The End of the Road for Zovio as an OPM

/by

This is the end
My only friend, the end
Of our elaborate plans, the end – James Douglas Morrison

As was widely reported yesterday, we now have a resolution on the end of the Zovio / UAGC relationship, with UAGC buying out Zovio’s single-customer OPM business for a dollar. From Higher Ed Dive:

Zovio and the University of Arizona Global Campus, or UAGC, are terminating their original agreement, and the online college is taking over the company’s business that provides education technology services to the university, according to their announcements. As part of the deal, the university is bringing over some Zovio personnel. The number is not set but it’s “in the hundreds,” according to an emailed statement from Paul Pastorek, UAGC’s president and CEO. 

The move comes less than two years after the University of Arizona purchased the for-profit Ashford University — which enrolled almost 80,000 students a decade ago — from Zovio. At the time of the sale, Zovio was moving away from its checkered past as a for-profit college operator and transitioning to an educational services provider. Meanwhile, the University of Arizona was hoping to expand into the coveted market of online education for working adults. 

Despite this being framed as UAGC taking back control, the situation was driven more by collapsing enrollment and Zovio’s pre-existing problems, as described by the Chronicle.

Meanwhile, Zovio struggled to distance itself from the reputational and legal fallout associated with its time running Ashford University, a for-profit institution. Despite a rebrand, potential investors and university partners remained wary. In February, UAGC’s accreditor recommended the university routinely undertake assessments of any risks resulting from its contractual relationship with Zovio. A month later, a California judge imposed a $22-million fine against the publicly traded company after determining Ashford had misled students, a penalty Zovio promised to appeal. And in May, Zovio announced a strategic review of its operations to “turnaround the company” — an analysis resulting in the $55-million sale of Zovio’s TutorMe business. That review continues.

Compounding the challenges for Zovio? Fewer than expected military-affiliated students recruited or retained in the second quarter of 2022 by the company and UAGC, Randy Hendricks, Zovio’s chief executive, said in an earnings call on Monday. All told, OPM-generated revenues for the first six months of 2022 were down 27 percent relative to the same period in 2021 — a $36-million drop.

“As we looked at the time and capital it would take to get to a profitable contract, that wasn’t something that we were in a position to do,” Hendricks said.

To be blunt, it was obvious that Zovio was facing an existential crisis, but it wasn’t clear until yesterday what the resolution would be, as I told the Chronicle reporter.

Alternatively, the contractual protections that UAGC secured from Zovio in 2020 most likely complicated any efforts by the already reputationally damaged company to find a buyer for itself or its OPM business as Zovio’s finances deteriorated.

“Nobody else wanted this. This was a business that was going away. It was a question of ‘how does it go away?’ So I’m not surprised that no financial buyers or competitor-OPMs were interested in buying it,” Hill said.

There is plenty of coverage, and I recommend these articles for additional reading:

Financial Clarifications

I would like to clarify, or highlight, two financial aspects of the story.

First, the terms of the contract were for UAGC to pay Zovio directly for OPM services in addition to 19.5% of the tuition revenue. The latter was dependent on whether any money was left over, meaning that the primary payments were for services. One of the sources of this misinformation (that Zovio’s revenue from UAGC was just 19.5% of tuition revenue) is the UAGC FAQ published in August 2020 (after the announcement of the deal but before it closed). I pointed this out at the time:

How much will Zovio make each year?

Zovio will receive 19.5% of the annual tuition revenue for the duration of the 15-year partnership in exchange for providingeducation technology services,only after priority payments to Global Campus totaling $225 million.

This is just plain wrong and deliberately misleading. Zovio will receive fees to cover their operating costs as the OPM (or educational services) provider for UA Global Campus. AND they will receive 19.5% of annual tuition revenue.

To their credit (and now that Paul Pastorek is CEO), UAGC internally has presented the financials much more accurately. In the May committee reporting, it was revealed that total Zovio expenses for FY22 were estimated to be $230 million, with $226 million budgeted for FY23. Note that SSA Direct Charges are the direct OPM service payments, TSA Transition Services are part of a 3-year transition deal negotiated in 2020, and Revenue Share is the 19.5% fees. I have added the FY22 and FY23 revenue estimates to this table.

Total Zovio Costs for UAGC, as presented in May 2022
SSA Direct ChargesTSA Transition ServicesRevenue ShareTotal Zovio ExpensesUAGC Tuition Revenue Estimates
FY22 Forecast       $     162,939,122  $     9,667,079 $         57,021,532 $         229,627,733 $     292,418,115 
FY23 Working Budget       $    166,197,904  $     3.551,625  $         56,851,969 $         226,601,498$     291,548,561 

This means that roughly 78% of net tuition revenue has been / would have been paid to Zovio under the OPM arrangement. Taking out the 3-year TSA fees would put the number closer to 75%. For a sanity check, look at Zovio’s reported 2021 University Partners segment revenue (their financial category for OPM services at UAGC) on page 36, showing revenues of $233 million.

While I recommend those four articles above, note that all but the Chronicle got this fact wrong. Think 75% of revenue for Zovio’s OPM payments, not 19.5%.

Despite this fact, the second clarification is that the “sale” of OPM assets was hardly a windfall for Zovio, as reported in HED.

The college is not paying a penalty for terminating the contract. Under the new deal, UAGC paid Zovio $1, took over an eight-year lease in Arizona worth $20 million, hired “substantially all” educational services employees, and released the company from all obligations under the prior contracts, according to filings with the U.S. Securities and Exchange Commission. 

In turn, Zovio paid UAGC $10.5 million and gave UAGC the right to a security deposit worth $2.7 million for taking over the Arizona lease. 

Despite an OPM operation with more than $200 million of annual revenue, Zovio gave away the OPM business to UAGC along with $10.5 million in cash. Of course UAGC picks up all obligations – payroll, leases, indemnification for future liabilities.

Where Does This Leave UAGC?

As I pointed out in both the HED and Chronicle articles, UAGC now has greater flexibility. They employ the former Zovio staff directly and no longer have to figure out complex revenue sharing arrangements. Decisions can be made without negotiations. But, it’s all on UAGC now. There’s no Zovio to kick around, and despite some clever framing, UAGC cares about enrollment growth and reversing the trends in the table I shared on the financials.

UAGC Enrollments and Net Revenue as of March 2022
Average EnrollmentNet RevenueNet Revenue per Enrollment
FY2018             40,268  $     442,071,727  $         10,978 
FY2019             38,440  $     417,566,702  $         10,863 
FY2020             35,621  $     385,543,181  $         10,823 
FY2021 Stub Year             33,778  $     361,748,919  $         10,710 
FY2022 Forecast (actuals through March)             28,643  $     292,418,115  $         10,209 
FY2023 Budget             27,936  $     291,548,561  $         10,436 

Will the end of the Zovio relationship, along with the merger of UAGC into the University of Arizona, improve UAGC’s marketing and recruitment efforts? Will the removal of the revenue sharing arrangement enable UAGC to cut costs and/or to invest resources more effectively? Will student outcomes improve? There is still a lot to watch with UAGC.