Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

Equity Research Firm

Equity Bottom-Up

<h2>KEY POINTS</h2>
<ul>
<li>Zovio’s 4Q21 results continued to show challenged fundamentals created by the difficult transition to University of Arizona Global Campus (UAGC), which has experienced negative enrollment growth in 2021. New CEO Randy Hendricks has moved quickly to address key issues impacting the company. Internally, Zovio has streamlined management levels and reduced its overall cost structure by $30 million. Externally, given all parties’ shared responsibility for the disappointing enrollment results at UAGC, it appears imperative that the overall servicing contract with UAGC be modified to reflect the current enrollment level.</li>
<li>The current servicing contract with UAGC seems to have implied a positive new enrollment environment. In the current negative enrollment situation, the guaranteed payments to UAGC appear extremely onerous to Zovio, to the point of the service agreement being potentially more of a liability than an asset. We believe that both parties can mutually benefit from a positively structured contract, and that to preserve the viability of the servicing contract, terms should be modified, at least until new enrollments turn positive. We believe discussions in that regard are ongoing.</li>
<li>TutorMe and Fullstack Academy continue to perform well under the Zovio umbrella and grew their revenues by 44% in 2021; management reiterated their guidance of at least 30% annual growth in revenues. We continue to see substantial value creation potential in these two businesses.</li>
<li>The company announced a strategic review of its three main businesses, with the potential of selling one or more. We believe the financial stress caused by the challenging situation at UAGC and by the recent negative judgement against the company prompted this action. At the same time, Zovio also announced that it entered into a $31.5 million credit facility in early April 2022, giving it additional balance sheet flexibility while it works to correct its enrollment challenge.</li>
</ul>
<h2>COMPANY OVERVIEW</h2>
<div></div>
<p>Zovio is an education technology company headquartered in Chandler, Arizona. It provides services to universities to help them manage distance-learning programs. These include program development, marketing, and student monitoring and retention. Its largest university partner is The University of Arizona Global Campus, with about 28,000 students enrolled. Zovio also provides specific services directly to students and in partnership with universities and schools, such as Fullstack Academy (coding and computer security training), and TutorMe (tutoring services).</p>
<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Thierry Wuilloud, who is the writer of this report, covers the Emerging Growth &amp; Special Situations sector for WTR. Mr. Wuilloud and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS

Zovio’s 4Q21 results continued to show challenged fundamentals created by the difficult transition to University of Arizona Global Campus (UAGC), which has experienced negative enrollment growth in 2021. New CEO Randy Hendricks has moved quickly to address key issues impacting the company. Internally, Zovio has streamlined management levels and reduced its overall cost structure by $30 million. Externally, given all parties’ shared responsibility for the disappointing enrollment results at UAGC, it appears imperative that the overall servicing contract with UAGC be modified to reflect the current enrollment level.
The current servicing contract with UAGC seems to have implied a positive new enrollment environment. In the current negative enrollment situation, the guaranteed payments to UAGC appear extremely onerous to Zovio, to the point of the service agreement being potentially more of a liability than an asset. We believe that both parties can mutually benefit from a positively structured contract, and that to preserve the viability of the servicing contract, terms should be modified, at least until new enrollments turn positive. We believe discussions in that regard are ongoing.
TutorMe and Fullstack Academy continue to perform well under the Zovio umbrella and grew their revenues by 44% in 2021; management reiterated their guidance of at least 30% annual growth in revenues. We continue to see substantial value creation potential in these two businesses.
The company announced a strategic review of its three main businesses, with the potential of selling one or more. We believe the financial stress caused by the challenging situation at UAGC and by the recent negative judgement against the company prompted this action. At the same time, Zovio also announced that it entered into a $31.5 million credit facility in early April 2022, giving it additional balance sheet flexibility while it works to correct its enrollment challenge.

COMPANY OVERVIEW

Zovio is an education technology company headquartered in Chandler, Arizona. It provides services to universities to help them manage distance-learning programs. These include program development, marketing, and student monitoring and retention. Its largest university partner is The University of Arizona Global Campus, with about 28,000 students enrolled. Zovio also provides specific services directly to students and in partnership with universities and schools, such as Fullstack Academy (coding and computer security training), and TutorMe (tutoring services).
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Thierry Wuilloud, who is the writer of this report, covers the Emerging Growth &amp; Special Situations sector for WTR. Mr. Wuilloud and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.  The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

4Q21 Results; Management Shows Urgency in Dealing with Current Operating Challenges at UAGC