Q4 2019 Earnings Call

Welcome to strategic Education's fourth quarter 2019 earnings call well now turn the call over two to restocking manager of Investor Relations for strategic Education. Mrs will get please go ahead.

Thank you Victor good morning, everyone and welcome to strategic Educations conference call in which we will discuss fourth quarter 2019 result.

With us today to discuss results are Robert Silberman Executive Chairman.

I will Macdonald, President and Chief Executive Officer, and Daniel Jackson, Executive Vice President and Chief Financial Officer. Following 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, maybe phone in strategic educations annual report on form 10-K.

Most recent 10-Q and other filings with the Securities and Exchange Commission as well as strategic educations future AK is 10-Q's and 10-K's.

Copies of these filings and the full press release are available for viewing on the web site at strategic education Dot com.

And now I'd like to turn the call over to Rob Rob. Please go ahead.

Thank you trees and good morning, ladies and gentlemen, we have a lot of ground to cover. This morning is we normally do for our yearend earnings call first Carl.

And on our Q4 operational in academic results and you can give his thoughts on the upcoming year.

Next Dan will cover our financial results for Q4, as well as a four year 2019.

And finally, I will walk through our capital allocation in 2019, NR capital plan for 2020.

Oh, it's suffice to say it was a great quarter, a great year and based on what we've seen so far we expect very strong results in 2020 Carl.

Thank you Rob good morning, everyone.

2019 by nearly every available measure was the most successful year in our company's history.

It was the first full year by merged company, which brought together strategic Strayer education, and Capella Education company and during the year. We completed our integration ahead of schedule and fully achieved our $50 million synergies target.

Both of our University Strayer, and Capella generated outstanding results, both in student academic achievement as well as strong enrollment growth and in many cases. These results were among the best that we've achieved in more than a decade.

Pro forma revenue increased 8% for both the fourth quarter and the full year 2019.

The combination of our realized synergies and our ongoing productivity efforts generated substantial operating leverage in the business. Our adjusted operating margin increased 520 basis points to 23.8% in the fourth quarter.

And increased 480 basis points to 19.5% for the full year.

In both cases after that increase was due to merger related synergies and the other half was due to organic productivity improvements.

These gains, particularly the fourth quarters are well ahead of the margins in our notional five year plan in which we get our operating margin into the mid 20% range over the next two years.

Both strayer and Capella generated strong new student enrollment throughout 2019 growing year over year in every quarter and for the full year Strayer generated 7% new student growth, which is the university six consecutive year of new student growth at Capella generated 9% new student growth.

The company opened six new campuses in 2019, including the first ever Capella campus Center in Atlanta, Georgia in each of these campuses is performing better than our notional investment plan and again the company intends to open between eat into 10, new campuses in 2020, including our first ever co locate a campus.

Which we represent both University brands that will open in Augusta, Georgia.

We also had a substantial improvement in our non degreed segment, which generated an operating profit for the first time and that's supposed to nearly $10 million loss in 2019.

And before turning the call over to Dan to go through our financials I just want to make a brief comment on the Corona virus.

Given that more than 95% of our students are already taking all of their classes online and given that we have the capability to operate our company with our entire workforce working remotely if required we see little to no risk as a result to the virus.

While it is not or practiced comment on the current or future quarter. I think it's fair to provide some level of visibility for the stability of our business and I can say that our first quarters enrollment results, including our new student enrollment are actually better than our fourth quarter performance and we expect pretax net income will both be up more than.

20% from the prior year in the first quarter.

And lastly.

For me the greatest achievement in 2019 is the mission driven and student focused culture that we nurture here every day I would like to extend my deepest depreciation and gratitude to the thousands of Sci employees, whose work helps make our students' lives better each and every day.

Dan Thanks, Carl and good morning, everyone. Today, we're reporting consolidated 2019 results for strategic Education, Inc., which include three segments Strayer University segment Capella University segment and the non degree programs segment note that our consolidated results exclude the financial results of Capella Education company that occurred.

Prior to August 1st 2018 for a pro forma view of our 2019 segment level results. Please see the fourth quarter earnings release slide deck that we posted this morning to the Investor Relations section of our website.

I also want to remind everyone that our earnings release references as reported or GAAP results and adjusted results, which are non gap. This format is intended to illustrate the financial performance of the core business as reflected in our adjusted numbers. In addition to our GAAP results.

Please refer to the non-GAAP financial information included in the fourth quarter earnings release, we issued this morning for additional information.

Now moving onto our Q4 results revenue for the fourth quarter of 2019 grew 8% to 263.8 million compared to adjusted revenue of 244.6 million in 2018.

Our adjusted income from operations for the quarter grew 39% to 62.9 million from 45.4 million for the same period in 2018.

Our adjusted operating margin for the quarter expanded 520 basis points to 23.8% from 18.6% in 2018.

Approximately 73% of our Q4 DNA costs related to marketing investment compared to about 73% in Q4, 2018 and 77% in Q3 2019.

Our bad debt expense for the fourth quarter was 5% revenue compared to 6.1% for the same period in 2018.

Fourth quarter 2019, adjusted net income grew 37% to 47 million compared to adjusted net income of 34.4 million for the same period in 2018.

And adjusted diluted earnings per share grew 37% to $2 in 13 cents compared to $1.56 in 2018.

Our adjusted effective tax rate for the fourth quarter 2019 was 28% and we expect our adjusted effective tax rate for the first quarter 2020 to be approximately 28%.

Moving onto the full year results, our adjusted revenue for the year increased 50% to 997.1 million from 662.9 million in 2018, our full year revenue increased 8% compared to pro forma 2018 revenue of 923.9 billion.

Our adjusted income from operations for 2019 grew 99% to 194.1 million from 97.4 million in 2018.

Adjusted income from operations grew 43% compared to pro forma 2018, adjusted income from operations of 136 million.

Our adjusted operating margin for 2019 expanded by 480 basis points to 19.5% from 14.7% in 2018.

2019, adjusted net income grew 41% to 147.3 million from pro forma net income of 104.8 million in 2018, and adjusted earnings per share grew 39% to $6.67 from from pro forma adjusted earnings per share at $4.79 in 2018.

I mean.

Our adjusted effective tax rate for the year was 27.8%.

We expect our full year adjusted effective tax rate in 2020 to be approximately 28% and finally regarding capital expenditures. We spent 38.7 million in 2019 compared to 27.5 million in 2018 and for the full year 2020, we expect capital expenditures to be between 40 and 45 million.

Rob.

Thank you Dan as is our custom at this time of year I'd like to say just a moment to run through our capital allocation decisions in 2019, and our plans for 2020.

And by the way we track this every quarter with our board of directors are not just at the end of the year. It's a it's a major part of our discussions [noise].

We started 2019 with $387 million in cash and marketable securities on our balance sheet.

During 2019, the strong operating results, which Carlos discuss across all of US G.I. segments generated $242 million in owners cash flow before taxes.

Now we use this generated capital during the year as follows first we paid $49 million in federal and state taxes.

Next we allocated $42 million to capital expenditures and other non capitalized investments in our business.

Roughly one half of that them out went to information technology upgrades and infrastructure one one quarter went to physical campus facilities, that's both new openings.

And routine maintenance on the existing plants.

And then the final one quarter, we invested in course development academic technologies and artificial intelligence.

Oh, we were then left with a $151 million of what we refer to as owners distributable cash flow.

No I wrote in last year's letter to shareholders that our owners distributable cash flow per share should roughly equal our reported adjusted net income per share that where you can keep track of us from our financial statements.

And in 2019 that owners distributable cash of 151 million or $6.96 per share.

We exceeded our adjusted net income the Dan just mentioned up $147 million or the $6.67 per share that we reported this morning. So we're tracking according to plan and that's important for all of US on the management team and our board looks at what is the cash generative nature of our business. After we have fully funded.

All of the improvements in academics that we think are necessary.

So out of this owners distributable cash flow, we paid $47 million and dividends and we added the remaining $104 million to our balance sheet.

So in rough terms when you think back over the year in 2019, we invested 25% of our after tax cash back into our business, we returned 25% to our owners and we held 50% for future years.

Well that left us at year end 2019.

A rock solid balance sheet of $491 million and cash an undrawn $250 million revolver and no debt.

In 2020, we are very well positioned to financially support both of our universities to continue to return capital to owners and to take advantage of any opportunities that come our way.

I think is important to point out to shareholders that having fully integrated capella education and Sci.

Including successfully executing on all the plan savings and synergies that we laid out at the beginning of the merger the announcement of the merger.

But as of yearend 2019, we believe we are now fully capitalize and therefore based on our very favorable projections for 2020, we're confident we will be generating truly excess owners capital this upcoming year.

So for 2020, we have increased our common dividend by 20% to $2.40 per share.

We have increased our share repurchase authorization to $250 million.

And importantly that $250 million is roughly the amount of capital. We've calculated we could return to owners either in share repurchases or increase dividends and still maintain our perfect 3.0 financial composite score with U.S. Department of education, which is one of our board's overriding objectives.

And with that operator, we would be pleased to answer any questions.

As a reminder to ask the question you any to press star one on your telephone to withdraw your question press the pound <unk> police and Bob only composite given a roster.

Yeah first call all of our first question will come from line of Jeff's Library from BMO capital markets you may begin.

Thanks, so much that's close enough.

Congratulations.

Good morning, congratulations on another good year and it sounds like great start to the current year as well when we were at your Investor Day, a few months that you talked about your new marketing campaign I'm just wondering how that's been rolling out and you know what kind of results you've had from that.

Yeah sure. Good morning, Jeff It's been great. We track that are actually weekly and what we're looking for is what we refer to as proper attribution, which is people recognizing the advertising and creating a impression on them that last that those kind of metrics are all favorable.

The demand environment has been strong organic inquiry growth has been strong. So we're we're very pleased with our with our marketing campaigns with both strayer and Capella.

Okay fantastic.

I'll talk a lot about the 10 X. instructional model I just want them, we can get an update on that enrollment.

Well, it's its mirroring maturity at strayer.

There's probably another 10% of course is that we might apply the 10 x. methodology to but we begin to implement that both the technology and the instructional approach inside of Capella.

And the early indications ours, it's also having a favorable impacts on the instructional model, they're meeting completion rate seem to be improved increased retention and so for it. So I think the focus on 10 X. predominantly in 2020 is gonna be the continued rollout of it inside of Capella University and Jeff just Uh huh.

Another thing on that although it's we've reached maturity in terms of the number of courses that we're going to.

Apply it hasn't methodology within Strayer University.

You still get you get the compounding effect of the higher continuation rates the better academic performance and we expect that to a you know.

Continue through the year and into next year as as those students continue through their progression.

Okay. That's helpful. I appreciate it and finally, one more arlon I'll jump back into queue.

Thank you at applied I know you don't give official guidance, but I think he called the 2020 modeling assumptions I'm. Just wondering are those still valid for this year. Thanks.

Jeff Yes, they are.

Okay.

Okay, and both are and I think you know I think carl's.

Comment is.

You know at least with regard to first quarter were ahead of them.

Yep Yep I got that okay really appreciate it and thanks again.

Thank you once again that star one quick question start one.

Your next question will come from line of Corey Greendale from first analysis you may begin.

Hey, good morning can congratulations on a another good year.

Hi, guys are especially I had is just I imagine given the new campuses haven't spend opened that long they that they didn't make a huge contribution to enroll but is there anyway to quantify what their contribution was to the enrollment to near it would be on the on the strayer side it might be 100 basis points, Corey we kind of model that can.

Buses.

When they reach maturity, which in our estimation and the new smaller footprint is probably 18 to 24 months, but any one campus on a on a full year basis should generate about 100 basis points of new student growth.

Okay. Good.

And then with the.

Integration of Capella done could you just maybe give us a little bit of the state of the nation. The status of any collaboration that I'd I'd I heard you on that the 10, X. I capella, but more broadly anyways that the institutions are collaborating on.

You know opportunities with employers or any other cross pollination Oh, yes, there is widespread collaboration.

Throughout the course of the integration we created a number of a shared services that support both institutions. So basically all of the corporate functions. Our shared service, so I T and finance and marketing.

We've also began to share best practices on student support models.

Advising models, the new Gen Ed curricula, it's being leveraged in both institutions.

So I'd say, there's considerable collaboration.

Which includes obviously, taking some of the technologies that strayer had developed in deploying those inside of Capella. The strayer academic team is evaluating flexpath and to determine if that's something that the strayer T. The strayer University might want to adopt and pursue.

So I'd say honestly Corey that's one of the big achievements of the merger is the level of collaboration that exists.

Great and then.

I'll just ask one last one which is a and I suspect that might know how you're going to this but I'll ask anyway.

As you might imagine we get questions about what the impact of Ace Anders presidency would be on the sector and a new in particular and I know that you're.

Your good with gainful employment anything like that but who knows that the could be broader than that just any thoughts you have on the impact of any Sanders presidency.

I see the best way to think about any.

Political impact or change of administration is that is a highly regulated industry and it deserves to be given that.

The taxpayer supports through very generous credit.

You know in our case, roughly 70% of our revenue through loans to our students, but you know our belief has always been that the fundamental.

A mission of the institution and the best defense against any criticism is great academic outcomes. So.

Our focus is on everyday teaching out well in the classroom developing academic technologies that help our soon succeed and other than that you know you you deal with and modify your operations to.

Just whatever regulations exist.

Great. Thank you very much thank you.

Thank you and I'm kind of not showing any further questions at this time.

Trying to call back over to Mr. Silberman for any closing remarks.

Thank you operator, and thank you ladies and gentlemen.

We appreciate your participation. If you have any other specific calls please contact us directly and we'll look forward to talking to you at our next earnings call in April. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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