Covista Fiscal First Quarter - COVISTA INC

Explicit Guidance:

• Fiscal 2027 Revenue: Raised to $2.6 billion – $2.695 billion (approx. 5.5%–7% YoY growth), up from a prior range of $2.6 billion–$2.9 billion. Midpoint increased by $7.5 million.
• Fiscal 2027 Adjusted EPS: Raised to $9.00 – $9.20 (approx. 9%–11.5% YoY growth), up from a prior range of $9.00–$9.20. Midpoint increased by $0.07.
• Fiscal 2027 Adjusted EBITDA Margin: Expected to expand by 0 to 50 basis points for the full year (down from 140 bps in Q1).
• Fiscal 2027 Tax Rate: Expected to be higher than in Fiscal 2026.
• Fiscal 2027 Capex: Expected to be above Fiscal 2026 levels, with spending weighted heavily toward the first half of the year to fund capacity and technology.
• Share Count: Management maintains a disciplined approach to buybacks; $578 million remains available under the $750 million repurchase authorization.
• Segment Timing: Walden shifts 18 million of revenue/EBITDA from Q2 to Q3 due to a normalized academic calendar (one less week in Q2, one more in Q3), resulting in below-average growth in Q2 and above-average growth in Q3 relative to full-year rates.

Business-Segment Outlook:

• Chamberlain:
  • Enrollment: Targeting double-digit growth for pre-licensure BSN (17th consecutive quarter of growth in Q1, up 13.2%).
  • Geographic Expansion: Cincinnati opened Aug 2027; Salt Lake City active; Nashville opens January 2028; Phoenix physician assistant program (2nd location) at full capacity, 3rd location in development.
  • Strategic Focus: Investing in new campuses ahead of enrollment; expecting startup costs to rise in H2; targeting incremental lift in post-licensure RN-to-BSN and student persistence.
• Walden:
  • Enrollment: Achieved double-digit growth (12.8%) for 10th straight quarter; total enrollment near 59,000 (record high).
  • Mix: Undergraduate enrollment growing >20%; strong persistence compounding growth.
  • Strategy: "Your Career, Our Job" campaign driving undergrad uptake; facing tougher year-over-year comps but viewed as manageable due to execution.
• Medical & Veterinary:
  • Enrollment: Up 3.5% (medical and vet contributing); driven by May/September combined intake (adjusted for federal loan program timing shifts).
  • Pricing/Mix: Revenue per student up due to mix, pricing, and credit hours; class mix improving.
  • Demand: High applicant pool (2+ applicants per USMD seat); long-term demand expected to remain durable despite student hesitancy regarding federal loan changes.
• Technology:
  • AI Classroom: Moving from prototype to full development and testing; designed for personalized learning and faculty support.
  • LLM Search: Investing in content and discoverability to ensure positive sentiment in AI search results; no material negative impact on enrollment anticipated.

Market and Competitive Outlook:

• Healthcare Workforce: Demand for healthcare workers is durable; 75% of U.S. jobs created in the past year were in healthcare.
• Shortage Dynamics: Workforce shortage projected to nearly double by 2040 without intervention; investment in talent attraction/retention could close >50% of the gap by 2041.
• Capacity Constraints: The primary market constraint is capacity, not interest. U.S. nursing and medical schools turned away ~93k and ~30k qualified applicants last year respectively due to faculty/site/space caps, not applicant quality.
• Competitive Moat: Leveraging scale as the largest healthcare educator; strong brand visibility and student outcomes (USMLE/vet licensing pass rates comparable to or higher than USMD peers).

Macro / Industry Outlook:

• Federal Loan Programs: Changes to federal loan programs caused a temporary enrollment pull-forward in May 2027 but are not expected to affect long-term demand; company actively educating consumers on financing options.
• AI Search Landscape: Recognized shift to LLM search as a dynamic changing consumer acquisition; company views current brand strength and student outcomes as a competitive advantage in this new environment.
• Regulatory Environment: Acknowledges state and accreditor caps as binding constraints on industry capacity.

Strategic Initiatives:

• "Purpose at Scale" Strategy: Four core priorities for the next three years:
  1. Operational Excellence: Driving efficiency across the portfolio.
  2. Platform Extension: Adding seats, new campuses (Nashville, Salt Lake, etc.), and new programs.
  3. Employer Integration: Expanding partnerships with health systems (Advocate Health expansion to 3 Chicago campuses; SSM Health partnership scaling); model provides health systems with pipelines and Covista with lower acquisition costs.
  4. AI Technology: Launching AI-powered classroom and LLM content optimization.
• Capital Allocation: Reinvesting operating cash into growth while returning excess cash to shareholders via buybacks; net leverage maintained at 0.5x.
• Leadership Transition: CFO Bob Phelan retiring after 7 years; search for successor underway; transition planned for continuity.

Risks and Headwinds to Outlook:

• Academic Calendar Shift: Walden's normalization creates artificially low Q2 growth and high Q3 growth compared to full-year run rates.
• New Campus Costs: Investments in new campuses (Nashville, etc.) will increase operating expenses (startup costs) before they contribute meaningful enrollment revenue.
• Student Financing Hesitancy: Potential continued hesitancy among students/families regarding federal loan changes until fully understood.
• Tax Rate: Expectation of a higher effective tax rate in FY2027 compared to FY2026.
• Execution Risks: Non-linear growth path for Chamberlain; reliance on persistence rates and post-licensure program mix improvements.
• General Risks: Standard forward-looking statement disclaimers regarding regulatory changes, economic conditions, and operational execution.

Management Tone on the Future:

• Confidence: High confidence in the durability of demand and the operating model; management describes the business as being "on a sustainable growth trajectory."
• Prudence: Explicitly stated they are taking a "prudent view" of the remaining quarters, raising guidance based on Q1 outperformance but acknowledging potential variability.
• Scale Advantage: Emphasizes that scale is an advantage but the focus is on compounding intrinsic value per share through disciplined capital deployment.
• Transition: Positive and confident regarding the CFO succession plan.

Miscellaneous:

• Cash Flow: Free cash flow over trailing 12 months was $355 million (up 11.4%); cash conversion remains strong.
• Debt Management: Repriced $510 million term loan B in Q1; spread reduced 25 bps to SOFR + 2%.
• Enrollment Base: Company now starts the year with 7.5% more students than the prior year, providing a structural revenue base.