BRIDGEPOINT EDUCATION
By: Kannu Priya, Ryo Seob (Joseph) Kim
and Rui (Cindy) Deng Mar 27, 2012
Agenda







Introduction
Macroeconomic Review
Industry Overview
Company and Business Overview
Financial Analysis
Financial Projections
Recommendations
Introduction





Bridgepoint Education
Headquartered in San
Diego, California
Provides
postsecondary
education services
Over $400M
in net cash and
investments
Market cap: $1.26B
Introduction

Position in GICS (Global Industry Classification
Standard)
253020
Diversified Consumer Services
25302010
Education Services
Companies providing educational services, either on-line or through
conventional teaching methods. Includes, private universities,
correspondence teaching, providers of educational seminars,
educational materials and technical education. Excludes companies
providing employee education programs classified in the Human
Resources & Employment Services Sub-Industry
Introduction

Screening process
Mkt Cap*
Ratio 1
Ratio 2
Sum
PEG*
P/E*
Fwd P/E*
Implied 1 yr g
Implied 5 yr g
Implied 7-10 yr g
BPI
COCO
APOL
1260000 368440 5360000
1.21
-0.15
0.76
0.28
-0.17
0.22
1.49
-0.32
0.98
0.52
-1.83
8.04
28.55
8.52
7.75
-5.63% 268.39%
15.46% -15.60%
N/A 10.03%
*As of Mar 25, 2012 (Source: Yahoo! Finance)
1.64
12.02
12.58
-4.45%
7.33%
1.76%
Introduction

Stock Market Prospects
 P/E
(ttm) = 8.04*
 It seems to be priced for
zero growth and eventual
bankruptcy.
 But in fact, most analysts
who follow the stock see a
bright future for
Bridgepoint.
*As of Mar 25, 2012 (Source: Yahoo! Finance)
Source: Capital IQ
Jan-01-2012
Nov-01-2011
Sep-01-2011
Jul-01-2011
May-01-2011
Mar-01-2011
Jan-01-2011
Nov-01-2010
Sep-01-2010
Jul-01-2010
May-01-2010
Mar-01-2010
Jan-01-2010
Nov-01-2009
Sep-01-2009
Jul-01-2009
May-01-2009

Mar-01-2009
Macroeconomic Review
Unemployment rate: A leading indicator rather than
a lagging indicator of recovery and GDP growth
Unemployment Rate - United States of America
12
10
8
6
4
2
0
Macroeconomic Review

Economic growth accelerated recently
 The
labor market stabilized: Unemployment rate inched
down to 8.3%
 The employment population ratio remain stable and
showed early sign of improvement

Outlook for 2012
 Unemployment
rate will remain between 7.5% and 9%
but more volatile due to the growing number of
discouraged workers re-entering the labor force.
Macroeconomic Review

Personal income increased $37.4 billion, or 0.3
percent in January 2012.
Personal Income percent change from preceding month
United States of America
0.6
0.5
0.4
0.3
0.2
0.1
0
Sep-11
Oct-11
Nov-11
Dec-11
Source: The Bureau of Economic Analysis
Jan-12
Industry Overview


Education and training service industry is a broad
category that encompasses job-specific certification,
professional training and classes emphasizing selffulfillment, leisure and hobbies.
The US education and training service industry
includes about 45,000 companies and many more
self-employed individuals with combined annual
revenue of more than $30 billion.
Industry Overview

Major services
 Technical
and trade schools (nearly 40% of industry
revenue)
 Business schools and computer training (nearly 20% of
industry revenue)

Characteristics
 Fragmented:
The 50 largest companies represent 30%
of total revenue
 Labor-intensive: Average annual revenue per worker is
around $65,000
Industry Overview

Demand Drivers
 Employment
trend
 Personal income

Profitability Drivers
 Number
of students recruited
 Operating costs
 Instruction
expenses: Faculty salaries, course materials, bad
debt expense, lease and occupancy costs, and educational
equipment
 Administration expenses: Direct marketing, finance and
accounting, admission expenses, and legal fees
Company and Business Overview

Background
 Bridgepoint
Education operates through Ashford
University and University of the Rockies. The company
was founded by Warburg Pincus and current
management with an aim of improving upon the online
degree market's prevailing value proposition.
 The company is a regionally accredited provider of
postsecondary education services. It offers associate's,
bachelor's, master's and doctoral programs in the
disciplines of business, education, psychology, social
sciences, and health sciences.
Company and Business Overview

Background

Bridgepoint Education’s two academic institutions, Ashford University and University
of the Rockies, were named to the 2012 President’s Higher Education Community
Service Honor Roll, the highest federal recognition a college or university can receive
for its commitment to volunteering, service-learning and civic engagement.

Ashford University is a private, for-profit university located in Clinton, Iowa. It is the
largest educational holding of Bridgepoint Education ( 90% revenues from AU, 10%
from Rockies) Although the university is regionally accredited by The Higher Learning
Commission of the North Central Association of Colleges and Schools, it has begun
the process of seeking regional accreditation from the Western Association of
Schools and Colleges.
Company and Business Overview
Financial Highlights
FOR THE YEAR
ENDED DEC. 31
2007
2008
2009
2010
2011
Total enrollment
12,623
31,558
53,688
77,892
82,100
Revenue*
$ 85,709
$ 218,290
$ 454,324 $ 713,233
$ 933,349
Operating income*
$ 3,983
$ 33,420
$ 81,730
$ 216,421
$ 273,747
Net income*
$ 3,287
$ 26,431
$ 47,105
$ 127,580
$ 172,764
Earnings per share
fully-diluted
$ 0.01
$ 0.16
$ 0.74
$ 2.14
$ 3.02
Cash provided by
operations*
$ 10,367
$ 70,748
$ 131,727 $ 189,949
* In thousands
Source: Annual Report
$ 220,808
Company and Business Overview
Revenue and EPS Trend
Source: bloomberg
Company and Business Overview
Current Holdings
Source: bloomberg
Company and Business Overview
College Ranking as per data from US Department of
Education
Rank
School
School
Type
Repayment
Rate
Retention
Rate
Tuition
Score
#1
California University of Pennsylvania
Online
Non-Profit
54%
74%
$11,914
85.49
#2
Western Governors University
Non-Profit
51%
76%
$5,870
80.39
#3
Iowa Central College
Non-Profit
54%
55%
$5,790
79.36
#4
National University
Non-Profit
51%
79%
$11,088
78.97
#5
Abilene Christian University
Non-Profit
62%
71%
$22,760
76.80
#6
Jones International University
For-Profit
49%
89%
$11,880
76.24
#7
Northcentral University
For-Profit
57%
63%
$8,400
76.21
#8
Bellevue University
Non-Profit
55%
38%
$6,150
73.70
#9
Concord Law School
For-Profit
---
75%
$9,984
72.37
# 10
University of the Rockies Online
For-Profit
52%
---
$12,096
71.44
Source: http://www.guidetoonlineschools.com/online-colleges
Company and Business Overview
Rank
School
School Type
Repayment Rate
Retention Rate
Tuition
Score
# 11
Northeastern University
Non-Profit
74%
93%
$36,792
70.39
# 12
City University
Non-Profit
59%
30%
$15,474
67.34
# 13
Colorado Technical University Online Grad
For-Profit
39%
84%
$10,665
66.96
# 14
Liberty University Online
Non-Profit
45%
71%
$18,064
62.41
# 15
Western International University
For-Profit
35%
67%
$10,480
57.96
# 16
Upper Iowa University Online
Non-Profit
50%
61%
$22,350
56.45
# 17
Saint Leo University Online
Non-Profit
39%
69%
$18,150
56.39
# 18
University of Phoenix
For-Profit
44%
52%
$10,120
56.38
# 19
Grand Canyon University
For-Profit
52%
25%
$16,500
56.29
# 20
Academy of Art University Online
For-Profit
44%
63%
$18,050
55.35
Source: http://www.guidetoonlineschools.com/online-colleges
Company and Business Overview
Rank
School
School
Type
Repaym
ent Rate
Retentio
n Rate
# 21
Bryant and Stratton
College Online
For-Profit
23%
73%
$15,120 51.87
# 22
Ashford University
For-Profit
45%
36%
$16,270
# 23
Capella University
For-Profit
40%
29%
$10,980 46.81
# 24
Walden University
For-Profit
41%
29%
$9,480
# 25
Colorado Technical
University - Online
For-Profit
39%
34%
$11,660 44.52
University of Maryland
Non-Profit
University College
37%
37%
$12,288 42.99
# 26
Tuition
Score

49.86
45.98
# 27
ECPI College of
Technology Online
For-Profit
29%
51%
$13,550 41.60
# 28
AT Still University
Non-Profit
33%
---
$24,156 36.27
# 29
American
InterContinental
University
For-Profit
39%
14%
$15,465 36.27
# 30
Argosy University
Online
For-Profit
37%
33%
$19,812 33.10
Source: http://www.guidetoonlineschools.com/online-colleges

Graduation rates for students
who have completed at least
two courses at Ashford was
51% for bachelors students
and 74% for masters students.
Bachelor degree graduate
salaries increased 11.6% y/y
Company and Business Overview
Source: bloomberg

BPI has among the lowest market cap compared to its competitors

Since the company’s P/E is below the industry average, the stock looks cheap
Company and Business Overview

Enrollments



Total student population of 86,642 was ahead of market estimates of
84,570 representing an increase of 11.2% y/y.
Management expects the new student enrollment decline next quarter to
be smaller than Q4 before turning positive in Q2, Q3, and Q4.
Management expects total population growth to be positive in all four
quarters of 2012, in part reflecting strong improvements in retention.
Source: Annual Report 2010
Company and Business Overview

Positives

Low tuition price results in a favorable student proposition and limits private loan
exposure. It is one of the distinctive aspects of the company (~26% less
expensive than comparable publicly traded online schools). Its credit-hour prices
are comparable to those of state-funded institutions and its liberal credit
transfer policy brings the cost even lower.

The low price point benefits Bridgepoint’s students as tuition is mostly covered by
federal financial aid (Title IV), leaving only a minimal need (<1%) for private
loans.

Ashton University brings with it, the heritage and long established traditions,
both of which appeal to potential students. The traditional feel is an important
competitive advantage.

Approximately 77% of Ashford’s students pursue bachelor’s programs, as they
provide the right balance of revenue duration and market size, it brings
advantage for the company
Company and Business Overview

Innovation in productivity- Strengths
 Constellation



Bridgepoint’s proprietary suite of web-based course materials, is replacing
third-party textbooks in many of Ashford University’s courses.
This contributes to student affordability, allows students to save money on
course materials approximately 50% over traditional textbooks while
enhancing the overall learning experience
It is expected to save 80% by the end of 2012
 Rockies




Mobile
Anytime and anywhere access to systems and content
Mobile app for Apple’s iPhone and other mobile devices. With convenient,
anytime and anywhere access to information, this app allows University of the
Rockies students to connect
with courses, post to discussions, follow threads, interact with instructors,
monitor school news and events, and stay on top of enrollment and academic
matters.
Company and Business Overview

New Technology- Strengths

In January, Bridgepoint showcased the external version of Constellation, called Thuze, and
announced partnerships with three major textbook publishers for a beta test of 850
students at 200 public and private universities across the U.S.

While management commented that it is too early for specific feedback from the trial,
management believes that Thuze has been well received by educators and publishers and
management is enthusiastic that the technology has large potential for mobile platforms

The company believes that its focus on innovation and technology is a significant
differentiator in providing a quality education to its students.

The company plans to continue branding efforts in 2012 to build awareness. It has also
decided to shift toward more expensive lead sources, which its own data analysis has
shown results in students that retain at higher rates and ultimately are more profitable in
the long run.
Company and Business Overview

Internal & External Challenges





BPI and its peers have become the focus of increased regulatory scrutiny from the regulators.
The gainful employment regulations effective July 1st 2011, require that, for-profit institutions
comply with certain marketing and incentive compensation policies and adhere to specific levels
of graduate salaries and student debt in order to remain eligible under the Title IV federal
student aid program.
BPI’s has historically focused on growth in enrollments and the revenue, which may distract the
management from ensuring proper reinvestments in academic quality and infrastructure. BPI
currently boasts of the highest gross margin in the sector (72% in 2011). Therefore, its important
for investors to monitor that proper reinvestments are made into the instructional costs (faculty
esp., admissions counselors and content) that reinforce academic quality and productive
academic outcomes.
Also, online schools, such as the ones owned by Bridgepoint, The recently completed Office of
Inspector General (OIG) audit at Ashford University has identified certain Title IV compliance
issues, which seem manageable but may have negative regulatory consequences for the
company.
Management expects 2012 net income to decline 17%-20% y/y (to $138.2-$143.7 million),
due to increased investments in branding, data analytics, and class size reductions, among others.
Company and Business Overview

Title IV and Cohort Default Rates

As of the year-end December 31, 2011, Ashford University derived 86.8% of its revenues and
University of the Rockies derived 85% of its revenues from Title IV funds. Management is
confident that it can continue to manage this metric going forward.
Title IV Programs (the 90/10 rule) - 2011
(of total rev.)
2009
2010
Ashford U
85.50%
85.00%
U of R
84.60%
85.90%


2011
86.60%
85%
Ashford University’s two-year cohort default rate (CDR) for 2009 was 15.3%, and the just
released draft two-year CDR for 2010 was 10.4%. For the University of the Rockies, the twoyear CDR for 2009 was 3.3% and the 2010 draft CDR was 3.9%. The Regulations require less
than 25% CDR for the trigger of the rule against the company
(of Total Rev)
2007
2008
2009
2010
Ashford U
13.30%
13.30%
15.30%
10.40%
U of R
0.00%
2.50%
3%
3.90%
Earlier this week, the company received draft three-year CDRs, which were 20.2% for Ashford
and 3.3% for the University of the Rockies. Management expects these rates to trend lower in
the future as the company continues to invest in attracting and retaining better-performing
students.
Financial Analysis
Assets Breakdown
100.0%
4.4%
0.0%
6.7%
0.0%
21.4%
16.0%
90.0%
80.0%
70.0%
5.9%
4.2%
14.1%
5.4%
4.8%
14.6%
12.4%
7.6%
5.5%
19.5%
14.6%
60.0%
4.9%
22.4%
15.2%
50.0%
19.2%
10.1%
Investments
Property and equipment, net
Deferred income taxes & Others
Accounts receivable, net
40.0%
25.1%
30.0%
20.0%
Other long term assets
Marketable securities
Cash and cash equivalents
43.7%
42.5%
40.0%
21.8%
10.0%
0.0%
2008
2009
2010
2011
- BPI has a strong cash generating business and has built excess amount of cash from last few years’ high growth in its
business. (FCF in 2011 = 186.3 mn, N/I in 2011 = 172.8 mn.)
- Cash and Investment Assets are worth 0.41 bn (66.4% of total assets) with its M. Cap 1.26 bn.
- BPI’s capital expenditure is expected to be stable in future (4% of total Rev.) . Therefore, the increase in Cash and
Investment Assets are expected to continue (but at a lower rate).
Financial Analysis
Business Breakdown
160.0%
140.0%
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
OP Margin
Accretion of preferred dividends
Rev. Growth(%)
Enrollment Growth(%)
-
2007
4.6%
1,856
2008
15.3%
2,006
155%
150%
2009
18.0%
645
108%
70%
2010
30.3%
0
57%
45%
2011
29.3%
0
31%
11%
BPS’s growth has been strong in the past because of the economic downturn and of relatively low admissions
standard.
-> Focused on providing bachelor’s degree to working adults
- The growth in Rev. and Number of Enrollment is expected to be lower mainly due to new regulations.
-> Negative growth in Enrollment in Q3, Q4 in 2011 and the growth is expected to turn positive from Q3 in 2012
- OP margin is expected to be slightly lower in near future due to the increase in Instructional and marketing cost.
- Growth rate of Rev. is expected to be higher than that of Enrollment. (Increase in tuition fee and other sources
of Rev.)
Financial Analysis
2010
2011
17.89%
18.51%
Total Asset Turnover
1.86
1.72
Equity Multiplier
2.06
1.83
68.44%
58.38%
NP Margin
ROE
-
Current P/B ratio is 3.60, but with BPI’s high ROE, high P/B ratio seems justifiable (58.38%/3.6 = 16.21% return).
However, ROE in the future is expected to be slightly lower in near future because of lower NP margin and lower TAT.
<Outlook for 2012>
- 2012 will be a new stage for companies in the education sector because of the new regulations and improvement of
labor market in the states.
- Hard to project figures, especially with the new situation for the company.
- According to the management’s guidance, 10% growth in rev. and enrollment, 24% as OP margin, 17% decrease in EPS
in 2012.
Conservative Management
Source: Earnings.com

Actual Earnings have always been higher than the management’s guidance.
Multiple Valuation




Rev
Growth
EPS
Growth
OP
Margin
ROE
P/E
P/B
P/S
Industry
Avg.
6.71%
10.15%
19.10%
42.51%
11.04
5.13
1.22
BPI
30.86%
39.24%
32.80%
58.38%
8.03
3.53
1.35
APOL
-3.91%
7.75%
23.80%
35.29%
10.05
4.04
1.26
DV
13.95%
20.66%
19.30%
17.87%
10.47
1.73
1.12
EDMC
15.11%
35.77%
15..80%
9.25%
10.42
0.95
0.73
BPI is being traded at discount even with its higher-than-industry average growth, margin, and ROE.
BPI looks competitive because BPI has retained its margin higher than its competitors even with its low price
strategy.
Because of the new regulations, its long-term future growth rate is expected to be around 11%, so it is
justifiable for BPI’s valuation to be 13 times its earnings.
Target price for BPI is 36.70 with expected EPS 2.77 in 2012. (47% upside potential)
Ownership Structure

Warburg Pincus
-
A private equity firm that owns 66.4% of BPI’s total shares.
-
Unlike other firms in the same industry, BPI has a unique ownership structure and it is important to know what
Warburg Pincus can do with BPI in future
<Scenarios>
-
-
If Warburg Pincus decides to sell BPI to other company, there will be high premium on BPI because of
premium on its business value plus its EV/EBITDA (3.2) is lower than the industry average (4.4).
If BPI starts paying dividends (when Warburg Pincus is trying to get its initial investment back by receiving
dividends), stock price will likely go up (without any harm to BPI’s business operation.)
Payout Ratio
-
20%
30%
40%
50%
N/I in 2012
156,246
156,246
156,246
156,246
Dividend Amount
35,446
53,170
70,893
88,616
0.55
0.83
1.11
1.39
2.18%
3.26%
4.35%
5.44%
DPS
Dividend Yield
Recommendation
-
-
-
-
-
Even with expected negative growth in 2012, the current price is attractive.
(Both down-side risk and up-side potential exit)
Projection for future is difficult with new regulations and a relatively short
history of the on-line for-profit education industry.
But BPI has its own strength over its competitors and proved its
competitiveness during the last 3rd and 4th quarters.
BPI’s ownership structure seems positive rather than negative to equity
investors.
Therefore, we recommend to buy 500 shares of BPI at a market price,
which is worth about $12,735.
Q&A