Q2 2020 Strategic Education Inc Earnings Call
[music].
Welcome to strategic Educations second quarter 2020 earnings call.
Ill now turn the call over two to reach Wilkie manager of Investor Relations for strategic Education. This is Wilkie. Please go ahead.
Thank you good morning, everyone and welcome to strategic Educations conference call in which we will discuss second quarter 2020 result, and the transaction we announced this morning with US today, our Robert Silberman Executive Chairman.
Carl Mcdonald, 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.
Such statements are based on current expectations and are subject to a number of assumptions uncertainties and risks that strategic education has identified today's press releases that could cause actual results could differ materially.
Further information about these and other relevant uncertainties, maybe found in strategic educations. 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 future aka 10-Q's, and 10-K's copies of these filings and the full press releases are available for viewing on the web site at strategic education Dotcom.
Now I'd like to turn the call over to Rob Rob. Please go ahead.
Thank you curious and good morning, ladies and gentlemen, I would to press releases. This morning, Karl and Dan have a lot of material to cover but before I turn it over to the two of them I just wanted to set the stage with a couple of introductory comments, particularly with regard to the impact of the Corona virus on our enterprise.
First notwithstanding the economic Lockdowns and significant unemployment caused by the krona virus pandemic, let's see I had a particularly strong first half of 2020.
Indeed, we outperformed our own plans and budgets by a wide margin.
Second having shepherded. These two academic institutions through a number of economic cycles in crisis season pass. This management team knows that significant unemployment has a negative effect on our prospective students willingness and capability to enroll and University degree program.
Well, we never provide forward guidance, we are seeing some of that negative impact on both strayer University's and Capella University's summer academic term enrollment, which will in turn drive us <unk> third quarter results.
Third the chronic virus pandemic is also highlighting some of the significant advantages of our academic model and our comfort with online academic technology.
These advantages will both propel our enterprise and create attractive opportunities for us in the future.
For instance, we will almost certainly made permanent our transition of Strayer University to a fully online model similar to Capella University.
While we will still maintain physical locations in our geographic markets for academic support faculty coordination International student classes and brand building, we will be able to significantly reduce those existing campus footprints and their associated costs.
In addition, as we announced last quarter in order to support the broader academic community in its four shift to a fully online model. We've made our self pay Sofia academic platform available free of charge to all universities and colleges. We've had over 150000 students registered it takes a fee a courses.
Its March the platform has operated splendidly and as more and more universities are now announcing that they will continue to require online and remote learning for the 2020 2021 academic year, we've decided to continue making the Sofia platform available. However, starting August 1st we will charge them on.
Option fee for unlimited access to our content, which we believe will significantly lower students costs of achieving their college degree as well as providing a meaningful new enterprise for Sci.
And finally that was the as was disclosed this morning as separate release, we are very excited to announce today the acquisition of laureates Australian and New Zealand academic assets.
We have been tracking and studying these two assets Torrance University in Australia, and the media design School in New Zealand for years tore. This is one of only 43 universities in Australia, which hold that nations highest academic designation and accreditation as University and it is the only investor funded entity in that group.
The media design school, while smaller is world renowned for the quality of its graduates in the entertainment industry.
While we are not naturally acquisitive. These two strong academic platforms are part of a group of no more than a half dozen universities that we keep track of worldwide, which are the highest academic quality and located in the markets. We are comfortable investing it. So we were delighted when they became available.
We have sufficient sources of capital to fund the acquisition, which we hope to close by year end, and which we expect to be materially accretive for us in 2021.
We believe both of these academic institutions will be worthy additions to Strayer University, and Capella University and will increase the value of your investment in strategic education.
In summary over the last 20 years, we have occasionally seen external economic shocks, which affected our short term student enrollment in financial results.
However, our experience has also giving us confidence that by maintaining our focus first and foremost on the successful academic achievements of our students.
Both our students and our universities will prosper over the long term.
In addition, given our experience and expertise and academic innovation technology and teaching online. We believe that Sci is uniquely positioned to provide the highest quality academic services, not just to our own students and institutions, but to the greater academic community as well.
And with that let me turn it over to Carl for more details on this morning's announcements Paul. Thank you Rob Good morning, everyone. As Rob just noted we do have a fair amount to cover today and I intend to broadly cover four key areas. This morning first I'll have some comments on our second quarter financial results.
Second I'll provide a preliminary outlook for the third quarter and balance of the year.
Third I'll provide an update on a couple of our new strategic initiatives and fourth I'll add some comments on the acquisition, we announced today Torrens University and the affiliated assets from Laureate education.
First though beginning with our second quarter results and Dan will go into more detail on these in a few minutes, but our overall second quarter financial results were quite strong.
Our revenue growth of four and 5% in the second quarter, along with a very focused cost management approached enabled us to generate significant earnings growth and margin expansion.
Our adjusted operating income and earnings per share were up from the prior year, 37% and 30% respectively with the differential in growth being almost entirely attributable to significantly lower interest income due to a much lower yields on the large amount of cash on our balance sheet.
Our adjusted operating margin of 24.6% was up 580 basis points from the prior year.
Now we began to see the impact of the cobot lockdown unemployment on our demand in the back half of the second quarter, which did impact our enrollment results.
New student enrollment declined 4% at strayer, while growing 1% at Capella.
Total enrollment grew 6% and 1% at strayer and compel at respectively.
Although the demand environment has been affected by this unemployment at both Strayer University and Capella University. It is having a larger impacted strayer. We believe primarily as a result of strayer is mostly undergraduate student mix, including many first time college students.
We did see a similar although less severe reduction in strayer demand following the recession of 2008, when stringers non sorry, when stringers, new non corporate related students declined between 10 and 20% for several quarters.
Strayer actually completed its third quarter enrollment results within the past couple of weeks and Fort Summer academic term, which represents straight years third quarter enrollment, we anticipate new students will be down approximately 27% versus the prior year, while total enrollment will be down between zero and 1%.
Capellas overall demand environment has seen a much less severe contraction most likely attributable to its focus on graduate education, and its learners being more stable and less sensitive to the current economic downturn.
Capella University is still in the early stages of its third quarter enrollment. So we have limited visibility, but we expect their third quarter results to be substantially better than straight years.
Based on these enrollment outcomes along with our cost management efforts, we project that both revenue and adjusted operating income will be flat to the prior year in the third quarter.
And while we don't have any visibility into our fourth quarter. Yet if you assume the current trends were to continue through the balance of the year for the full year 2020, we would project revenue to be flat to up 1% and adjusted operating income and pre tax income to be up in the low to mid single digits from prior year.
Due to the pandemic related unemployment our preliminary planning for 2021 is to hold total operating expenses flat, meaning we will offset annual pay increases and investments into new strategic priorities with savings from other areas as part of this the company intends to implement a restructuring later this year.
To ensure that our resources are properly allocated heading into next year.
And obviously, our 2021 planning will be refined as we get further ended the year.
Turning now to comments I made starting with our last earning call where I discussed a couple of new strategic opportunities arising from the more sudden shift in demand and popularity to online or digital alerting.
One of those being Sofia learning, our direct to consumer online portal with a certified college courses.
As Rob noted in early March we decided to make Sofia free to the general public through the end of July of this year and the popularity of that offer has been quite amazing more than 155000 unique users have registered for more than 350000 courses. If you assume many of these courses are being used to transfer college credit to another.
College or University. This free offer has saved the students collectively certainly tens of millions of dollars if not hundreds of millions of dollars in college tuition.
Pre cobot Sofia charged a flat fee per course of between two and $300 on August Onest. When we intend to re monetize the platform, we will be converting Sofia two a paid subscription offer.
Anyone who registered for a free class prior to August Onest, we'll have the opportunity to buy unlimited access to Sofia for a full year for $149 for that first year.
Anyone who had not registered for a free course prior to August 1st we'll have the opportunity to have unlimited access to Sofia for $79 per month, and we believe this is another example of our ongoing commitment to be a leader on college affordability.
Another area I highlighted as a potential future opportunity for Sci is helping other institutions transition to online instruction, particularly since many of them have little to no experience in a digital setting, including many of the nation's HPC use and since our last call.
Has received requests for more than 14 institutions collectively covering more than 25% of their faculty members for online trading.
We have created several courses to teach best practices in delivering in teaching online instruction and to date have taught more than 300, non Sci faculty members with an additional 100 on a waitlist in fact three of these institutions have requested that we teach a 100% of their faculty members in best practices in digital.
Turning.
To date as we said previously we've provided this as a public service with no charge to these institutions, but moving forward. We see this as a possible new source of revenue as we get into the latter part of this year and moving into 2021.
Finally, this morning like Rob I'd like to briefly comment on the acquisition, we announced today of laureate educations towards University unaffiliated assets.
This acquisition, which we anticipate will be immediately and significantly accretive it's consistent with our desire to find the highest quality most attractive higher education assets be that domestic or international. It clearly we felt we accomplish that in 2018 with the strayer and capella merger in the United States and now.
We are confident we have found the highest quality asset in the Asia Pacific regions towards as the only federally recognized university level investor funded institution in Australia.
Like Strayer and Capella. It focuses primarily on adult students and has a very strong track record of producing superior academic outcomes.
Towards is led by its very talented CEO, Linda Brown, who upon close will report to me and she is aided by an exceptional team of leaders who have built this institution from the ground up.
We have already begun transition and integration planning, which admittedly will be slightly more complicated with current travel restrictions, but I have full confidence in Linda and her team as well as the Sci team to complete this transition in a timely and effective manner.
Our goal is to support Linda and her team as they work to fulfill their mission and also bring any and all Sci tools and technologies to help further improve outcomes and retention.
And finally this morning I'd like to express my ongoing and considerable gratitude to all of my colleagues within Sci.
They continue to work tirelessly on behalf of our students and in many cases, even more so now when their remote as opposed to when they were in the office and with that I'll ask stand to run through the second quarter financial results Dan.
Carl and good morning, everyone first I want to remind everyone that our earnings release references as reported or GAAP results as well as adjusted results, which are non-GAAP adjusted numbers exclude charges and expenses that are nonrecurring including merger related costs.
Please refer to non-GAAP financial information included in the second quarter earnings release, we issued this morning for additional information.
Moving onto our our second quarter results revenue for the second quarter grew 4.4% to 255.8 million compared to 245.1 million in 2019, driven by nearly 4% total enrollment growth, including both capella in strayer university's and slight improvement in revenue per student.
Revenue per student was significantly better than we expected for the quarter due in part to higher courses per learner, Capella University, which more than offset the impact of attrition discounts and scholarships granted to students impacted by the pandemic.
Attrition uptake.
Christian and uptake of discounts and scholarships were lower than we anticipated for the quarter a trend we expect in the third quarter and thus we anticipate relatively stable revenue per student from the third quarter for the full year. We project revenue for soon to be down about 100 basis points, driven by pandemic relief measures and a continued mix shift to lower paying corporate sponsored students.
Expected in the fourth quarter.
Adjusted operating expenses for the second quarter declined 3.1% to 192.8 million compared to 199 million in 2019, which coupled with our revenue growth drove almost 37% growth in adjusted operating income and almost 600 basis points of margin expansion.
Operating expenses for the second quarter were lower than we expected due mostly to bigger pandemic related savings on facilities travel events and healthcare expenses.
Our bad debt was 4.7% of revenue for the quarter, which was inline with last year, even after considering an additional reserve against weaker anticipated collection due to the pandemic year to date. The additional reserve we've taken equates to about 100 basis points of additional bad debt expense as it as a percent of revenue.
Adjusted diluted earnings per share for the quarter grew 29.6% to $2 in six cents compared to $1.59 in 2019.
Adjusted effective tax rate for the second quarter.
28.5%, which is also the tax rate, we're forecasting for the third quarter and full year 2020.
Moving to the balance sheet and cash flow, we generated 43.2 million in cash from operations during the quarter compared to 44.4 million during the second quarter of 2019 and ended the quarter with 525.
Point $3 million of cash cash equivalents in marketable securities our cash from operations for the quarter was impacted by some unfavorable timing of large vendor payments and the timing of a large payroll run at the end of June.
Capital expenditures for the second quarter of 2020.
Were 11.2 million compared to 10.1 million for the same period in 2019 and for the full year 2020, we expect capital expenditures to be at the lower end of our estimate of between 40 and $45 million and finally, we continue to maintain 250 million in available credit on revolver, though as indicated in our transaction announcement. This morning.
We received commitments to expand the facility to 350 million at the close of the pending transaction.
Rob.
Thank you, Dan and Carl and operator, we'd be pleased to answer any questions.
Certainly as a reminder, ladies and gentlemen, if you wish to ask a question. Please press star one on your telephone to withdraw your question first the penalty.
Please standby, while we compile the culinary roster.
No first question comes on line of Jeff Silber BMO capital markets.
Thanks, so much and good morning.
And Jeff wanted to point I guess, what are the first start on the acquisition I know you've been talking about going internationally or at least outside the us for some time.
Why Asia Pacific as opposed to Europe, you talked a little bit about that specific assets, you're buying but im just curious.
In terms of the region.
Well, it's both Asia Pacific and specifically, Jeff, It's Australia New Zealand.
We're looking for markets, where there's very predictable good rule of law English language strong academic cultures that Mary the the academic and regulatory oversight that we have here in the us.
The fact that it happens to be located in the Asia Pacific region is an added benefit.
But it's more about the quality of the institution and the market in which is located and our belief in our ability to transfer some of the.
Expertise that we have in teaching working adults, particularly online.
To a platform that we think in.
To which we can add value and from which I think we can extract an enormous amount of value.
Okay. That's helpful.
Based on what laureate disclosed about the schools it looks like a pretty sizable acquisition price relative to your own multiple on can you talk about how you justify paying that multiple.
Yes, I'm not sure Thats accurate Dan.
Jeff.
But the.
Obviously is when when the deal is closed in some of the background information is available than I think that will be made clear.
But.
In our view is when you have an opportunity for the highest quality academic assets.
And you have.
Sufficient excess capital available to invest.
You take advantage of those opportunities.
As I said, we we keep track of a small number of of platforms. Both in the United States and outside of the United States that we think meet that criteria and when they become available we try and take advantage of that.
Okay. You may can you expect the transaction to be I guess immediate and significantly accretive can you talk a little bit about that are you going to get there are there any synergy goals involved et cetera.
Well, there arent any real cost synergies, Jeff because number one in a market is.
Distinct.
As Australia is from where we are.
We're not looking for the kinds of synergies that we had when we combined strayer and capella.
There may very well be a number of revenue synergies associated with our technologies and some of our platform and programs.
But the real driver.
Significant accretion is we're taking excess capital, which is earning nothing on our balance sheet.
And employing it at rates of return relatively equal to what we have in our current business and when you do that math you generate an awful lot of accretion.
All right that makes sense and finally, one more before I jump back into queue you had given.
A goal in terms of reaching I think it was low to mid 20% adjusted operating margin by the end of next year does this transaction impact that at all.
Hey, Jeff Carl I don't think so.
You know weve.
We've been quite focused on cost management throughout the year, our adjusted operating margin. This quarter was nearly 25%. So we don't anticipate that post close our notional view that we should have margins in the mid 20% range would change at all.
Okay, that's really helpful I'll jump back in queue. Thanks, Thanks, Jeff.
Thank you next question comes from the lineup, Alex Paris with Barrington Research.
Good morning, this is Chris off sitting in for Alex.
Well the color that you provided bus bar.
A little bit deeper in regard to straighter and also capella.
Can you provide some color as to the month to month.
Cadence or.
Sequentially, what you saw for the respective institutions in regard to enrollments and.
Specifically.
Corporate enrollment in regard to strayer.
And how that impacted.
Your results and following up on that.
Perhaps some additional color on what you're seeing so far and wide.
The month to month cadence.
Sure.
One thing to note strayer and capella operate on different academic calendars.
And that's a product of Capella University, having monthly new student starts in strayer, only having quarterly new student starts so.
In any moment in time Strayer is always enrolling students for their next quarter a quarter ahead of Capella, which is why we were able to provide you with some visibility for the third quarter today, because stringers already completed that.
Whereas capella is still very much in the early.
Part of their third quarter enrollment.
I'd say broadly we began to see some adverse impact on overall demand and by that I mean inquiries into the universities and and applications for new student enrollment in the back half of the second quarter.
As I said it my comments, that's been more pronounced strayer much less so at capella.
I can't provide any visibility on capellas third quarter enrollment results because it's so early other than to say, we see it being substantially better than what strangers was.
And it wouldn't be appropriate to comment beyond that for their third quarter, because they're so early in the process and with respect to corporate enrollments.
As has traditionally been the case when we've had periods of economic downturns.
Corporate affiliated enrollments are performing much better than the non affiliate channel. Although I don't have the specific number for the third quarter for Strayer with me today right now.
Mm.
Okay, and you mentioned the more pronounced impact.
For strayer, given the visibility I just want to make sure I have it correct.
New student enrollment for the upcoming quarter, you said down.
What was the number.
So for the second quarter, which we reported today Strayer is new students declined 4% on a year over year basis, and because strayer has already completed its third quarter to quarter enrollment, we can provide that number two and its down 27% year over year.
One of the Miss your head that correct and then my last question just in regards to the acquisition you mentioned that you've been tracking them along with.
Half a dozen other global institutions.
Was this more of a reflection of.
This asset coming Brazil, how is the current environment.
And as these institutions.
Some of which may be more pandemic Lee strained than others are more coming are more institutions home into markets that are yet still of high quality that fits.
The brand that you currently yet.
We don't have anything.
Alex This is Rob we don't have anything.
That is immediately available that we know of.
And indeed, the kinds of institutions that we keep our eye on.
Unlike all institutions are affected by the worldwide pandemic and I think most importantly, the economic distress associated with that.
But our view was.
The pandemic and cobot is a temporary phenomenon.
Academic quality, if you maintain and as a permanent source of value.
So.
We were not overly concerned about the short term impact with regard to covidien.
And considered ourselves fortunate to be in a situation to get our hands on something that weve sort of fellas that after.
And.
That it was available.
Okay, Great. That's all you have for now and appreciate the color as always thank you. Thanks Alex.
And as a reminder to ask a question you will need to press star one on your telephone.
Our next question comes from the line of Greg Pendy with Sidoti and company.
Hey, guys. Thanks for taking my question can you provide with US it seems like you.
Outperformed your.
The budget forecast you provide us a little bit the color or maybe what some of the drivers were and then secondly on that topic.
What's called the costs, you incur where the significant with sort of direct to consumer free so operating in the quarter and also the floating.
In structural teaching costs and how should we be think about those going forward. Thanks.
Hey, Greg This is Dan I'll take the first one on the handed over to Carl on the on the performance relative to what we said last quarter.
It was both on the revenue front and again driven.
Primarily by slightly better enrollment and in better revenue per student and then more significantly on on expense savings, which as I noted noted earlier, where a lot driven by pandemic savings that we we froze travel events.
And cut back on a lot of in other areas.
Leading into the pandemic and then healthcare expenses, which of course, we don't directly control.
A big part of it as our employees adapted to the kind of the lockdown situations. So that those are the big drivers of it and.
I think moving forward, we're going to continue to manage costs.
Prudently as we can but I think there's definitely an element of some timing on this as we as we hopefully return to some level of normalcy.
Yes, and with respect to incremental expenses for Sofia, and our online enablement of other institutions.
On the SIFI aside we added some head count.
These are courses that eventually it provided you pass can be transfer credits. So we want to maintain a high level of academic integrity and so one of the roles that we Havent Sofia are people that audit. The course work on the part of the student we added some of those auditors, but these are a few hundred thousand dollars of incremental expense to Dan's point that was more than offer.
By savings and other areas and with the online training that we did that with content that we had already created so there was really no incremental expense associated with delivering that.
Okay. That's helpful. Thanks, a lot.
Thank you and we have a follow up question from the line of Jeff Silber BMO capital markets.
Thanks, So much in your prepared remarks, and forgive me at all of the exact reporting but I think you talked about.
The pandemic.
Accelerating the plans to move straight a fully online University can you talk a little bit about that I know you've been expanding your footprint you may turn those centers into some of the learning centers like you Havent capella, but some more color on that would be great. Thanks.
Yes sure Jeff.
It's important to note that back in March we cancelled all of stringers on ground classes for the spring term they've been canceled for the summer term and they will be cancelled for the fall term. So we will have gone almost a full year with no on ground classes at strayer.
And pre Cove, it only about 5% of our overall instructional seats were being taught in the on ground mode. In one of our campuses. So we just see this is an opportunity to move all of that Ics instruction with a few exceptions in major metropolitan markets, where we have a high percentage of international students on F. One.
Visas.
And or VA students, who need some on ground flexibility, we probably will continue to provide that in select markets other than that it just makes sense to to move where students preferences have already been going over the last several years, which is fully online.
And Jeff.
Just one thing you. This is Rob I just wanted to amplify is that.
The.
Our our campus network.
For the most part has been built out over the last 20 years.
And these facilities were designed and built at a period, where that ratio that Carl described was much much lower and in terms of the online participation.
In many Kate I mean, I think it was 30 or 40% of our classes were were online versus 60 or 70%.
In the in the classroom so.
As those leases.
We are rolling off we were already incrementally taking advantage of a shrinking footprint.
Hello.
The cost savings that come from the fact that we just know we can accelerate that shrinking of the footprint.
Okay, Great. That's helpful. Thanks, so much yep.
Thank you.
Next question comes in line or Randy Heck with good now investment.
Thanks for taking my my question I actually two questions. The first one is.
The seasonally typical year Q3 starts force dray or equal roughly what percentage of the total starts then have a follow up after that.
Randy Carl it's by far the lowest.
And on a discrete percentage of overall annual new students, Dan and I'd have to get back to you on that we don't have that off the top of our head, but it clearly is seasonally the lowest cohort smallest cohort.
Okay, and secondly, if I looking at laureates 10-K.
Trying to match up what.
The Australian and New Zealand properties.
It looks like revenue.
Somewhere in the neighborhood of $190 million, maybe just a little less than that.
Okay.
Assuming that numbers in the ballpark.
I think Rob.
Answered a question, but I think Rob said margins would be comparable.
Strategic educations.
Current margins, which.
25% would imply that the.
EBITDA I think thats, an EBITDA margin would be somewhere around 40% $50 million other things being equal based on in 2019 numbers, which in a by the way does it looks like the enrollment with its grown reasonably nicely.
Since.
19, so I'm not.
Im reading this correctly.
Am I right ballpark there.
Randy I think if you'd probably in them and the right ballpark.
But.
At this point, we Havent we havent.
Included any of that in our disclosure so I would.
Say your math is probably right based on what laureates, saying, Okay. We don't have left at Heartland.
Okay, and the and the funding of this acquisition is it are you going to use essentially all of your cash balance sheet or the majority of it.
Radius, Rob we're finalizing the financing plan it won't really be.
Necessary for several months, obviously, it's probably you know hopefully within six months, we could get it closed.
But we do have sufficient capital access to capital and we'll optimize it for the highest return on capital and all of our other obligations.
Okay, but as you pointed out.
I wanted to be highly accretive because.
The cash balance sheet currently is earning about nothing and.
Borrowing money at this point is also comes to nothing.
Yes, so that's accurate thanks.
Okay.
Terrific it sounds like a great deal and.
Based on your.
On the result.
Capella acquisition.
I would say.
Shareholders ought to be pretty happy.
Thank you.
Thanks, Ryan Thanks, Randy.
Thank you and I'm showing no further questions I'll now turn the call back over to executive Chairman, Robert Silberman for any closing remarks.
Thank you operator, and thank you ladies and gentlemen.
We look forward to continuing to communicate with you. If you have questions. Please give us a call.
And we'll talk to you on our next scheduled earnings call in third quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
[music].
[music].
[music].
[music].