Covista Fiscal First Quarter - COVISTA INC

Financial Performance:

• First-quarter revenue grew 10.7% year-over-year to $512 million.
• Adjusted EBITDA increased 17.1% to $131 million, with margins expanding 140 basis points to 25.6%.
• Adjusted earnings per share (EPS) rose 25.1% to $2.19, driven by revenue growth and a reduced share count.
• Diluted shares outstanding averaged 34.6 million, down 2.5 million from the prior year due to share repurchases.
• Operating cash flow funded new campuses and $84 million in stock buybacks; net leverage remains low at 0.5x.
• Free cash flow over the trailing 12 months reached $355 million (up 11.4%), despite capital expenditures rising to $99 million.
• Interest expense declined to $9.9 million following the repricing of a $510 million term loan B (spread reduced by 25 bps to SOFR + 2%).

Guidance and Future Outlook:

• Fiscal 2027 revenue guidance raised to $2.6 billion – $2.695 billion (approx. 5.5%–7% growth), up from the prior $2.05–$2.9 billion range.
• Fiscal 2027 adjusted EPS guidance raised to $9.00 – $9.20 (approx. 9%–11.5% growth).
• Full-year adjusted EBITDA margin expansion expected to be 0–50 basis points, acknowledging one-time Q1 margin expansion of 140 basis points.
• Walden University returned to a normalized academic calendar in FY27, shifting $18 million of revenue/EBITDA from Q2 to Q3 compared to FY26, causing lower Q2 growth and higher Q3 growth with no full-year net impact.
• Capital expenditures expected to exceed FY26 levels, weighted toward the first half of the year for new capacity and technology.
• Effective tax rate anticipated to be higher in FY27 compared to FY26.

Business Segments and Product Lines:

• Chamberlain: Enrollment grew 1.3% (total) and pre-licensure BSN enrollment grew 13.2% (17th consecutive quarter of growth); revenue up 7.4%. New campuses opened in Cincinnati (Aug) and Salt Lake City (Oct), with Nashville opening Jan. Pre-licensure BSN is the primary growth engine; post-licensure RN-to-BSN facing softness but targeted for pricing improvements.
• Walden: Total enrollment grew 12.8% to record levels, marking 10 consecutive quarters of double-digit growth; revenue up 14.1% to $216.7 million. Undergraduate enrollment grew >20%, and doctoral/undergraduate programs led performance. Strong persistence compounds new enrollment.
• Medical and Veterinary: Enrollment grew 3.5% (combined medical/vet); revenue up 10% to $102.5 million. Adjusted EBITDA surged 27.9% with margins expanding 370 basis points to 26.7%. Enrollment was boosted by students utilizing multiple intake cycles ahead of federal loan program changes, with strong blended results for May and September terms.
• Strategic Initiatives: New AI-powered classroom in full development/testing; employer partnerships expanded with Advocate Health (3 Chicago campuses) and SSM Health; $84M stock repurchase completed with $578M remaining.

Market and Competitive Landscape:

• Healthcare sector accounts for ~75% of U.S. jobs created over the past year, supporting durable demand.
• Health care workforce shortage projected to nearly double by 2040; Covista addresses the "capacity constraint" (faculty/site caps) rather than student interest, noting 93,000 qualified nursing applications were turned away last year.
• Market competition: Covista reports strong visibility and share of voice despite shifts to LLM/AI search; no material impact on acquisition costs or enrollment observed yet.
• Ross Medical and AUC (medical segment) show USMLE Step 1 pass rates comparable to or higher than U.S. MD schools with similar MCAT scores; veterinary segment operates near capacity with strengthening licensing exam indicators.

Risks and Challenges:

• Federal Loan Changes: Some student hesitancy remains regarding financing the full four-year journey, though Covista expects demand to remain durable and is investing in consumer education.
• Academic Calendar Shifts: Walden's calendar normalization creates significant quarter-to-quarter volatility (lower Q2, higher Q3) impacting year-over-year comparisons.
• Campus Expansion Costs: New campus openings (e.g., Chamberlain's Nashville) incur upfront costs that will weigh on near-term margins before revenue realization.
• Competition: Increasingly challenging comparable cycles for growth rates, particularly for Walden, requiring continuous execution.
• Regulatory/Policy: State and accreditor caps on clinical sites and faculty limits constrain industry-wide capacity.

Management Commentary and Tone:

• Tone is highly confident and optimistic regarding the "Purpose at Scale" strategy and long-term durability.
• CEO Steve Beard emphasized that the business is "running ahead" of guidance, driven by durable demand and capital discipline (reinvesting cash only if it earns > cost of capital).
• CFO Bob Phelan announced his retirement after seven years at the company, expressing pride in the transformation and financial strength.
• Management highlighted a shift toward "operational excellence," "platform extension," "employer integration," and "AI technology" as key moats.
• CEO noted that capital allocation prioritizes reinvestment while maintaining opportunistic shareholder returns.

Analyst Questions and Answers:

• Loan Confusion: Jeff Silber (BMO) asked about loan policy confusion impacting nursing enrollment; management stated no material impact, noting only minor consumer hesitancy regarding financing clarity.
• EPS Beat Drivers: Alex Paris (Barrington) asked if expenses were shifted to Q2; management confirmed no expense shifting, with outperformance driven by revenue overperformance and continued investments.
• Chamberlain Enrollment: Analysts questioned the modest 1.3% total enrollment growth at Chamberlain; management attributed this to lower persistence and post-licensure softness but cited strong pre-licensure growth and confidence in future recovery.
• Margin Cadence: Jack Slevin (Jefferies) asked about margin trajectory; management reiterated 0–50 bps full-year expansion guidance, noting Q2 margin pressure due to Walden's calendar shift and ongoing campus investments.
• AI Search Impact: Jasper Bibb (Truist) inquired about AI search effects on acquisition costs; management reported no headwinds, citing strong brand equity and proactive content optimization for LLMs.
• Working Capital: Analysts asked about receivables; management explained the increase is commensurate with revenue growth and academic session timing.

Other Key Points:

• Covista is America's largest healthcare educator with 90% of students in healthcare fields.
• Employer integration is a key differentiator, providing health systems with a proprietary talent pipeline and reducing Covista's cost of acquisition.
• The company maintains a "prudent" view on future quarters despite the strong Q1, monitoring tax rates, campus ramp-up costs, and market dynamics.
• A new CoVista Health Care Workforce Index was published projecting that investment in talent could close over half the workforce gap by 2041.
• $84 million in stock buybacks were executed at an average price of $127.63, leaving $578 million authorized for future repurchases.