Strategic Education, Inc. (NASDAQ:STRA) Q2 2023 Earnings Call Transcript

Strategic Education, Inc. (NASDAQ:STRA) Q2 2023 Earnings Call Transcript July 27, 2023

Strategic Education, Inc. beats earnings expectations. Reported EPS is $0.85, expectations were $0.69.

Operator: Welcome to Strategic Education’s Second Quarter 2023 Results Conference Call. I will now turn the call over to Terese Wilke, Director of Investor Relations for Strategic Education. Ms. Wilke, please go ahead.

Terese Wilke: Thank you. Hello, everyone, and welcome to Strategic Education’s conference call in which we will discuss second quarter 2023 results. With us today are Robert Silberman, Chairman; Karl McDonnell, President and Chief Executive Officer; and Daniel Jackson, Executive Vice President and Chief Financial Officer. Following today’s remarks, we will open the call for questions. Please note that this call may include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements are based on current expectations and are subject to a number of assumptions, uncertainties and risks that Strategic Education has identified in today’s press release that could cause actual results to differ materially.

Further information about these and other relevant uncertainties may be found in Strategic Education’s most recent annual report on Form 10-K, the 10-Q to be filed and other filings with the Securities and Exchange Commission as well as Strategic Education’s future 8-Ks, 10-Qs and 10-Ks. Copies of these filings and the full press release are available for viewing on the website at strategiceducation.com. And now I’d like to turn the call over to Karl. Karl, please go ahead.

Karl McDonnell: Thank you, Terese, and good morning, everyone. SEI’s second quarter reflects continued strong performance in U.S. Higher Education, another strong quarter from ETS and improving trends in Australia and New Zealand. But before I discuss our performance this morning, I just want to note that all financial figures that I reference in my prepared remarks are on a constant currency basis. In the second quarter, SEI’s revenue increased 7%. That’s significantly better than our first quarter performance where our revenue was flat to the prior year. The revenue growth that we had is a product of strong U.S. Higher Education continued performance, significant revenue growth within ETS and strong revenue per student in Australia and New Zealand.

Based on the current performance, we expect that second half 2023 revenue will be higher than the 7% that we had in the second quarter of this year. Our second quarter operating expenses increased 8%, and that created a slight reduction in our operating income. But as I’ve previously discussed, our expenses are higher in the first half of 2023 because the majority of the incremental investments that we make this year are timed to occur in the first and the second quarters. Expenses in the second half of 2023, we expect to be up only 2% to 3% from the prior year. Our second quarter adjusted earnings per share were $0.85, and that’s flat to the prior year. I’d like to note that this is the first time since the second quarter of 2020 that SEI’s earnings have not been down on a year-over-year basis.

Given the current visibility into our business, we expect to see significant earnings growth in both the third quarter and the fourth quarter and for the full year 2023. Now turning to our segments. U.S. Higher Education continues to perform very well. The demand environment remains very strong, and we continue to see strong increases year-over-year in inquiries into the university. Both Strayer and Capella Universities continue to post strong new student enrollment. We also see strong persistent increases. Our trailing 1-year persistence increased 30 basis points in U.S. Higher Education to 87.4%. Employer-affiliated enrollments also remain very strong. Total employer-affiliated enrollments increased 16%, which was well ahead of the 5% increase across all of U.S. Higher Education.

I’d like to also note that the Strayer recovery continues to be well ahead of our expectations, and we expect Strayer total enrollment to be increasing in the high single digits by year-end. ETS, Education Technology and Services segment, had another very strong quarter. ETS revenue increased 22% to $20 million. ETS adjusted operating income increased 16%, notwithstanding that we continue to make significant new investments in both Sophia and Workforce Edge. Sophia average paid subscribers increased 30%, and we now have over 30,000 paid subscribers on the platform. Workforce Edge continues to gain traction in the marketplace. We added 7 new corporate clients, bringing our total to 62 who now collectively employ more than 1.4 million people.

Australia and New Zealand also had a strong second quarter. Revenue increased 4% to $70 million despite a slight decline in enrollment on the basis of strong revenue per student. The revenue per student increased based on a planned pricing increase for 2023 as well as an improved course load on the part of our students. ANZ operating income increased 25% to $15 million, and operating margin increased 400 basis points to 22%, and that’s the highest operating margin that we’ve had at ANZ since making the acquisition. But more important than their financial results, we were more pleased with the results from the Australian government annual survey on postsecondary academic quality. It’s known as the quality indicators on learning and teaching.

And in that report, Torrens University fared quite well. On the over — on the measure of overall quality of education experience, Torrens University ranked 7th of 43 federally recognized university, and that’s an increase from their 14th position in the prior year. On the measure of student support and teaching, Torrens was in the top 10, which was up from 16th in 2021. And for overall satisfaction of recent graduates, Torrens scored 80.3% satisfied, which is 270 basis points higher than the Australian national average. So we were very pleased to see these significant gains in academic quality at Torrens University. Lastly, I’d like to remind all of our owners, we will be hosting an Investor Day on November 7 in New York City, and there’s more information on our website if you’d like to participate or attend.

And finally, as always, I’d like to thank all of my colleagues at SEI for their ongoing commitment and professionalism on behalf of our students. And with that, Amy, we’d be happy to take questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Jeff Silber with BMO Capital Markets.

Jeff Silber: Wanted to start on U.S. Higher Education and the strong enrollment trends that you’ve been seeing. I know you mentioned the employer-affiliated programs. I know that’s driving a lot of the growth. But can we drill in a little bit further in terms of the type of schools or programs where you’re really seeing that growth?

Karl McDonnell: Well, you’re right, Jeff. It clearly is employer. Health care at Capella remains the strongest segment, with nursing being at the top of the list and FlexPath in particular. But we’ve seen equally strong growth at Strayer, in fact, a little bit higher growth rates on the new student side. And we attribute that just to the fact that we continue to operate in a normal Strayer environment, meaning campuses open and staffed. So I’ve said that the Strayer recovery is a little ahead of what we might have expected. But on the other hand, given that we saw no structural barriers to Strayer recovering its enrollment, the fact that we’re just opening and we have that strong demand environment that I was talking about, I think that speaks to why the results are where they are.

Jeff Silber: Okay. That’s really helpful. If I could switch over to Australia and New Zealand. I know enrollments were down a bit. Are you still being affected by the timing issue? Or is there something else going on?

Karl McDonnell: Actually, our domestic new students in Australia were up in the quarter. They were also up in the first quarter. So the decline continues to be in the international new student category. As I said in the last quarter, July 1 is the implementation date of the changes that require international students to be taking a full course load to be in country and so forth. We continue to be optimistic that the international new students are going to turn around. But that’s the source of the decline in Australia.

Jeff Silber: Okay. And then from an overall company perspective, I think you said last quarter, you would expect revenues to be up in the mid-single digits for the year. And if that happens, we wouldn’t see operating expenses rising more than 3%. Are you still comfortable with that? It sounds like you might have raised that bar a little bit.

Karl McDonnell: Yes, I think our revenue is going to be higher, Jeff, than mid-single digits. As a result, whenever you have more revenue, you’re going to have some variable expenses that you have to add for more courses, teachers and so forth. So if you just go back to my prepared remarks, I said in the back half of the year, we expect our Q3 and Q4 expenses combined, if you will, to be up no more than 2% to 3%.

Operator: [Operator Instructions] Our next question comes from Jasper Bibb with Truist Securities.

Jasper Bibb: I just wanted to start with the U.S. Higher Ed operating margin. The enrollments grew there, but the operating margin actually fell year-over-year. Would that be due to the timing of growth investments that you mentioned? And what would we be able to expect for U.S. segment margins over the balance of the year if you’re moderating those growth investments in the second half?

Karl McDonnell: It is predominantly the growth investments. We like to make those investments early in the year so that we have the benefit for the full year. And we — similar to what I was just saying to Jeff, we expect all of our operating expenses, and U.S. Higher Education is our largest segment, to moderate in terms of growth from the prior year in the back half of the year. And Dan, what do you think on margin?

Daniel Jackson: I think we’re going to see margin expansion for U.S. Higher Ed in the second half of the year, Jasper. And then one other thing that I’d add is that we did have a year-over-year increase in bad debt that’s contributing to the U.S. Higher Ed margin, which is now — I’d say we’re at a more normalized rate of bad debt relative to last year, where it was lower due to some one-off benefits related to some revenue recognition changes we made.

Jasper Bibb: Okay. Got it. And then since the last call, we have a new gainful employment proposal from education department. I was just hoping to get your thoughts on that rule and how more, I guess, stringent gainful employment standards could eventually impact enrollment levels in the U.S. Higher Ed segment.

Karl McDonnell: Well, obviously, we’re continuing to monitor all the developments across the full regulatory spectrum, including potential new gainful employment regulations. But until we see the final rule, Jasper, it’s difficult for us to comment with any specificity. What I can say is we remain very comfortable with the overall risk profile of both Strayer and Capella. And we’ll do whatever is required to comply with any new regulation once it goes into effect.

Jasper Bibb: Okay. Last question for me, maybe following up on that. Are you managing the business any differently today due to the GE proposal, like maybe that would entail shifting marketing dollars away from programs that might be at risk of noncompliance under the new threshold?

Karl McDonnell: Well, first, just — as a matter of principle, we always manage to the highest academic quality standard that we think we can. And that in part is — well, it’s primarily intended to create the most value that we can for our students, but it’s also geared to making sure that we are well within compliance with any proposed regulation — or current regulation, rather, and also any proposed regulation. But to answer your question specifically, no, we have not made any changes tactically to things like marketing as a result of this particular proposed regulation.

Operator: Our next question comes from Alex Paris with Barrington Research.

Alex Paris: Congrats on the very strong performance in the second quarter. I had a follow-up question on ANZ segment. The Australian government’s requirement that international students are in country and taking a full-time load is effective July 1. And I think you had commented in the past that you view that as a potential catalyst for the business, both on new student enrollment — total student enrollment and potentially revenue per student as some of these international online students were taking less than full loads. Is that still the expectation? And when would you expect that, that would show up in the numbers?

Karl McDonnell: Yes. That is still our expectation. The primary reason that we see it as a benefit is Australia is a very popular destination for foreign students. It’s third or fourth globally in terms of number of international students that immigrate in for the purposes of education. That was all prevented, obviously, all the way up from the beginning of the pandemic till July 1 of this year. And although some students still enrolled and took their classes online in their home country, they took a lighter course load than they otherwise would have. So it depressed our revenue per student for close to 2 years. Post July 1, we see that as a benefit. And in terms of when would we expect to see that, I personally would expect to see it in the back half of this year and all of next year moving forward.

Alex Paris: Great. That’s helpful. And then just a follow-up on U.S. Higher Education. Revenues were higher than expected. Enrollment was higher than expected. Revenue per student was higher than expected. Just to be clear, revenue per student was driven by — did you say price increases?

Daniel Jackson: Yes. Pricing, Alex, was the biggest driver. We also had slightly lower scholarships in the U.S. on a year-over-year basis.

Alex Paris: Okay. And then employer-affiliated enrollment at U.S. Higher Education was up 250 basis points to 27.1%. This is from the press release. What was the growth in employer-affiliated enrollment by university? I think you’ve given that in the past. In the first quarter, I think Strayer was up 25%, and Capella was up 13%.

Karl McDonnell: Yes. I don’t have it in front of me, Alex, but I know roughly that Strayer was up, call it, 17% to 20% in the second quarter and Capella was above 30%.

Alex Paris: Great. And then last couple of quickies. Restructuring costs, Dan, we’re up more than I had modeled year-over-year. What’s included in there? And how should we think about restructuring costs going forward?

Daniel Jackson: Yes. On a year-to-date basis, we think the majority of planned restructuring costs have been incurred in the first half. Half of them roughly are related to facilities that we’re rationalizing, and the other half is related to severance costs for restructuring-related role terminations.

Alex Paris: Great. And then last one on the regulatory side, too. I think you will likely talk about 90/10 in your 10-Q, which is not yet filed. Do you know those numbers for Strayer and Capella now that you can disclose?

Karl McDonnell: No. we have anticipated for some time, obviously, the change in the department’s categorization of veterans benefits and active duty military flipping from the 10 so-called into the 90. We’re working to manage it as carefully as we can, and we believe we’ll have no compliance issues by the end of the year.

Daniel Jackson: And Alex, just to follow on and clarify because I think you’re asking specifically about our normal disclosures. Yes, they will be in the Q that we’ll file following the call. And Strayer is roughly 80, and Capella is well below — I think it’s in the high 60s, low 70s.

Robert Silberman: Yes. The 80-20 is Strayer. It was like 68-32.

Alex Paris: And that’s under the new calculation, including veterans in the numerator.

Karl McDonnell: No, that’s the last — what calendar year is that?

Daniel Jackson: That’s for ’22, Alex, the new reg is for ’23, which [indiscernible].

Alex Paris: Got you. Okay. Good. But it seems like there’s plenty of room there to lead you to conclude, as you had said that you should have no regulatory issues by year-end under the new calculation, yes.

Karl McDonnell: Yes, that’s what we believe.

Operator: Our next question comes from Heather Balsky with BofA.

Heather Balsky: I was curious about just the broader macro environment and everything that’s going on. I think data for the labor market has been relatively mixed. What are you focusing on? What do you think the data means for your business in the near term and into next year?

Karl McDonnell: Well, as I’ve said, it seems like going on a year now. The demand environment in the United States for both Strayer and Capella has been strong for over a year. And to be more specific, what I mean by that is the sum of people that are inquiring about potentially enrolling in either Strayer or Capella, we’ve been growing those inquiries pretty significantly for the last year. But what I would point to is, again, how strong our employer-affiliated enrollment has been. That has — the growth rate in employer-affiliated enrollment has been double, if not triple, in some cases, the growth in nonemployers. So I would take that to mean that employees at these companies are feeling good about their labor prospects, their job, the security that they have in periods where there’s been less certainty or confidence.

On the part of the labor force, we tend to see less or lower employer-affiliated enrollment. So the demand environment for both Strayer and Capella has been strong and remains strong. We haven’t seen any leading indicators that suggest it would weaken.

Robert Silberman: Heather, it’s Rob. Also, just specifically on the macroeconomic statistics, they may be mixed across the broad spectrum of things you look at. But the one statistic we look at most closely, to Karl’s point, is labor force participation rates. And I think that the labor force participation rate in the last month for 25- to 50-year-olds, which is sort of our target market, was at a 20-year high. So the data — the underlying macroeconomic data does reflect the kind of strengths that Karl is describing.

Heather Balsky: That’s really helpful. And I’m just curious because you have called out the strength in inquiries. How do levels compare to 2019 levels right now?

Karl McDonnell: I would suspect they’re higher. I don’t have the 2019 numbers in front of me. But the inquiries into both Strayer and Capella have been growing consistently for as long as I can remember, looking at our internal reporting. But to answer your question specifically about 2019, I couldn’t speak to that with any specificity but other than to say the environment is been strong for some time now. What I can say is in terms of absolute enrollment, certainly at Capella University, Capella University is on track to have the highest enrollment it’s ever had in 2023. Strayer will be below 2019 because they had a sharp decline as a result of having to close all of our campuses for a couple of years. But the recovery is very much sort of in a V-shaped at Strayer, and we expect, over time, that it will surpass its 2019 enrollment.

Heather Balsky: That’s really helpful. And then just a follow-up question, and it may be a little premature, but right now, there’s a lot going on around student loan repayments and the timing and forgiveness. And I’m just curious if you’re hearing from the folks you work with, with the banks or anything with regards to kind of how potential default rates are being managed and kind of how the industry is just gearing up for kind of this change and the return to repayment.

Daniel Jackson: Heather, this is Dan. We’re not hearing a lot. We are, of course, planning to start working with our own students or really students that are not in school anymore and thus will be in repayment to help make sure that they know what their obligations are. But beyond that, we’re not hearing much of anything.

Operator: And I’m showing no further questions at this time. I would now like to turn the conference back to Karl McDonnell for closing remarks.

Karl McDonnell: Thank you, everyone. We appreciate your time this morning, and we look forward to discussing our results next quarter and hopefully seeing as many of you as we can at our Investor Day in November.

Operator: And this concludes today’s conference call. Thank you for participating. You may now disconnect.