Q2 2021 Strategic Education Inc Earnings Call
Welcome to the strategic Education second quarter 2021 results conference call.
I will now turn the call over to the trees Wilkie director of Investor Relations for strategic Education Smith of Smoky. Please go ahead.
Thank you good morning, everyone and welcome to strategic Education's Conference call in which we will discuss second quarter 2021 results.
Al.
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.
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.
Materially.
Further information of all peas, and other relevant uncertainties may be found in strategic Education's, most recent and the 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.
Q's and 10-K's copies of these filings and the full press release are available for viewing on the website at strategic education Dot com.
And now I'd like to turn the call over to Karl Karl. Please go ahead.
Thank you Terry and good morning, everyone.
Our second quarter financial results.
We released this morning, we're basically right in line with our expectations and this morning, I would like to cover a few highlights from our results and then open the call up for your questions on the streets just said.
And first I'd like to begin with our Australia, and New Zealand segment, which generated $74 million of revenue and $16 million of operating income.
In the second quarter.
The integration of towards the University think education and the media design school onto S. He is the infrastructure is mostly complete and we expect the last component of that integration to be complete by the middle of August well ahead of our original plan, which was the end of the year.
At the beginning.
Of this year.
We assume that the Australia, the borders would reopen to foreign travel, including international students by this time of the year of essentially the third quarter. However, it now appears the borders will remain close through at least spring of 2022, which we expect could have a moderately negative impact on this year's revenue.
Revenue.
Notwithstanding this we still believe Anz's EBITDA will be essentially at their plan of $60 million the U S.
The next I'd like to provide a few updates on our alternative learning segment, which again includes Sophia learning workforce edge, which again is our education benefits management platform.
For employers and our employer solutions team for.
For the second quarter alternative learnings direct revenue increased 52% from the prior year to $13 million, they're operating income increased 24% to $5.2 million and the reduction in their operating margin was the result.
<unk> of continued accelerated investments in new products and services to support their continued growth.
Sophia learning continues to perform exceptionally well and is now generating more than $1 million of subscription based revenue each month and is on track to generate $15 million this year, which is up more than 3.
At 4% from the 12 months preceding the pandemic.
Also workforce edge continues to gain good traction in the marketplace.
And since launching workforce edge roughly 5 months ago, we've already signed 20 corporate agreements, which collectively employ more than 415000 employees. This compares to.
So our internal goal of 200 of 50000 total employees for the full year based on this strong traction we expect to have more than 750000 total employees to be on the workforce edge platform by the end of the year.
Turning now to our U S higher education segment.
Thought it would be useful to talk specifically about.
Both of our U S based universities, beginning with Capella.
Capella University had a great second quarter and an incredibly strong first half of the year year to date Capella as total enrollment has grown 6% from the prior year and its continuation rate has increased 50 basis points.
Total flexpath.
We have increased 36% so far in 2021.
And now comprise 35% of total enrollments, which is up 700 basis points from the prior year.
Employer of affiliated enrollment that capella have increased 18% year to date.
Turning now to Strayer University.
The enrollment where we continue to focus on reversing their enrollment declines and returning the university of the positive enrollment growth following more than a year of COVID-19 related lockdowns.
Gray of spring term or second quarter enrollment was in line with our expectations and strayer summer academic enrollment, which ultimately will.
Inform our third quarter financial results continued to improve and was sequentially better than the second quarter, albeit at a level that was below what we had expected.
As a result of this as well as the extended border closures in Australia.
<unk> full year 2021 financial results could be.
City of the bottom or low end of the indicative outlook, we provided during our last earnings call. However.
However, we are continuing to focus on reversing strayer enrollment declines by working to resume normal operating practices as quickly and safely as we can.
We have already reopened 30 of Strayer 65 campus.
It plans to open all remaining campuses no later than October 1.
We have added additional resources to strayer, advising and coaching functions as well as our employer solutions team, which has also resumed in person meetings with our network of corporate partners.
We have also added additional operating managers to assist our campus in the results.
Within of their activities supporting and enrolling students.
And since the end of our summer enrollment period, we've seen strong increases in several leading indicators such as inquiries into the university as well as applications for new enrollment.
Both of which are now positive on a year over year basis in <unk>.
Resumptive access the strongest predictor of long term retention and defined as the percentage of students who complete of course and earn academic credit was positive on a year over year basis in both the first and second quarter, which should aid us in the back half of the year.
We remain very confident that these steps along with others will return Strayer University.
The the positive enrollment growth and strayer remains a strong institution with the rich 129 year history of serving working adult and which has weathered other periods of declining enrollment before returning to solid growth.
Across all of our institutions, we remain committed to providing the highest quality education that we can and working to help.
Our graduates earn of substantive return on their educational investments.
And finally before opening the call up for questions. Sci continues to have substantial liquidity of nearly $300 million of cash and marketable securities and has generated $125 million in cash from operations in the first 6 months of 2021.
Non representing a 13% increase over the prior year.
I would like to once again extend my thanks to all of my colleagues within the Sci for their ongoing commitment to serving our students.
And with that Danny we would be happy to open the call for questions.
Alright at this time I would like to remind everyone.
If you would like to ask a question you will need to press star 1 on your telephone.
All of your question. Please press the pound key please standby, while we compile the Q&A roster.
Okay.
Your first question comes from the line of Lisa.
The summer from today of Securities. Please ask your question.
Thank you.
I'm curious what is the impact so far and I guess expected future impact of reopened the reopening of physical campuses.
On particularly your marketing and enrollment.
And the trains.
Well, we have many years of data to suggest that.
Both the enrollment rate of new student enrollment rates as well as academic achievement rate.
Are substantially higher in areas, where we have campuses versus areas that we don't.
And.
We have some early and preliminary data on the campuses that we've reopened after more than a year of being shut down as a result of COVID-19 and it does it does suggest that they are performing better than the campuses that remain closed so as I said, we've already reopened 30, and we have plans to open the remaining 35 for a total of 65.
<unk> no later than October 1 and we expect that that will improve the performance both on our new enrollment as well as the retention and academic achievement.
Have you had to role of any of that back based on a sort of localized geographic conditions are or have you every time you.
Reopened 1 has it been maintained open we've not had to we've not had to pivot and close of campus that we've reopened obviously, we're working to open our campuses of safely as we can and of course, we would always comply with any local or state regulations, but to date that has not been an issue and we continue.
The plant all of her to open all 65 campuses by October 1.
Okay.
Pivoting a little bit what of your future plans to expand flexpath across the schools, whether it's specifically flexpath or conceptually something like it and how has the.
The last 16.17 months of experience informed your view.
With Flexpath is.
Great program in that it's designed to allow capella learners to complete their degree of essentially in half the time at half the cost as.
As I said, it's been a major driver of capella as enrollment growth.
The we've recently launched the first doctoral flexpath programs, so there's probably areas to extend into doctoral as well as expanding some of the Bachelor programs into Flexpath. We've said before that we have looked at bringing flexpath over the Strayer University.
That's a longer lead time issue just.
Giving them the regulatory approvals that are involved with it but we continue to believe that Flexpath has a lot of runway ahead, and we're very happy to support its future growth.
With respect to the Australia, and New Zealand newly acquired business is there an opportunity for this kind of concept there or is.
Is it maybe not applicable.
Paul.
We are looking at that along with some other revenue synergies by exporting existing U S based curricula into Australia. The first 1 that we plan to do which will be in place by the end of this year as the Jack Welch Management Institute MBA program, but there is an opportunity to think about a flexpath like programs for.
For towards the University in Australia, as well and the.
The online nurse and online nursing as well okay.
Our last question from me could I get your perspective on sort of the medium and long term outlook for pricing.
Across your schools in so treat the if you could touch on the the geographic.
Big differences as well.
Thank you.
Well on purely of notional basis, because a lot of our strategy as we just said Flexpath, which we know reduces the cost of the degree and has slightly lower revenue per student as well as our strategy to continue to drive higher and higher corporate enrollments.
Those are things that ultimately reduced revenue per student, we notionally plan for pricing overall to be relatively flat.
Which would be a mix of taking some very moderate tuition increases where we think there's value in the degree program and there might be an opportunity to do so but that normally is offset by increases in corporate enrollment.
Geographic increases in Flexpath and so for us So we plan notionally for pricing to be flat.
Thank you very much.
Your second question comes from from the line of Gary Bisbee from the Securities You May ask your question.
Hey, good morning, Terry Good morning, a couple of questions I guess, so on on the Strayer I guess, it's positive for some of the leading indicators are looking up after this difficult period, but you also acknowledged summer it's trending below what you thought earlier in the year.
Or does that really mean I mean previously you said you thought.
The new students could potentially.
Turned back to positive in Q4, but it might be more likely be first half of 'twenty 2.
Is that still fair or does this make it look like at the later.
'twenty 2 it's just hard to define from those 2 statements what youre really telling them.
Well.
The best way to describe the Gary is stairs enrollment has been steadily improving since the first part of this year.
In the third quarter was actually better than the second quarter. The summer academic term, which I'll remind you. We're in the midst of so those enrollment numbers are not final because.
Because we still have students.
Attending the summer term and some could drop and so forth.
But the third quarter is also the first quarter from a year ago, where we saw the first new student declines at Strayer and so from just a sheer expectation standpoint, we had thought that the enrollment might be higher than it was notwithstanding the fact that it continues.
Better and was better than the second quarter.
And even since then so more currently the leading indicators that I referenced which is inquiries into the university.
Applications for new enrollment of those are 2 very important leading indicators are.
Positive now on a year over year basis.
To get the first time and you know close to 16 months, probably and so we remain confident that we're on the trajectory to return stereo to growth at some point relatively soon could that be the fourth quarter, maybe could it be the first quarter. We certainly hope. So by then but we'll just have to wait and see how the enrollment plays out between now and the end of the.
Yeah got it so the comps gotten a lot easier that's probably part of the year to year.
The improvement, you're seeing but but even that aside sequentially as you move through the year things have gotten a little better off the bottom is that yes some of that.
Okay.
That's helpful. Thanks, and then.
N.
On on.
You know what is the last quarter you called out 3 things that were impacting it the.
The.
The economic hardship on the students, which we understand and I think a lot of your demographic.
Still is challenged with with.
Schools in day care, not fully open and whatnot just.
Trying to parse apart the the BLS data it doesn't strike me that has gotten a ton better competitive intensity I don't know if you of any update on that and then you did reference the operating challenges getting the campuses open some more head count some of our focus there are those all 3 still issues any real change in in the first 2.
For perspective relative to the comments a quarter ago, no I wouldn't say, there's any change I'd say the the biggest lever that we have available today.
Is getting our campuses reopen and it has been encouraging to see the higher level of performance in the campuses that have reopened that was our expectation that has borne out.
<unk>.
We have added some resources as you just noted both at the student facing level as well as the management level just to try to resume as much normal activity as we can as quickly as we can and as safely as we can and so what the team is focused on now is just the.
Getting all of our campuses open.
From your shifting our strayer focused advertising dollars into those local campuses because historically, that's what we always relied on to drive brand awareness in the part of the prospective new students. So the.
Of the quicker we can return to normal campus operations, we think the better and we're on target to do that by October 1.
First.
And then just 1 on Australia, and New Zealand, if I could so I heard your commentary on the border I guess last year of the border was close but my understanding was the allowed students that were enrolled to to do it remotely from wherever they were and I guess what changed now you know the the <unk>.
Year to year change of new enrollment.
And then sharply I guess is that.
Is that just this concept of the international students.
Either weren't allowed to do that or didn't want to do on line for a second year.
Going on or is there something else that would explain the deceleration in the pace of enrollment growth well, what we what we've seen spin.
Ossific Lee in Torrance with the inability of foreign students to enter the country is a fair amount of the students that were enrolled at Torrens or who would prospectively enrolled came from areas that were very hard hit from Covid, including India. Okay.
And so we think that that's kind of of 1.
I'm issue, what we're saying is if the borders continue to remain closed for some indefinite of a period of time and.
You know all we know is what we read in the Australian press, which is suggesting that it could be the middle part of next year before the country reopens the foreign travel.
It is likely at some point to have a moderately.
Moderately negative impact on their enrollment, but it's also impacting all of the other 42 universities in Australia, who also rely on international students and in that respect towards is pretty well positioned given that they have the capability to teach all of their programs fully on line as we've been doing which is of.
1 type of unique competitive position because none of the other Australia and the universities are in that position. So in a in a world where we could have sustained border closures in Australia. We expect that we would continue to attract certainly domestic students and do the best job that we can from a remote standpoint teaching those online offshore students as.
As we've done this last year.
Gary It's Rob just a sort of 1 of other.
A comment on that is I think the simplest way to think about it is.
At first from the borders were closed most of the international students the Torrance had.
The those who are inside Australia, obviously stayed enrolled in.
And those that were outside of Australia, most of them enrolled on line.
As the borders continue to stay close I think what we're seeing is is that it takes a little bit of the sizzle of off the top of growth from international students.
And and that's really what's reflected in I think karl's comments.
Right.
Presumably that would normalize once we once we get through this okay in the indirect 1 last tactical 1 on that so the $73 million adjusted revenue given the seasonality and the timing of the school year is is there any reason other than FX or something like that that that would not be a reasonable assumption for this.
Right.
Yes, Gary.
I don't think so I think there's more seasonality there.
So I don't think you should just carry forward.
ANZ revenue and of course, we still don't know what the enrollment is going to be for the third quarter for the most part so.
Next the seasonality be better or worse, because I I had previously had Q2 and 3 of the same essentially and that was I think based on some of your preliminary guidance. When you close the I'd say, they're similar but yeah.
Got it.
What he's asking yes, Gary It is Q2 and Q3 are similar in terms of the seasonality.
Okay, Alright, I understand there is some certainly some variability with enrollment okay. That's all I had thank you yes. Thanks Gary.
Yeah.
Again, if you would like to ask a question. Please press Star then the number 1 on your telephone keypad.
Your third question comes from the line of Greg <unk> of Sidoti.
Please go ahead.
Guys. Thanks for taking my questions.
The color on the inquiries and applications on strayer, but can you provide a little bit you know.
Where where do you think job growth might be impacting any pickups in demand.
The on that topic as well, whether youre seeing any any different mix in demand for degree as being maybe based on job growth in areas like business first.
<unk> of of that effect.
Well on the Capella side.
We see very strong health care it.
And maybe the.
The health care programs health care related programs, including the RN to BSN degree of Capella are the highest growing reflecting strong job growth in the health care field.
The Strayer side is is and always has been predominantly undergraduate and the primary focus or.
Our area of demand has always been business that continues to be the case.
So obviously our teams are always looking at ways, we might expand programs. If we believe that there's an area to add a program where there is expected to be strong job growth, but for now we haven't really seen any shift away from what has been historically the strongest areas.
Demand for our degree programs.
Counseling healthcare and.
The other masters and doctoral programs on Capella, and then mostly undergraduate business at strayer.
Okay, Great and then I guess just can you maybe compare and contrast, maybe you mentioned you'd.
You'd seen the downturn I.
Areas of maybe around OA at Strayer, what is different maybe this time and what youre seeing in terms of the recovery.
Any color on that front, well I mean, the we've seen several downturns at strayer related to suppress the economic activity. What was different. This time is it was pandemic induced and so we.
I guess of being able to operate in our campuses, we had our entire network shut down for more than a year, which I think is why we had such a disparate impact from from prior periods, but what we know from those prior periods is when we do return to a level of normality in terms of economic activity and when we're able to open our campuses fully and fully resumed.
Zoom all of our normal activities, we expect the strayer will once again return to growth as it's done when it's faced other periods of of enrollment decline and I should also note that obviously 1 thing that's very different today versus periods, where we had enrollment decline before in those prior periods. It was just strayer.
And we had the weather.
For that as an organization full.
Fully absorbing the impact of those enrollment declines today, we're a much bigger more diverse organization with obviously, our Australia, New Zealand of assets Capella University now we've got this fast growing alternative of learning Division. So I think we are even better equipped to weather. This what we believe will be.
On a relatively short lived period of enrollment declines and returning to the normality beginning next year.
Yes, Greg the other thing I would add is is that.
The thing about running of the University is it tends to have a lot of fixed costs. It's a highly operationally levered enterprise you pay.
For the professors you pay for the curriculum you pay for the technology.
Technology in the classrooms, and when you add students youre, adding revenue without addition of lot of additional costs. So there's a high.
Incremental margin contribution per student and it's the same thing in reverse when you listed and we've seen that.
At least twice before on our tenure here when you had enrollment declines your operating margin goes down pretty quickly and as you start to grow enrollment again, the operating margin expands very rapidly. So we think this particular cycle will be similar to the other ones that we faced where we face some.
The margin pressure now in and we will get some pretty significant margin expansion when enrollment starts to grow again.
Very helpful. Thanks, a lot you bet.
Okay.
And your next question comes from the line of Jeff Silber from BMO capital markets go ahead. Please.
Thanks, so much.
You mentioned earlier or I think it was 1 of the questions regarding parsing out some of the issues you had at Strayer University in 1 side of it in terms of economic hardships.
Just wondering.
Some of the states, where the extra unemployment subsidies ended a bit early.
For each seeing any meaningful change in either Apple cancer enrollment from those locations.
Well first of all good morning, Jeff.
What we are seeing is increased demand as I said.
So for the first time in 16 months aggregate demand overall demand is up year over year.
And it's difficult to parse out exactly why that is other than we.
We have began to reopen our campus network, we are focusing mark with all of our marketing dollars advertising dollars into those local markets. There is a healthier economic activities. So my guess is it's the combination of all of those factors.
Which is why we continue to plan to reopen our entire network of campuses by the end of the summer essentially.
And our hope and expectation is that will help improve our performance and ultimately return strayer has enrollment to growth.
Yeah.
Okay. That's helpful. And then if we can switch over to AMC.
Despite the issues that are going on there or are you still I guess kind of bless your EBITDA guidance for the year. How can you get there if for some reason there is either an enrollment of revenue shortfall.
Well, we expect any revenue shortfall to be if there is 1 to be relatively modest.
And that's a very efficient organization.
So we expect if we if we have fewer students there'll be fewer instructional cost and then we have of management team that is very focused on cost discipline and just due to the seasonality of the ANZ academic calendar.
On the bulk of their enrollment and therefore their revenue happens in the in the first part of the year. So the smaller intake periods are actually in the back half of the year. So there's less opportunity for there to be some sort of major miss on a caveat that by saying, we still have to get through the calendar and we still have to see.
Enrollment is but at this point based on everything that we see we're not expecting them to come in below the EBITDA of $60 million U S.
Okay. That's really helpful. Thanks, so much sure. Thank you Jeff.
And your next question comes from the line of Tobey Sommer of true Securities go ahead.
See what the.
Just wanted to ask a question on expected.
Regulatory changes or impact at the stage if you could.
Kind of refresh us on what you think the the down the fairway sort of.
Expected changes.
From a b emanating from the the Baidu administration. Thank you.
Yes, sure well.
First let me say that when we when we manage our university as we always take a very long term view.
And we always base all of the decisions that we make on making sure that we're providing is high quality of an education as we can.
The man based on that approach, we have always been confident that both of our U S. Based universities would be able to comply with any reasonable set of regulations.
At this point the department is just in the very early stages of announcing of negotiated rulemaking. So we don't have a lot of details on what that potentially might cover we hope to be of construct.
Can the party to any new rule, making and to the extent we would ever be asked we would be delighted to share our opinion on what some regulatory reforms might look like but we're confident in the regulatory profile of both capella and strayer, obviously, we will pay attention to what's happening in the rulemaking process and as I said to the degree that.
Construct we would ever be asked to participate we would welcome the opportunity to do so.
<unk> been asked to participate in Pryor.
Rulemaking processes and would you expect to be invited at some stage. During this 1 we have participated in several of rulemaking sessions with.
Net Sci executives being actually members of the Rulemaking Committee, we certainly have no expectation.
To be invited but should we be invited we would obviously participate and do so as constructively as we could.
Thank you very much.
And your next question comes from the line of Gary Bisbee from Bofa Securities Go ahead. Please.
Just 1 follow up the.
The.
The workforce edge product, what does 20 companies and 400000 go into 700000.
Workers that those companies what does it really mean I know on the past you've said you hope to.
The 3% of.
Employees signed up at your University.
I guess is that still how youre thinking about that maybe over what time period.
And other than.
The initially just using your software platform, which you are not charging for it and I understand it right.
What does it mean.
Net 1 for your.
For your for your business in the short term I understand the long term.
The potential to enroll a lot of their employees.
The lower cost.
Yes, the acquisition cost and whatnot.
What are they doing with it just any update on sort of what it really means in.
Well everything you said Gary is exactly right on point, so the monetization strategy for workforce edge is to first get as many employees as we can on the platform just to get scale Youre correct. We allow employers to use the platform at no cost the monetization.
The shortcomings when members of those companies' employees of those companies decided to enroll in an Sci institution be at strayer or Capella and just based on national averages around participation rates within companies that have educational benefits we.
We don't think it's unreasonable to expect that somewhere between 1.
And 3% of the employees on the workforce edge platform ultimately would decide to enroll in either strayer or capella and we don't expect it to be that long term. This very first year was all about getting into the market.
Continuously to improve the the platform itself and just to build scale on.
<unk> com platform itself, which we're very much on track to do I mean, if we could get close to a 1 million employees by the end of the year that would be enormously successful and so we really look to 2022.
To be the year, where we would start to see scale in the way of new enrollment is coming in and.
And you are also correct to say that it's the channel for us that would have.
On the acquisition cost other than obviously, whatever we invest in the platform itself would be which to date has barely of $1 billion. So.
It's a great product. That's that's had a very good initial go to market strategy and we think it's going to be a potentially major source of new students for us in 2.
2022 and beyond.
Sorry, 1 other thing on that I also think as compared to other entities that are in the space.
We're going to be providing a better product at zero cost.
And with.
Zero tuition revenue take from other traditional universities so.
Okay, Alright thats helpful. Thank you.
And there are no further questions at this time I will hand, the call back to Karl.
Alright. Thank you very much everyone. We appreciate your time today and look forward to having an out of the call with.
Quarter.
Okay.
And this concludes today's conference call. Thank you for participating you may now disconnect.
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Okay.
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