Zovio Inc (NASDAQ:ZVO) Q2 2020 Results Earnings Conference Call August 3, 2020 8:00 AM ET

Company Participants

Alanna Vitucci – Vice President of Corporate Communications

Andrew Clark – Founder, President and Chief Executive Officer

Kevin Royal – Chief Financial Officer

Conference Call Participants

Alex Paris – Barrington Research

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Zovio Q2 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 turn your conference over to your speaker today, Alanna Vitucci, our VP of Corporate Communications. Thank you. Please go ahead.

Alanna Vitucci

Thank you, and good afternoon. Zovio’s second 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 plans regarding 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 June 30, 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.

Andrew Clark

Thank you, Alanna, and welcome to our second 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.

We had a solid second quarter of 2020 which meet expectations. But before I provide more details on the quarter, let me quickly touch on the other exciting news we announced this morning. Earlier this morning we announced the signing of a definitive agreement with the University of Arizona to acquire Ashford University. The University of Arizona will create a new nonprofit entity that will bear the name of the University of Arizona Global Campus and will be a fully online University providing access to affordable, high-quality higher education with flexible opportunities to students from diverse backgrounds to achieve their educational and life objectives.

This is a monumental day for Zovio in our transition to a world class education technology services company. Two years ago we announced our intent to return Ashford to its historical nonprofit status the institution held in 2005. Since then, we have been steadfast in the advancement of this process. We are pleased to have unanimous support of Ashford’s Board of Trustees for this transaction. We want to take this opportunity to thank Ashford University’s leadership and its Board of Trustees for their hard work in this endeavor.

We are incredibly excited to partner with the University of Arizona in support of their vision to expand access and provide innovative learning solutions to meet students where they are, while at the same time providing excellent education technology services to Ashford University. University of Arizona is one of the 63 AAU designated universities in the United States, a Carnegie research won designee, and the original land-grant University for the State of Arizona with a mandate and responsibility to educate all classes of students.

The acquisition and re-granting of Ashford University to University of Arizona Global Campus will support the growing number of students turning increasingly to online platforms for higher education. University of Arizona Global Campus will expand on Ashford’s commitment to provide high quality, accessible, affordable, innovative educational programs that meet the diverse needs of individuals pursuing advancement in their lives, professions, and communities.

Under the terms of the agreement, the University of Arizona Global Campus will acquire the institutional assets comprising Ashford University, and will assume certain specific liabilities relating to those assets. We anticipate the transaction to close by the end of the year subject to approval by Ashford’s accrediting by [ph] swaps. We have also been in conversations with the Department of Education, but there be – the determination will come sometime after the close of the transaction.

The way learners access to education has been changing rapidly and was only accelerated by the onset of the COVID-19 pandemic. Now, it is clearer than ever that online classes are a necessity. If we are to continue expanding educational opportunities to underrepresented students and nontraditional students who worked or parents full time. With an ever growing student population educators who seek to expand potential for all students are delivering classes online and embracing now and innovative learning formats.

The University of Arizona Global Campus will be one of the Nation’s most diverse, online universities with approximately 35,000 students and geographic reach across the United States with promise of high-quality virtual learning of access and inclusivity will be combined with the University of Arizona’s heritage as a land-grant institution focused on student’s success. University of Arizona Global Campus will meet students wherever they are in their educational journey and will focus on serving underrepresented and nontraditional students such as veterans or those who are in need of flexible pathways to advance their education or learn new skills.

For Zovio this transaction will allow us to complete our transformation into a world-class education technology services company. Zovio will continue to provide its services under our long-term strategic service agreement to the University of Arizona Global Campus. Under the strategic services agreement Zovio will continue to provide enterprise education technology which uses advanced data analytics to provide personalized and innovative online education that enhances student engagement and improves the likelihood of student success. This, coupled with our deep expertise delivering personalized individual learning experiences for students will further bolster the long-term success of University of Arizona Global Campus.

In addition, our strategic services agreement with the University of Arizona Global Campus will create a strong foundation from which we can pursue diversified growth providing technology and services to other institutions, corporations and learners. Our platform ensures competing life obligations or world events never complicate a person’s path to higher education because they are designed to meet the learner where they are. This is a great step forward for Zovio and University of Arizona Global Campus.

Now turning to our results for the quarter, as I mentioned we delivered solid results. For the second quarter of 2020 we reported revenue of $103.9 million and net income of $5.1 million or $0.16 per diluted share. Excluding non-GAAP items our non-GAAP net income for the second quarter of 2020 was $8 million or $0.24 per diluted share. New enrollment came in well ahead of our expectations for the second quarter of 2020. As a percentage new enrollment was down by 12.6% when compared to the same quarter of the prior year.

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During the quarter our team has remained focused and energized as we experienced a steady flow of new enquiries and welcomed several new cohorts of advisors and coaches. I am incredibly proud of the dedication of our team as the combination of increased staffing to meet rising demand and improved efficiency has enabled us to usher enquiries through the process which supported the better than expected improvement in new enrollment.

As we look to the remainder of the year, we expect new enrollment to return to low single-digit growth in the third quarter of 2020. Further, Ashford’s annual cohort retention continued to improve increasing 80 basis points over the prior year to reach 60.4% as of June 30, 2020.

As discussed last quarter, our education partnership program was challenged as a result of the COVID-19 pandemic during the quarter. For the second quarter these students represented nearly 35% of total enrollments compared to approximately 28% of total enrollments of one year ago.

While we had certain corporate partners to spending and tuition reimbursement programs in line with large scale cost cutting programs as a result of the uncertainties surrounding the pandemic, this trend has stabilized with some partners reinstating their programs. While this remains an important aspect of our new enrollment growth, after many quarters of substantial growth we do anticipate the velocity of new enrollments from this group to moderate in coming quarters.

Our more expanded offering continues to gain traction as well with Fullstack, TutorMe and Learn@Forbes, all gaining momentum. More than a year ago we communicated a strategy that focused on enhancing our ecosystem of software and services to support learners’ education and career aspirations by building on our existing capabilities to meaningfully service higher Ed in institutions, bridge the education to employment gap and/or help enterprises up-skill and educate their most important assets, their people.

Both at TutorMe and Learn@Forbes are all proving that this strategy is not only the right one, but will propel Zovio forward. Fullstack added four new partnerships in the quarter including Caltech, the University of Oklahoma, Virginia Tech, and San José State University [ph], and their institutional pipeline remained solid. As students and experienced professionals continue to look for opportunities to up-skill, we are seeing increased opportunity for our offerings.

For example, Virginia Tech will offer online coding and cyber security boot camps to prepare students and experienced professionals for new jobs in the tech industry. With policy makers embracing technology disruption and defense agencies constantly seeking more cyber security talent, these 26-week boot camps are designed to teach participants technical skills to prepare them for emerging coding and cyber security jobs in Virginia’s workforce.

Both actions have been a wonderful extension to Zovio’s ecosystem and has continued to outperform. In fact, by the end of 2020 we expect Fullstack nearly double the university partners versus our initial expectations. TutorMe has had a strong quarter as well adding many new partnerships and delivering revenue well ahead of our expectations.

As of the end of the second quarter of 2020, TutorMe had more than 115 university partners. Further, the COVID-19 pandemic is driving increased demand as college students are increasingly taking online classes during the historically slower summer months, which has supported explosive growth for online tutoring services.

In the second quarter customer usage and partner usage increased 350% and 850% year-over-year respectively, which accelerated as the global pandemic hit the United States. In addition, following a successful pilot program in 2019, TutorMe is expanding its relationship with McGraw-Hill to offer college students using McGraw-Hill Connect, a free 60-minute tutoring session, exposing TutorMe to more than 4.3 million students on the McGraw-Hill’s Connect platform today.

As online and blended learning continues to be the new normal for many students, the collaboration between McGraw-Hill and TutorMe seek to ensure that students receive the support they need and remain engaged as their learning environment shifts throughout the ongoing COVID-19 pandemic. TutorMe is brining an offering for learners that was important before the pandemic, but is now essential in the virtual environment we are in today.

As a self paced skill-based content platform for the consumer, Learn@Forbes attracted subscribers at a strong pull. At the end of the second quarter we had 2400 active subscribers which increased nearly 30% from the first quarter of 2020. We continued to be very encouraged by the success of this offering and are putting in place a strategy to significantly expand subscriber base for this platform. We remain enthusiastic about the prospects ahead for Learn@Forbes.

Before I turn the call over to Kevin, let me provide a brief update on our go forward strategy. The COVID-19 pandemic has presented significant challenges for everyone, making it clear that increasingly virtual world will be our new normal. Higher education is at the forefront of this trend, but not all institutions are prepared for this accelerated shift. Now more than ever, providing students an online platform for learning that is not only robust, but engaging will prove credible. At the same time the employed and unemployed workforce is seeking opportunities to up-skill.

Zovio could not be better positioned to leverage these trends and execute our long-terms strategy, which is centered on three main pillars. First, deliver education services that meets the diverse and large scale needs of the Universities, employers and learners. Second, capitalize on middle market opportunities through enhanced programs and services and building our capabilities, and third, expand our skills to employment offerings to empower learners to better connect with in-demand jobs.

Today’s announcement marks the next chapter in Zovio’s future as an education technology services company. We believe that we have the right team and offering to address the broader secular trends in higher education, while at the same time expanding our addressable market to meet the needs of learners. We are incredibly excited for the opportunities ahead for Zovio.

Now I will turn the call over to Kevin Royal to review our financial and operating results.

Kevin Royal

Thank you, Andrew. Let me begin by providing some key financial and operating information for the quarter ended June 30, 2020. Revenue for the second quarter of 2020 was $103.9 million compared to revenue of $107.5 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 second quarter of 2020 instructional cost and services were $44.9 million or 43.2% of revenue, compared to $55.1 or 51.3% of revenue for the comparable prior period. The cost as a percentage of revenue decreased year-over-year, and was primarily driven by lower labor costs, and a decrease in bad debt expense. Net bad debt expense in the second quarter of 2020 was $3.1 million or 2.9% of revenue, compared to $3.9 million or 3.6% of revenue for the comparable prior year period.

We have experienced improvement in bad debt expense due to operational efficiencies, as well as an increased FTG student population. Admissions, advisory and marketing expenses for the second quarter of 2020 or $38.8 million or 37.3% of revenue, compared to $44.8 million or 41.7% of revenue for the comparable prior period. These costs decreased as a percentage of revenue, due to lower labor costs and decreases in advertising spend.

General and administrative expenses for the second quarter of 2020 were $14.5 million or 13.9% of revenue, compared to $22.5million or 21% of revenue for the comparable prior period. The decrease as a percentage of revenue was primarily driven by the decrease in acquisition costs from the prior year, as well as lower labor and facilities expense.

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Restructuring and impairment charges for the second quarter of 2020 were $0.5 million or 0.5% of revenue, compared to $5.4 million or 5% of revenue for the comparable prior period. The charges in the second quarter of 2020 relate to severance costs for wages and benefits as well as lease exit costs. During the second quarter of 2020, we recognized $0.3 million of income tax expense. Our effective tax rate for the second quarter of 2020 was low single digits, and we anticipate this trend to continue for the remainder of 2020.

Net income for the second quarter of 2020 was $5.1 million or net income of $0.16 per diluted share. This is compared to a net loss of $17.6 million or net loss of $0.58 per diluted share for the second quarter of the prior year.

Our non-GAAP net income for the second quarter of 2020 was $8 million or income of $0.24 per diluted share compared to the non-GAAP net loss of $4.6 million or loss of $0.15 per diluted share for the second quarter of the prior year. The non-GAAP net income for the second quarter 2020 excludes restructuring and impairment charge of $0.5 million, separation and conversion costs of $2.6 million, and net income relating primarily to contingent consideration revaluation of $0.6 million.

As of June 30, 2020, we had combined cash and cash equivalents of $75.1 million compared to $69.3 million as of December 31, 2019. We had $6.7 million of cash provided by operating activities during the year-to-date period ended June 30, 2020. By comparison, we used $22.1 million of cash in operating activities during the same period in the prior year.

The year-over-year change in the cash provided by operating activities was primarily driven by the increase in earnings, partially offset by changes in working capital. The net accounts receivable were $42.2 million as of June 30, 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 second quarter of 2020. Capital expenditures for the year-to-date period ended June 30, 2020 were $1.6 million, as compared to $17.8 million for the same period last year.

Before I turn the call back over to Andrew for his closing comments, let me briefly provide an overview of the definitive agreement we announced today with the University of Arizona. University of Arizona Global campus a nonprofit entity that will be formed and operated in affiliation with the University of Arizona will purchase the assets of and assume certain specified liabilities of Ashford University. Following the close of the transaction Ashford University will become University of Arizona Global Campus. Under the terms of the asset purchase agreement, University of Arizona Global Campus will pay Zovio cash consideration of $1.

University of Arizona Global Campus will acquire the institutional assets comprising Ashford University, and assume certain specific liabilities relating to those assets. The assets acquired will include working capital in the amount of $16.5 million in cash. Zovio will make a closing payment to University of Arizona Global Campus in the amount of $37.5 million in cash.

At the closing of transaction, which is expected by the end of 2020, Zovio and the University of Arizona Global Campus will enter into the Strategic Services agreement. The Strategic Services agreement with the University of Arizona Global Campus will have an initial term of 15 years with renewals at year 7 and 12, Zovio receive 19.5% of University of Arizona Global Campus annual revenue, as well as reimbursement for direct cost.

In terms of our outlook for the rest of the year, we believe given the expected closing date of the transaction, it is most appropriate to view our results from a consolidated view. As Andrew noted in his comments, we expect new enrollment to return to low single digit growth in the third quarter of 2020. Beyond new enrollment expectations for the third quarter, we will not be providing financial guidance for 2020. For 2021, we anticipate total revenues to be in the range of $290 million to $310 million, and non-GAAP EBITDA margin in the high single digits. Please note this assumes the successful completion of our transaction with the University of Arizona by the end of 2020.

Now, I will turn the call back over to Andrew for his closing comments.

Andrew Clark

Thank you, Kevin. Today is an important day for Zovio, as we take the final steps towards solidifying our position as a world class education technology services company. University of Arizona has a 135-year record of providing student centered, high quality education to all classes of students. Our partnership with this esteemed institution as it establishes University of Arizona Global Campus will be a strong foundation to build on.

The University of Arizona Global campus will be an online learning experience centered on student success. It will be created with the depth of knowledge, experience, committed to excellence and mission delivered by a world class land grant institution empowered by Zovio’s deep expertise, delivering innovative solutions that’s personalized to each student’s individual learning experience.

As students increasingly turn to online platforms for higher education, the University of Arizona Global Campus will be positioned to meet them wherever they are in their educational journey. We have a clear strategy in place to be a world class education technology services company that will leverage our core strengths while applying our technologies and capabilities to priority market needs, including recruitment, retention, and the learner experience.

Our second quarter results reflected strong execution by our team, as well as the strength of our offering, which is robust, flexible, and most importantly, online. Recent trends within higher education have accelerated and continue to support an increasingly optimistic outlook for Zovio and its expanded offerings.

With a rapidly growing university partnership network and high growth industry disruptors including Fullstack, TutorMe and Learn@Forbes, now more than ever, I believe Zovio is well positioned to take advantage of the attractive trends in higher education, and deliver long-term growth and value creation.

At this time, I’ll ask our operator to open the phone lines for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Alex Paris from Barrington Research. Alex, your line is live.

Alex Paris

Good morning, guys. Congratulations on the announcement this morning of the transaction of the University of Arizona and better than expected new student enrollment. I wanted to get a lot of questions, but I’ll start with just a bigger picture sort of question. How did the transaction happen with the University of Arizona? You know, obviously, last year you were looking at a couple of different scenarios, one conversion of spin-off Lee University, or sale of the university to another university. So obviously, we went with the latter here. How did it come about? Why did it come about and why is this a superior outcome? In your words, just add additional color?

Andrew Clark

Yes, sure. Good morning, Alex and thank you. So as you know, we made it public that we had a lot of universities interested in acquiring Ashford, private universities, public institutions, just a variety of schools and this was, of course before the pandemic. And, as we examined those possibilities we continue to be convinced that the conversion was the best way to go. And then we began discussions with University of Arizona in March and it just became increasingly obvious to us, Alex over that, probably the next 30, 45 days.

Just was an outstanding public land grant institution it is the leadership. There is visionary, they’re doing things that quite frankly, a lot of public universities aren’t doing, and to be affiliated with a university like that was so beneficial to Ashford students, to faculty, to the staff, and even to alumni.

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And so, the Ashford Board of Trustees in fact unanimously supported the sale of Ashford to University of Arizona Global Campus. So it just was superior outcome Alex, a fantastic one. We couldn’t be more excited for the institution and for all of its stakeholders. And then it has the added benefit of being a really wonderful outcome for Zovio. From our perspective, to have a chance to partner and work with them, again, such a highly respected public institution will be fantastic in terms of being a foundational partner that we will then begin to, in the future, work with other university partners to provide other services to other universities.

Alex Paris

No, I mean, I agree, don’t get me wrong. I think this is a great tie-up with an outstanding University, the University of Arizona and a great partner. Now this looks a lot like the transaction that Purdue did with Kaplan. Am I correct in that assumption and how is it alike or how is it different?

Andrew Clark

Yes, I mean it is alike in some regards contractually. I would say the big difference is that Ashford University in the conversion was going to remain a freestanding nonprofit WASC accredited entity with the University of Arizona World Campus that continues to be the case. So, they have formed a nonprofit entity, that entity is being named University of Arizona World Campus than and the buying the assets or acquiring the assets of Ashford University.

So when they received the WASC approval, then they will – Ashford name will go away. But it will be a free standing – continue to be a free standing separate accredited institution with the leadership and faculty governance structure that it has as well as a Board of Trustees. So that’s a little different than Purdue. A big difference actually. From a contractual standpoint, I’d say, we approached it similarly, and you’ll recall out that we said, we really thought that the Purdue-Kaplan model was one to emulate. So our revenue share is just 19.5% where we’re reimbursed for direct expenses produce of course was 12.5% of leads. And then the term of the agreement is 15 years. The initial term is seven years.

We are providing the University of Arizona $37.5 million up front as part of this arrangement. They have the ability to terminate after seven years and they would pay if they did terminate a trailing 12-months revenue to us for the termination rights. So there’s similarities there, there’s, I don’t have the full list in front of me, but there’s a lot of similarities to Purdue-Kaplan from a just a contractual standpoint. We tried to emulate that in the ways that it made sense and then we tried to improve on it as well.

Alex Paris

Yes, it looks great. And it also looks fairly similar to the broad outlines of the contract that you would have had had it been just a conversion and separation with Ashford University, it’s the surviving entity. It doesn’t look too different from what we talked about before. 19.5% direct costs reimbursement et cetera.

Andrew Clark

Yes, that’s correct. It’s very similar to the conversion as well, which I think is particularly good. From an accreditor standpoint, the accreditor is not going to be looking at too much that’s different. Really the only piece, and it’s an important piece that’s different is that rather than it being an independent, freestanding institution unto itself, it is what it is an independent freestanding institution that’s renamed and affiliated with the University of Arizona. And I think that can only be viewed as a very positive addition or change to what the accreditor had already approved for the conversion.

Alex Paris

Right, exactly. And then just from a from a prospective student perspective, it’s a heck of a brand to – not that Ashford wasn’t, but University of Arizona is a heck of a brand going forward.

Andrew Clark

Yes, they’re fantastic brand, fantastic institution, great reputation. Again, the leadership, there’s it’s just really impressive, and we couldn’t be more happier. And from just the Zovio perspective, how wonderful it was it that, we’re headquartered now in office in Chandler. So, publicly traded headquartered company right there in the state of Arizona, able to partner up with one of the premier public institutions in Arizona, so that was just kind of frosting on the cake.

Alex Paris

Oh yes. Well, congratulations again on the transaction. It’s been a long two years, but I’m very pleased with the outcome. Now, as for the closing date, you say by year-end, if you got the requisite approvals more quickly, could it be before that or what’s really just focus on your end?

Andrew Clark

Yes, no, I mean it could theoretically be before the year-end. It’s really going to be dependent upon the work that University of Arizona and Ashford do with their creditor and kind of that, that process and how expeditiously that occurs. So, could be earlier, but I think we felt comfortable saying, no later than the end of the year.

Alex Paris

And then to Kevin’s comments with regard to Q3, new student enrollment guidance, no financial guidance for ‘20, but we should consider a consolidate and so, in other words, Zovio is going to look like first half Zovio in the second half and the model will look a little different beginning in 2021 hence the guidance for 2021.

Kevin Royal

Yes, that’s correct.

Alex Paris

Okay, great. And then lastly, I don’t want to be too much of a time hog here, but the new student enrollment outcome in the second quarter was better than expected. I think we get modeled in an 18% decline and that decline was more like 12% if I heard that correctly?

Andrew Clark

Yes 12.6% to be precise, yes.

Alex Paris

And what do you owe that better than expected performance to? And what do you owe the inflection point to growth in their student enrollment in the third quarter?

Andrew Clark

Yes, so we’ve, we were really pleased with our new enrollment performance in the quarter. We had guided to negative 14 to negative 20. You just commented that you had a negative 18. So we really outperformed that. Really what it has to come down to were two main items. First and foremost the demand that we’re seeing is significant. We saw significant demand as well in the first quarter, but unfortunately didn’t have the resources in order to be able to serve that demand.

We took steps as we talked about on our last earnings call with you Alex to begin hiring, we brought in now, at least 200, perhaps over 200 new employees into Zovio. But the thing that I really attribute the outperformance to beyond an increase in demand was just the operational execution of the team. There was a bunch of new work processes put in place, a tremendous, tremendously effective use of data and data analytics and some predictive modeling to make some data driven decisions around our distribution of resources.

And really, our team just performed really tremendously. I can’t say enough about them, especially in a quarter in which you saw a pandemic. And we moved 100% of our workforce off site remotely, so I was just really proud of that. And because the demand of inquiries is strong, and now we see the team doing such a wonderful job on execution, it gives us a lot of confidence about the third quarter and our ability to grow new enrollments.

Alex Paris

Great well, I’ll leave it there. I’ll have a follow-up call with you later. Thank you very much, and congratulations again.

Andrew Clark

Yes, thank you, Alex.

Operator

There are no further questions. I’ll turn the call back over to the presenters for closing comments.

Andrew Clark

We’d like to thank all of today’s callers for your interest in Zovio and for your participation on the call today.

Operator

That concludes today’s conference call. Thank you everyone for joining and have a wonderful day.



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