides: $1 and a 15-year services agreement paying ZVO cost + 19.5% revenue share against a minimum UAGC profit

• ZVO provides: $16.5M in working cap, $37.5M in pre-funded profit guarantee, and the outlined services summarized above

To complement its transition to EdTech services, ZVO has built/acquired several adjacent “Growth” businesses:

• Fullstack Academy: operates coding/cybersecurity bootcamps (with locations in Chicago and New York City) and partners with universities to whitebox its curriculum (often for continuing education programs); acquired in April 2019

• TutorMe.com: on-demand tutoring and online courses; acquired in April 2019

• Learn@Forbes: skills development and employment offerings tools facilitated by AI/ML learning paths

Valuation and Catalysts

2021 guidance, which will include a full year of ZVO’s economics under the UAGC contract, calls for $290-310M revenue and “high single digit” EBITDA margins, or what I estimate as ~$22-31M in EBITDA. This implies ZVO is valued on 2021 guidance at 0.5-0.6x revenue and 5.5-7.5x EBITDA.

Near-term: transparency and revaluation

Near-term results and improved disclosure

Management will begin segment reporting for University Partners (UAGC) and its Growth businesses in Q4 2020. This will give investors its first glimpse into the performance of UAGC and the Growth businesses, most notably Fullstack, which has seen service disruption due to COVID-19 at its bootcamps, yet has had tremendous growth in the number of university partners it serves (see discussion of this below).

OPM/EdTech multiple revaluation

Publicly traded OPMs (TWOU and LOPE) currently trade at ~3-5x revenue and ~14x EBITDA. Fullstack was rumored to have $15-20M in revenue at acquisition, implying a relative bargain purchase at 3x revenue versus other recent EdTech acquisitions at 6-7x revenue, on average, and most notably 2U’s own bootcamp acquisition (Trilogy) for nearly 8x revenue.

Segment disclosure will provide clarity for investors to assess ZVO’s differently-valued businesses. I estimate this may resemble the SOTP valuation below, which implies significant upside for ZVO’s stock.

Long-term: operational improvements

Executing on new enrollment growth at UAGC

While the OPM/EdTech transformation may drive significant value for ZVO, ZVO’s value, as well as the values of other FP education stocks, has historically been tied closely to year-over-year new enrollment growth. By this metric, ZVO has particularly struggled to execute, delivering only 2 quarters of year-over-year new enrollment growth in the past ~3 years. The first, in Q2 2018, was guided to as an inflection point for new enrollment growth. Instead, ZVO missed and revised guidance several times; this was the driving force behind ZVO trading off 80%+ through much of 2019 to below $2/share. Since, ZVO has turned over its Ops division, revamped its marketing spend to more effective digital channels, announced $66M in right-sizing initiatives, partially reversed these initiatives to hire admissions counselors amidst a COVID-19 unemployment tailwind, and has also implemented new retention / early intervention tools (“Signalz”). In Q3 2020, ahead of the most recent new enrollment growth inflection target of H1 2021, ZVO reported new enrollment growth. They have guided to continued new enrollment growth going forward. We can look at the SOTP-implied estimate of UAGC’s 2021 EBITDA as a sanity check, as $36-38M is directly within previous guidance, pre-conversion, for Ashford of $30-40M EBITDA, which assumed flat enrollment growth, a not-very-heroic assumption and for the Ashford brand. “This time is different” is hard to underwrite, especially given the recent track record, but I believe the increasingly analytics-driven organization coupled with the UAGC brand will help make these ‘famous last words’ true.

Expansion at Growth businesses

On currently reported metrics, ZVO’s Growth businesses have seen huge growth, albeit from immaterial levels. For example, Fullstack has grown from 1 university partner at acquisition to 12 as of Q3 2020. Management has guided to an expected doubling of 2020 projection by the end of December 2020 and 22-25 partners by the end of 2021. What this means for revenue/profitability is to be foreseen, but segment disclosure will soon give us clarity.

Adding OPM clients

ZVO will likely attempt to add new university partners eventually, but doing so, isn’t key to this thesis. This is particularly true in the near-term, as LOPE, for example, sought its first new OPM partner for 2+ years before signing Valparaiso University in September 2020 — the sales cycles are long, especially if ‘elephant hunting’ for bachelor programs and not smaller graduate programs, and the result is unlikely to yield any single customer larger than, for example, UAGC at 36K students. Still, aggregating smaller schools over time, and doing so profitably, could meaningfully expand (and diversify) ZVO’s customer base.

Cyclical tailwinds

Continued K-shaped recovery and an eventual recession has and will likely continue to facilitate enrollment growth.

Key Risks

• Enrollment misses (detailed discussion above)

• Biden DoE regulatory regime: the Biden DoE, likely weakened by a Republican-controlled Senate, is unlikely to reach the level of hostility towards FP schools (current and former) as did the Obama DoE, and is thus unlikely to find means to claw UAGC back from NFP status; this is particularly true now that ZVO is aligned with the University of Arizona, a powerful, land grant university in a state unlikely to take federal overreach sitting down.

• Rising OPM competition: traditional OPMs, emerging players and structures (e.g., Collegis and ISAs, respectively), and other disruptors (fee-for-service, skinny service bundles, etc.) may cause pricing pressure, but budget shortfalls may create countervailing pressure.

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Catalyst

• Near-term results and improved disclosure 
• OPM/EdTech multiple revaluation
• Executing on new enrollment growth at UAGC
• Expansion at Growth businesses
• Adding OPM clients
• Cyclical tailwinds