Consider the following, While Zovio beat adjusted earnings estimates handily, by losing just $0.05 per share (versus the -$0.15 per share consensus), it still came up short on revenues. So, the beat was mostly down to heavy cost cutting on a still shrinking business.
This notion that the business is still contracting was evident on Zovio’s enrollment numbers:
Total student enrollment at the Company’s academic institution was 36,349 students at September 30, 2019, compared with total student enrollment of 39,584 at September 30, 2018.
This actually showed deterioration versus the prior quarter, since back in Q2 2019, enrollment was down 5.5% year on year, and in Q3 2019, it was down 8.2% year on year.
Considering the mixed message in the earnings report, then, why did the stock go up 40%? There are a couple of linked reasons for that. Let’s go over them.
More Cost Cutting
In its earnings conference call, Zovio announced it was going to take a large slice out of costs (bold emphasis is mine):
Further, over the last several months, we have outlined a restructuring plan that we believe will drive further cost savings in 2020 by approximately $51 million. These actions, which will result in a fourth quarter restructuring charge have of roughly $11 million, were focused on three primary areas. First, implementing new processes to improve our overall operational efficiency at both the Zovio and Ashford, which results in a need for fewer resources internally; second, maintaining a very-discipline, tight control on marketing and general administrative expenses; and third, significantly improving bad debt expense through a combination of enhanced collection efforts and a more favorable mix of Full Tuition Grant students where collection efforts are more consistent.
$51 million is a lot for Zovio. There are only 30.3 million shares outstanding, so a $51 million savings could drive EPS up by $1.68 per share.
Very Good 2020 Guidance
As a result of the above cost cutting, Zovio guided for 2020 as follows:
With that in mind, if you assume Zovio owns Ashford for 2020, assuming flat new enrollment, we expect Zovio to have revenues in the range of $405 million to $420 million with adjusted EBITDA in the range of $30 million to $40 million or adjusted EBITDA margin of approximately 7% to 9%. Adjusted EPS would be expected to be in the range of $0.50 to $0.90. Operating cash flow is expected to be in the range of $28 million to $33 million. We would anticipate normal capital expenditure levels of 2020 and as a result would expect to end 2020 with unrestricted cash on hand in the range of $80 million to $90 million. As a point of reference for 2018, Zovio delivered revenues of $443.4 million and adjusted EBITDA margin of 4.2% and adjusted EPS of $0.47.
Of course, there’s a “flat enrollment” assumption in there. But just consider the following:
- If Zovio hits the midpoint of its adjusted EPS guidance ($0.70), even at $2.20, it would still be trading at just 3.1x 2020 Price/Earnings
- Also at $2.20, Zovio would be trading with a negative EV (Enterprise Value) even though it would be producing $30-40 million in EBITDA.
It’s thus no wonder Zovio traded up strongly on this guidance.
Of course, two doubts remain:
- Will Zovio manage to hit flat enrollment growth? For many quarters, Zovio has struggled with that, though guidance for Q4 2019 implies a bit of improvement (a drop in the mid-single digits versus 8.2% in Q3 2019). A further help comes from the fact that private full tuition grants are now 30% of enrollment. This component is stable to growing, so it can help the overall enrollment as it gains relevance.
- Will Zovio meet any guidance it issues? Zovio has often failed at meeting guidance on enrollment and revenues. The market will likely place a large discount on anything Zovio says. It remains a question mark how large that discount will be. That the stock is only at $2.20 in spite of the guidance already shows the market’s disbelief.
Still, if Zovio does hit its 2020 guidance range, there should be a significant upside from $2.20.
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Disclosure: I am/we are long ZVO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.