Description

Zovio (ZVO) has been a value trap for the last several years, and this year has been no exception with the stock down >80% YTD. However, there appears to be an asymmetric setup in the equity as management has committed to selling their last and best asset by the end of October.  Relative to Zovio’s current share price of $.27/share, we think final liquidation value will range between $.35 to $1.70 per share,  an attractive return on both an absolute and annualized basis.

Background

On August 1st, 2022 Zovio announced that they entered into an agreement with the University of Arizona to divest their Operations Platform Management (OPM) business which had formerly operated under the name Ashford University and was renamed the University of Arizona Global Campus (UAGC).  Importantly Zovio terminated its previous service agreement with the University of Arizona and released Zovio from all remaining obligations under the previous agreement, including releasing them from all indemnification obligations and minimum payment guarantees.

https://d18rn0p25nwr6d.cloudfront.net/CIK-0001305323/78b12667-1991-45fb-9bc9-86d5776142f6.pdf

Getting relief from these minimum payment guarantees was a huge deal for Zovio because the contract could have drained them of their cash and bankrupted the company.  

Previous to divesting the OPM, Zovio also  sold another asset called TutorMe for $55mm which it used to repay a bridge loan and satisfy obligations stemming from a judgment from the Superior Court of California (Zovio is appealing the judgment but all legal costs and potential upside from an appeal were divested along with the OPM to the University of Arizona).  

Zovio’s  is now left with one asset,  Fullstack Academy, and  net liabilities of $20mm. The price Zovio gets for Fullstack will determine the ultimate recovery in the equity.

What Could Fullstack Academy be worth?

Fullstack Academy is a leading Coding Bootcamp. Admittedly Fullstack operates in very competitive markets with many University and branded Bootcamps (App Academy, Codesmith, General Assembly, Hack Reactor, etc.). Fullstack’s primary offering is to white label Bootcamps for university partners and let the universities leverage their brand while Fullstack provides  a turnkey offering. 2U, Inc. owns the largest outsourced bootcamp company called Trilogy which they acquired in 2019.  FullStack also operates programs under the Fullstack name but its primary business revolves around outsourcing.  Fullstack has a decent roster of partners and contracts typically last  between 5-10 years.

Financial Performance at FullStack has been strong with >30% topline growth over the last couple of years and a decent pipeline of new revenue opportunities.  Current revenues are ~$30mm on a run rate basis and EBITDA is projected to go from a $5mm loss this year to breakeven next year. From the August 1st, 2022 Q2 Conference Call CEO Randy Hendricks provided this color:

The big question (really the only question) is what will Zovio get for Fullstack which they have promised to sell by the end of October.  As a baseline, Zovio paid around $38mm in 2019 for Fullstack including earn outs. The business has consistently grown since it was acquired  but clearly we are in a different asset pricing environment.

The one analyst that covers Zovio, Alex Paris from Barrington Research,  estimates Fullstack is worth $50mm:

In the most optimistic case,  we think Zovio can create a competitive process and sell Fullstack for 3x sales or around ~$100mm which doesn’t seem unreasonable since Fullstack is a proven business model in a growing industry. 

The good news for shareholders is Zovio has taken some of the guesswork out of estimating what a recovery will look like for the equity after Fullstack is sold. After the sale of the University of Arizona Global Campus in early August, Zovio released ProForma financials which give a decent picture of how much Zovio needs to generate on Fullstack to provide a recovery for the equity:

https://d18rn0p25nwr6d.cloudfront.net/CIK-0001305323/63fcf04d-17e2-48f2-975f-29bdec10b6ad.pdf

Our understanding is that in a liquidation scenario Zovio would be left with $20mm of net liabilities,  but that liability could grow with time because  Zovio is burning cash.  To be conservative we add $5mm to our final liability number.  Bringing everything together we get the following outcomes:

Conclusion

Zovio’s CEO Randy Hendricks has proven himself with the sale of TutorMe and the divestiture of the University of Arizona Global Campus that he means business and is intent on maximizing shareholder value.  In our “Low” case, Zovio should be able to sell Fullstack for at least what it paid in 2019 – $38mm– which would net investors $0.35/share and a 30% return at today’s prices. We think this is reasonable in light of the fact that Fullstack’s revenues are 2.5x larger than when acquired in 2019 and it is on the verge of profitability. In our “Medium” scenario, Zovio would be worth $0.62, or 130% upside.  In  our “High” scenario, Zovio could be  a home run with >500% upside in 6 months.  We’re hopeful that the company will consummate the sale of Fullstack and give Zovio’s long suffering shareholders something good to go out on. 

Catalyst

-sale of entire company or Fullstack Academy