Q1 2021 Strategic Education Inc Earnings Call
Yeah.
Welcome to the STB Education's first quarter 2021 results conference call.
I will now turn the call over the three smoky manager of Investor Relations for strategic education.
Please go ahead.
Yeah.
Thank you good morning, everyone and welcome to strategic Education's Conference call in which we will discuss first quarter of 2021 results.
With us today are Robert Silberman Executive 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 other 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 found in strategic education. 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 eight Ks 10, Qs and 10 Ks.
Copies of these filings and the full press release are available for viewing on the website at strategic education Dotcom.
And now I'd like to turn the call over to Rob Rob. Please go ahead.
Thank you Theresa and good morning, ladies and gentlemen, this first quarter earnings report coincides with the one year anniversary of the global impact of the coronavirus pandemic.
The support also coincides with the point in the calendar, which we have a good view of the first half of the year and we start to get a sense of the second half as such we're going to go into a little more detail. This morning than we normally do on both of our individual segment results and also on our outlook for the balance of the year.
Karl will walk us through both the segment results from the forecasts.
Dan has a couple of detailed comments on the Q1 financials and then I'll make some concluding remarks before we open it up to questions Karl.
Thank you, Rob and good morning, everyone.
This morning, as I discuss our first quarter results. In addition to my normal commentary on our operating results.
Tend to also provide a more detailed update on the Strayer University, who is the performance remains challenged as well as to provide a full year financial outlook for the Companys consolidated results.
This is to assist our owners and better understanding the financial impact of Strayer University's performance as well as to better understand Australia, and new Zealand's contributions over the full year given the seasonality of the first quarter.
I'll be discussing our results by segment, beginning with our largest segment U S higher education, which is mostly comprised of our two U S based universities Strayer and capella.
For the first quarter U S higher education revenue decreased 29 $29 million from the prior year, which is a reduction of 11%.
The restructuring that we began in the second half of 2020, and which is now largely complete enabled us to reduce the U S higher education operating expenses by 10% generating $20 million of savings.
As a result, there segment operating income decreased $9 million from the prior year, which is a reduction of 16%.
Capello, the operating income actually increased $2 million for the first quarter, while strayer has contracted $11 million.
Total enrollment within the U S higher education decreased 7% from the prior year.
These declines in our U S higher education enrollment and financial results are attributable to the ongoing performance challenges at Strayer University.
This morning, I'd like to describe what we believe is causing these performance challenges as well as what we're doing to improve the results.
From a call of standpoint, we see three primary drivers to the of her current performance challenges.
We continue to see the economic hardships created from the COVID-19 related restrictions and shutdowns for more than the past year on the strayer student demographic as the largest contributing factor to their declining performance as a reminder, over two thirds of strayer new student cohorts are first time college students, meaning they're high.
This level of education attainment at the time of enrollment is of high school diploma, which during any period of economic distress is the segment of the labor force most adversely impacted seconds.
Secondly, we have also begun to see a sizeable increase in competitive intensity, which has resulted in advertising inflation lowering the yield of our marketing investments of.
Of course Capella operates in the same competitor the the same competitive environment and aside from serving of more established student than Strayer student demographic. Capella has also greatly advantaged by Flexpath, which has consistently generated 20% plus growth since being launched.
And third we do see operational challenges for strayer, whose admissions enrollment and advising processes were built for an operated within a network of 65 campuses with local presence in the various communities in which we operate.
Strayer students have taken almost all of their courses online for many years now, but the admissions and enrollment process was handled at the local campus level, having to abruptly shut that system down and pivot to a 100% remote work presented challenges that are certainly fixable, but also have the adversely impacted our performance to date.
<unk> say, we have begun to see some improvements in Australia as key performance areas, most notably first quarter continuation rate increased 100 basis points from the prior year, which is the first time that that metric has improved on a year over year basis since before the pandemic.
Also the percentage of new applicants, making the decision to enroll in the University has been steadily, albeit gradually improving each week since the middle of the fourth quarter of last year.
Strayer has the ability to engage with people enquiring into the University, along with new applicants measured as the total number of hours spent actually speaking with the prospective students per week is nearly identical to the same metric of capella, which has been growing new students.
Our strategy to recover Strayer has performance to pre pandemic levels and return to sustainable growth of involve new initiatives aligned to our ongoing strategy of focusing on affordability and corporate partnerships within the next couple of weeks, we will be launching of new employer focus tuition assistance subscription product that enables large.
Here's to greatly expand the reach of their education benefit dollars without having to increase the overall size of the benefit.
We will also be launching a new first term in first year student experience, which includes the opportunity for a new student to begin their instruction during any week that is convenient for them versus limiting it to strayer has the existing for academic start dates per year.
We're also implementing new technologies that will substantially improve our teams ability to engage and communicate with our students and finally, we are reopening campuses and plan to have 15 campuses open over the next month with plans to reopen most if not all by the end of the year.
Notwithstanding some of these emerging signs of stabilization and improvement it is clear to us that strayer has returned to new student growth is not likely to occur before the fourth quarter of this year and could be delayed until the first half of 2022.
For the full year 2021, we see total enrollment at U S higher education to be down approximately 10%.
Turning now to our alternative learning segment, which consist of three primary products first Sophia learning our direct to consumer platform of American Council of Education certified college level courses offering consumers, an ultra low cost way to earn college credit.
So for years revenue for the first quarter more than doubled from the prior year to $3 million. Currently we expect Sophie as full year revenue to exceed $14 million for 2021, which would be of 350% growth rate above the 12 months preceding the pandemic.
Beyond this year, we're planning for C. P of degenerate at least $20 million in revenue in 2022, and ultimately building at two of 50 million dollar business.
Workforce edge is our SaaS based education benefits management platform that enables small medium and large companies to better manage their tuition assistance plans and provides those companies with access to our proprietary network of S. C. I N noodle partner institutions.
Our first priority for work force edge is the gain market traction and we set a goal to have at least 300000 total employees, having their education benefits manage through work force edge during the course of this year.
I'm pleased to say as of now we have already surpassed the full year goal and already have close to 400000 employees on the platform.
Unlike workforce edge has two primary competitors in the space access and use of the platform is free to the company money.
Monetization of the platform occurs through enrollment from workforce edge in the strayer and Capella universities base.
Based on our understanding of the education benefit participation rates.
It does not seem unreasonable for us to assume ultimately we should be able to capture somewhere between one and 3% of employees on the platform into enrollments at either strayer or Capella universities, which again is why our first year goal has been to sign up as many employer partners as possible, creating a critical mass of employees available to enroll.
And lastly, the other main product of alternative learning is our employer solutions team, which manages our 900 plus corporate partnerships for strayer and Capella and works to increase these employer affiliated enrollments across both universities and for the first quarter total employer affiliated enrollments increased.
400 basis points from the prior year.
Across all of these products alternative learnings revenue grew 30% to nearly $13 million. There are $6 million of segment level operating income is flat from the prior year as we also invested $3 million of incremental operating expense to further support the 30% revenue growth over the next couple of years.
Yeah.
These incremental investments were front end loaded into the first quarter and their current expense run rate should stay relatively flat for the balance of the year, resulting in income growth this year and with normalized operating margins in the mid to high 50% range in the years ahead.
Our Australia and New Zealand segment completed its first full quarter of operations under Sci and during the quarter achieved their first term budgeted enrollment.
You may recall, we had a slight loss from ANZ in the fourth quarter of last year, which was mostly attributable to the timing of the close from laureate education the.
The small segment level of decline in Q1 operating income is entirely attributable to seasonality and we fully expect the Australian segment to fully achieve their full year revenue in EBITDA targets of $270 million and 60 million U S dollars respectively. The.
The transition of Australia, and New Zealand from Laureate education systems infrastructure and onto the Sci platforms remains on track to be completed by the end of the second quarter of this year.
And finally, because we want to assist our owners to best understand the impact of of challenging performance situation of Strayer University as well as the other moving pieces of our three segments. We have decided to share our current full year outlook for the full year 2021, we see the following ranges of performance.
Revenue of between 1.165 and $1.180 billion of.
Adjusted EBITDA of between 245, and $265 million and adjusted earnings per share of between $5.20 and $5.50.
And as always I'd like to express my deep gratitude to our faculty our administrators and other professionals at Sci for their ongoing commitment to our mission and the success of our students and with that I'd outstand to walk through our financials in a little more detail.
Thank you Karl and good morning, everyone.
Karl has already covered much of the Q1 performance I'm just going to add a few comments, but first I wanted to remind everyone that our adjusted results and the outlook. The Karl just described are non-GAAP and exclude charges and expenses that are nonrecurring, including merger acquisition and restructuring costs now a couple of notes on the quarter, our consolidated bad debt.
Climbed to three 7% from for 2% last year. This was due to a relatively flat bad debt in the U S and much lower bad debt in Australia, New Zealand, where our tuition payment arrangements generally result in us collecting a larger portion upfront we expect bad debt for the full year to be in the four to four five per cent range.
Our adjusted effective tax rate was 29.2% for the quarter were still forecasting 29 five per cent for the full year.
Cash from operations for the quarter was particularly strong due to favorable working capital dynamics in Australia, and New Zealand. We received a portion of our Q2 tuition revenue in March we will likely see some of this benefit reversed towards the end of the year, but continue to project distributable free cash flow for the year to be at or better than our adjusted net income.
Our capex was a little lower year over year at $12 7 million compared to $14 3 million. This was mostly related to timing and we continue to expect full year capex in the range of $50 million to $55 million.
And finally, we ended the quarter with $274 million of cash cash equivalents and marketable securities and approximately $210 million of available credit on our 350 million dollar revolver Rob.
Thank you Dan So just a couple of final points.
The first S T I as a stronger and more financially sound institution today than at any point in its history.
After a year of enormous economic disruption our Australian assets. The alternative learning Division and Capella University are all performing very well and even strayer University somewhat challenged in terms of enrollment growth is both financially stable and continues to contribute of healthy operating surplus.
Second because of our financial strength, we can absorb wide variations in student enrollment and revenue at any one entity. Therefore, our primary focus will continue to be on improving the academic outcomes of our students across all of our institutions, which we believe is the only generator of sustainable increases in the per.
Her share of value of Sci.
And finally, the current strength and stability of Sci is the result of investments. The company has made over the last 10 years, including the founding of the Jack Welch Management Institute.
Our yearly investments in academic technologies, including Flexpath, our Tenex academic program at Strayer Studios.
Our merger with Capella Education company, which resulted in more than $70 million in annual operating synergies and finally, our most recent purchase of our Australian and New Zealand assets.
These investments have significantly increase S. He is per share of revenue earnings and cash flow over what they would have otherwise been today and have given us the resilience to not just navigate through the coronavirus pandemic, but also the financial resources to fund significant future growth opportunities to continue to improve.
Our academic capabilities and performance and to provide a healthy return of capital to our owners.
And with that operator, we'd be pleased to answer any questions.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
Charles Your question press the pound key.
Again that is star then one if you'd like to ask a question at this time.
Our first question comes from Jeff Silber with BMO capital markets.
Thank you so much and I appreciate all the details I wanted to go back for some of the early.
Of your comments.
Can you parse out some of the issues that are occurring at Strayer University.
Specifically focusing on shutting the campuses I don't think you've called this out beforehand.
Is that something that's been happening obviously since the campuses had been shot but you are either not aware of it or didnt discuss it publicly if you can just give us a little bit more color when exactly you figured out that this was an issue.
Sure Good morning, Jeff, it's something that we've been monitoring throughout the past year.
We've said all along that we think the single largest factor is just the economic hardships being experienced by the strayer student demographic somebody who is the first time college student.
But we but we also have recognized that.
That we had of our emissions and enrollment and advising process that was designed to work at a local level and that has been significantly interrupted over the last year. So we do believe it's had an impact I think it's relatively small.
But that's why we're focused now that the virus seems to be subsiding vaccinations are increasing we're focused on reopening as many campuses as we can between now and the end of the year. So that we can resume that local interactivity that we have with students.
Alright, that's fair enough you mentioned again, a smaller impact being competition intensifying I think he talked.
More about the impact on advertising cost but.
Are you seeing.
Losing share to some of these competitors are these new competitors or are these just competitors that had been around for a while you know ramping up their advertising. If you can give us some color there as well that'd be great.
Sure. It's twofold. So first I think there's just large advertising inflation across all industries.
As more and more companies are resuming their normalized advertising budgets, we've seen that across all channels.
And then I would say that we're seeing increased competition from all sorts of postsecondary education organizations traditional competitors that we've seen for the past several years as well as some smaller of regional entities that are now moving into the online space post pandemic. So it's a combination of just advertising <unk>.
Spence inflation, which I think all companies are seeing as well as some increased competition in the post secondary space.
Okay, and just the segue off of that.
Yesterday, the president announced the.
The American families plan.
Potentially giving a lot of money to community colleges.
<unk> et cetera, I know you work with a lot of those of organization, but do you see the influx of funding there being a potential competitive threats or are you going forward as well.
Actually Jeff we've been focused on affordability as you know for many years and our current thinking is that by integrating tools like Sofia, which we've already done frankly of Capella and strayer, which enables the student to earn a significant portion of their general education courses for free.
Actually aligned with the thinking that an ultra low cost or even free associate's degree is in the best interest of students. It's something that we're working towards I alluded it to it in my prepared comments when I said, we're going to be implementing our new first year experience for students that involved for that type of a program to eliminate as much of the cost as we can.
In the first year for students and then if you align that with our strategy that we outlined at Investor day of a little more than a year ago around transferring the other payments from the private sector or sorry from the public sector visa the title for to corporations, ultimately, where we're trying to get at Strayer University in particular is that the student him or her.
Herself would bear almost no cost of the degree either because we've eliminated the need for tuition through things like Sofia integration for general edge of courses and or we've transferred the responsibility of paying it two of corporation, who has a partnership with us.
Okay. Thanks, so much I'll jump back in the queue.
Thanks, Jeff.
Our next question comes from Tobey Sommer with truly securities.
Thank you.
With the follow up on one of these rigs from questions with respect to.
The emerging competition new online entrants.
Post pandemic.
Of course me that maybe a lot of institutions feel the need to make that transition. So is this.
Played out where you think we've seen that impact or is this the tip of the iceberg is sort of everybody who wasn't online shift online.
Well I think broadly.
Over and this was our point of view, even pre pandemic, we we expect and plan that competition will increase we.
We see the future of education is clearly being digital.
So to the extent the majority of institutions Werent able to teach in the online modality. It was only a matter of time and our point of view that they would realize that they had to the pandemic clearly has caused that realization.
And so we are very much looking for ways to continue to have differentiated or advantage products or programs, which as I said Capella is clearly advantaged with flexpath and for strayer. It's the the culmination of everything that I've been saying around having an ultra low cost degree combined with these very deep <unk>.
Partnerships are 900, plus so as work force edge begins to ramp up and has you know over 400000 employees and as those employees start to enroll in the University. We feel that that is going to be a significant differentiator for strayer and then both of our institutions institutions.
Would have advantaged sort of places in the space.
That would be able to insulate them from what we do see is continued increases in competition plus call. You had mentioned on the qualitative side Strayer Studios you know all of the academic improvements that have been made that we think are going to yeah, well our investments in not just studios, but all of these other technologies around tenex instructional.
The model our faculty action Center those are really designed to help drive our academic success and long term retention and so we've got we've got things in motion that are designed to differentiate on the front end. If you will for prospective new student and then things that are designed to get traction in the classroom.
And so that we get long term completion rates the retention increased and so forth.
Okay. That's helpful could you describe are on the on the corporate side, the competitive landscape and <unk>.
What switching cost would look like for a corporate relationship to you know move from another institution to being.
So looking towards strategic education, as a partner or vice versa.
I think this is an area Tobey, where we really are advantaged, just given the breadth and scale.
Of our assets, we're the only provider that can vertically vertically integrate degree granting accredited universities with alternative on ramps likes of fear and our ability to bundle those and be able to offer a very affordable price point from of tuition standpoint for employers is quite compelling and I think we've seen that having gone from.
No employees on workforce edge of the start of the year to over 400000 in the span of a quarter. We actually did have at least one employer that I know of a relatively large employer switch from one of our main competitors onto work force edge because again, it's free to the company to use.
So I am very confident in our ability to differentiate visa the corporations of the large education provider and to my knowledge Sci is the only organization in the United States that continues to add large.
Fortune 500 level enterprise level arrangements from an education benefit standpoint.
So as I said, it's a major area of investment for us.
We plan for that alternative division to grow at least 30% the share and.
You know, we're very confident that it'll be an important part of our business in the years ahead.
Okay.
Last question for me with respect to sort of the ROI calculus that you're.
The target student demographic. They may look at the choice to go back to school does the potential for a substantial increase in the minimum wage a shift.
Shifts that calculation or kind of visit and influential in any way from your perspective.
I I would doubt it I think the reality is many of the students of Australia in particular of rely on grants and federal aid and to the extent the theyre employed in one of our corporate partners tuition assistance to fund their education.
It speaks to our strategy to reduce as low as we can.
The cost of the degree and to minimize the out of pocket expense and hopefully that for students.
But I don't see an increase in of minimum wage being a catalyst in any way for for higher levels of enrollment.
Thank you for your time.
Thank you.
Our next question comes from Gary Bisbee with Bank of America Securities.
Hey, guys. Good morning, Hey, Gary I guess, a couple of let me start with a couple on alternative of learning and corporate overall, so first of all of that now that you've put this out of zone segment.
Help us understand.
What's in the revenue and it may be.
How does if a student enrolled in one of your two universities through corporate relationship like what's the royalty that's paid for this or how are the economics split I'm trying to think through cost structure of margin.
For the new segment.
Gary This is Dan first of all of its about 70%.
Related to employer affiliated enrollment and it's essentially of revenue.
The transfer that's based on the the the work that the alternative learning group team of employer solutions is doing two to generate those agreements and to activate those agreements with employers and then the rest of it is essentially Sofia.
So he has been growing by far the most rapidly and is the biggest driver of the growth in that revenue.
Okay.
And.
And so then.
If I look at the end of employer enrollment you in the in the.
New segment.
The other day, you showed that percentage than it was.
Your notes today as well.
It looks like you grew.
From employer affiliations are nicely year over year actually in the quarter. Despite you know despite the challenges.
And it's been growing.
You know over time.
What's been driving that say in the last.
12 to 18 months and I guess, how sustainable is that in the current environment do you believe those relationships will continue to drive growth.
As we look to move through the rest of this year.
Yes, we do expect that our our employer affiliated enrollment will continue to grow.
And the growth that you're speaking of <unk> over the past couple of quarters has really been mostly health care related partnerships growing at capella.
It has been growing in some cases in excess of 20, 25% year over year.
Strayer its growth has been less but.
Importantly, the strayer employer affiliated account management team is just now able to return to local field base activation. So when we have a relationship as we do with a company like best buy or Cvs as an example, historically our teams would be out visiting.
These stores are in the regions in which we have campuses and so forth that stopped for the better part of the year, but has now started to open back up.
And some of the very early metrics.
Which would include things like new inquiries into the universities or even applications there, they're actually up significantly over the prior year. So we're confident the combination of the continued popularity of Flexpath in health care in particular at Capella and now being able to engage at the local level for the strayer related corporate partnerships combined.
With the growing ecosystem on workforce edge, we do think that that's going to continue to drive higher employer affiliated enrollment in both of our universities.
And on <unk>.
One last one on this topic on the <unk>.
The Capella healthcare.
Tremendous success and you've been talking about that for a while now but is that largely like.
For the nursing program, you've discussed over the last couple of years.
Yes.
There are of a large part of it is the flexpath RN to BSN.
The students that enrolled in that program have been finishing in roughly a year. So it's a it's almost the perfect program for a nurse who has clearly a lot of practical knowledge and needs of the credential to to further his or her career.
So that has been the big driver on the Capella side of it and we continue to see a lot of strong demand in that program.
Great and then just one last one and I'll turn it over so the cost saves that you. The program you started last fall you.
That said you made great progress into Q1 is there more to go in terms of Q2 versus Q1 or is it safe to say.
Net debt.
Most of those had been achieved.
Yes investments beyond the $3 million this quarter, an alternative learning is there is there anything.
Materially different you'd expect in the next couple of quarters on the investment front.
Gary There are a few more pieces of the restructuring that will have at the at.
At this point of finished in the second quarter. So we'll still have some incremental savings throughout the rest of the year.
And on the investment front I'll, let Karl speak to the specific investments, but there will be additional investments because we are reinvesting some of that savings through the balance of the year as I said, Gary the $3 million step up in the alternative learning Opex was primarily of time to be in the first quarter, there may be very small and incremental.
<unk> from here on out, but I would use their Q1 run rate is a good run rate for the rest of the year.
Great. Thank you.
<unk>.
As a reminder, if you'd like to ask the question at this time that's star then one.
Our next question comes from Greg <unk> with Sidoti.
My questions and thanks for all of the color on Strayer, but just one kind of a question of the policies on the struggles at strayer, how much of it I mean, you alluded to the strength of nursing, which is obviously your cap of capturing through capella, but how on point is the curriculum at strayer with what students.
The demanding given the trends seem to be heavily favoring stem in nursing right now and is that part of the problem.
I don't think so.
Again remember the you're talking about two very different types of students of capella nearly everyone that enrolls over 70% of students there already have of Baccalaureate degree.
We're at Strayer, it's the exact opposite of more than 70 per cent of students don't and they only have a high school education and by and large business specifically, our Bachelor of business administration continues to be the most popular degree for that segment of students and we're confident that we've got a great curricula and we've got a great program we've got.
You know very differentiated student experience in the course room with the tools and technologies that we have what we've said and we have data to back this up now that the.
They're just very reluctant to enroll the first time college student and we presume that is because of all of the distress that they've been under economically.
And when we look at data that shows that we're still having the same level of conversations we're still able to talk to students identical to capella as metrics, but they're just not enrolling.
And it's not a period in which we feel comfortable or confident to necessarily push somebody to enroll because it's certainly not going to be enough students' best interest that won't be in the best interests of the institution either.
And so when Rob says, we're able to withstand wide variations in our enrollment of it. It means that we're comfortable waiting for the students economic condition to improve enough. So that he or she does have the confidence to take on a degree program because it's quite rigorous.
Aside from the fact that they may be hesitant, we're doing everything that we can do internally operationally to remove any other friction that may exist, but ultimately the student has to have the confidence that it's the right time for him or her to enroll and that has not been the case for the last year.
Hey, Greg just one of them. This is Rob one other comment.
Comment on that that might be helpful from an external standpoint, as you look back over the last 20 years of Strayer University's history. The periods in which enrollment has been challenged Australia University had been periods of rapidly declined labor participation rates and you know from an economic standpoint economics of.
Pistic standpoint, if you are looking for an external metric.
Sort of define when this a reluctance for this economic pressure that Karl is describing.
Alleviate some of his watch those labor participation rates as the economy Reinflate says as.
We go back to a pre pandemic kind of mode of operation.
And not just employment goes up but employment confidence goes up that's what I think you'll see the sort of change in attitude that we're.
Comfortable waiting for because it brings us the right kinds of students.
Okay. So then it's fair to say that just that type of student or that degree might be more economically sensitive I would take it then other types of degrees correct that's been our experience.
Okay, and then just one final one of just as we get familiar with the Australia and New Zealand assets can you just give us the big picture. It looks like you kept your full year target of $270 billion in revenues just what the cadence of how we should be thinking about the cadence.
Given the seasonality in <unk> yeah.
Yeah, Greg the the the second and the third quarter are by far the.
The biggest quarters and the biggest contributors to the bottom line.
And then the fourth quarter is probably just just follows the the first quarter first quarter is always going to be the lowest.
Then the fourth quarter second and third of pretty in line with each other.
Perfect. Thanks, a lot. Thank you.
I'm showing no further questions in queue at this time I'd like to turn the call back to Rob Silberman for closing remarks. Thank you very much operator, and thank you all for participating if you have additional questions. Please feel free to call us and we'll look forward to talking to you again next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
Mhm.
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