University of Arizona Global Campus terminates contract with Zovio
The University of Arizona Global Campus announced Monday that it terminated its contract with Zovio, a beleaguered company that provides education technology services to the online college in exchange for a cut of its tuition revenue.
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.
Ashford U was rebranded into UAGC but the institution kept close ties with Zovio through a 15-year services contract. The deal had UAGC paying Zovio 19.5% of its tuition revenue in exchange for an array of services including enrollment and recruitment.
UAGC had roughly 28,000 students this past spring.
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.
In a Monday letter announcing the change, UAGC Pastorek cast the move as a way to fully control the university’s operations. Pastorek became the university’s president after serving as the interim leader during the Ashford acquisition.
“This new chapter reflects our belief that our mission demands that the governance and control of critical functions, in particular enrollment, marketing, student advising, and financial aid, rest exclusively with UAGC leadership,” Pastorek said. “It is grounded in a conviction that outsourcing such functions is inherently at odds with our aspirations and desired outcomes.”
More challenges lie ahead
UAGC has had a rocky go from the start.
University of Arizona faculty were initially wary of the institution’s decision to purchase a for-profit college. They worried the decision would harm the flagship university’s reputation, pointing to a 2017 lawsuit that accused Zovio and Ashford of misleading students about career and educational outcomes.
Zovio lost that lawsuit in March, a little over a year after UAGC changed hands. San Diego Superior Court Judge Eddie Sturgeon fined Zovio $22.4 million, citing evidence estimating the company had made 1.2 million misleading calls to prospective students from March 2009 to April 2020.
The company has since filed a notice to appeal the lawsuit.
But legal troubles haven’t been the only headwinds. The university has also struggled with enrollment challenges since the acquisition, although those issues predated the sale. Adding another wrinkle, UAGC temporarily lost access to GI Bill benefits earlier this year as it moved its headquarters from California to Arizona.
Moreover, lawmakers and policy advocates have grown increasingly skeptical of online program management companies, or OPMs. These companies help colleges launch and run online programs, often in exchange for a cut of their tuition revenue. In a few instances, they provide services to an entire institution under a revenue-share agreement, as happened in Zovio’s case.
Critics of these arrangements, however, say they encourage OPMs to aggressively recruit students, as company revenue is tied to enrollment. They also argue these deals prioritize the interests of the OPMs’ shareholders over those of institutions’ students.
Stephanie Hall, a senior fellow at The Century Foundation, a left-leaning think tank, described UAGC’s move to take over Zovio’s OPM responsibilities as a “step in the right direction.”
But she said the university still may have to change some of its practices.
“What we don’t want to see, I guess, is public colleges replicating the predatory call center recruitment operations,” Hall said. “Just taking over the OPM service provider isn’t necessarily going far enough.”
UAGC controlled the enrollment strategy under its prior contract with Zovio, and it will continue to train employees brought over from the company as it moves away from the OPM model, according to the university.
Terminating the contract with Zovio will likely relieve some of the pressure on the university from policy advocates who have opposed the university’s relationship with its former owner, said Phil Hill, partner at ed tech consultancy MindWires.
But UAGC will still need to increase enrollment.
“They still need to do a turnaround,” Hill said. “It’s just a cleaner job now because it’s just them taking care of themselves — they no longer have this problematic OPM relationship.”
What’s next for Zovio?
Zovio officials decided to offload the OPM business to UAGC after evaluating how much capital would be needed to make the contract profitable, said Randy Hendricks, Zovio’s CEO, during a call Monday with analysts. He also said the reasoning was based on recent enrollment declines among military-affiliated students, who account for more than one-fourth of the online institution’s headcount.
“We looked at the time and capital it would take to get to a profitable contract,” Hendricks said. “That wasn’t something that we were in a position to do.”
Zovio’s already low stock price plummeted further after the announcement, closing at 67 cents a share. The company is in danger of being delisted from the Nasdaq Stock Market’s Global Select Market if it cannot boost its closing share price above $1 or more for 10 straight business days by the end of October.
Meanwhile, the company has explored selling its businesses.
Earlier this year, it sold its tutoring services subsidiary, TutorMe, in a $55 million cash deal. This sale left the company debt-free and allowed it to satisfy obligations stemming from the California lawsuit, Zovio said in Monday’s announcement.
The judge in the case had ruled that Zovio must pay a $7 million bond to avoid the full $22.4 million fine while it appeals the case.
Now that it has sold its OPM business, Zovio only has one remaining business segment — boot camp subsidiary Fullstack Academy. An analyst on Zovio’s earnings call estimated the value of Fullstack at about $50 million.
The company said it will continue to support the growth of that business while exploring a sale. Zovio will decide whether to sell or keep Fullstack within the next three months, according to Hendricks.
Hill predicts that Zovio will sell Fullstack and cease to exist.
A decade ago, the company owned two for-profit institutions — Ashford and the University of the Rockies — that brought in almost $1 billion in annual revenue.
“This used to be a company controlling a school that had 90,000 students — it was this juggernaut. Now they’re down to a second-tier, maybe first-tier boot camp making tens of millions of dollars a year,” Hill said. “They’re not going to be able to continue to be publicly traded because this is putting their stock value well below that $1 share limit.”
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