The End of the Road for Zovio as an OPM
This is the endMy only friend, the endOf 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:
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.
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.
There is plenty of coverage, and I recommend these articles for additional reading:
Zovio divests management business to UArizona Global Campus (Phoenix Business Journal)
University of Arizona Global Campus terminates contract with Zovio (Higher Ed Dive)
Two Years After Promising a ‘Transformational’ Partnership, the U. of Arizona and Zovio Part Ways (Chronicle of Higher Education)
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:
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.
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.
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.
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.