Q1 2022 Strategic Education Inc Earnings Call

Welcome to strategic Education's first quarter 2022 results conference call.

I'll now turn the call over to Teresa Wilkie director of Investor Relations for strategic Education. Mr. Wilkie. Please go ahead.

Thank you good morning, everyone and welcome to strategic Education's Conference call in which we will discuss first quarter 2022 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 1985.

Statements are based on current expectations and are subject to a number of assumptions uncertainties and risks that strategic education has identified in today's press release that could cause actual results to differ materially.

Further information about these and other relevant uncertainties may be found in strategic Education's. Most recent annual report on Form 10-K , the 10-Q to be filed and other filings with the Securities and Exchange Commission as well as strategic Education's future eight Ks 10, Qs and 10-K s coffee.

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

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

Thank you Theresa and good morning, everyone. Our first quarter results, which we reported this morning included year over year declines in revenue operating income and earnings per share, reflecting the impact of nearly two years of declining enrollment at Strayer University.

Proving strangers performance has been and remains the company's highest priority and this morning I can share that substantial progress has been made in this respect and that stream is current performance is ahead of where we expected them to be at this point in the year.

The vast majority of strayer campuses have reopened we've implemented dozens of enhancements to our systems to enable us to more effectively interact with both prospective and current students.

Academic achievement has been consistently improving throughout the past year.

Our employer affiliated accounts are performing much better and amongst our largest agreements showing strong growth versus prior quarters and the prior year we.

We've seen significant stabilization in new student enrollment at strayer, including within our employer affiliated accounts as well as improvements in student retention.

Total enrollment for employer affiliated students in U S higher education increased to 23% of enrollment, which is up 200 basis points from the prior year.

Across all of U S higher education, we have seen a significant increase in demand and interest into our universities and we now have enough visibility into the second quarter to reiterate our indicative outlook for this year that we expect new student growth in U S higher Ed for the full year, sorry, new student growth for the full year in U S.

Higher Ed and that total enrollment will be down in the mid single digits for 2022.

And finally on U S higher Ed the current expense run rate is approximately 8% below its pre pandemic levels, reflecting savings generated over the past two years as a result of various technology and productivity investments, which were all designed to improve our ability to effectively teach much larger cohorts of students.

Without having to add substantial levels of expense as a result, our U S. As our U S higher education enrollment increases moving forward, we expect significant improvement to our operating margin.

Our education Technology Services Division also continues to perform very well during the first quarter Sofia added more than 15000, new paid subscribers, which was a 15% increase from the prior year.

As well as a 37% increase sequentially from the fourth quarter of last year.

Average total paid subscriptions were more than 22000 for the first quarter, which is an increase of approximately 95% from the prior year.

So if he is revenue grew 73% from the prior year to $6 million and Sophie as operating income was $2 4 million and its operating margin was 45%, which is down slightly from the prior year, reflecting continued higher investments in product development and marketing.

Our 2022 operating plants for Sofia.

Included a 50% revenue growth rate from 2021, and we expect that they will be significantly ahead of that number for the full year.

Workforce edged finished the quarter with 37 corporate agreements with a total employee population of 920000 people.

We also have seen some early progress in enrollments from workforce edge into F. C. I institutions, which again is ultimately our monetization strategy for workforce edge.

Our goal is to have close to 1000 students from the platform by the end of this year and several thousand beginning in 2023 and beyond.

Turning now to our Australia, and New Zealand Division. We're following two years of borders being closed we are working to normalize our enrollment practices, which includes having foreign students travelling to Australia, and New Zealand on student visas.

Given the backlog of demand to enter Australia, we've seen some delays in the processing of these student visas, which helped contribute to a slight enrollment decline in the first quarter.

Student achievement within the ANZ segment remains very strong and some of the highest with N. S. C I and towards University for the first time achieved a student continuation rate for the quarter in excess of 90% based.

Based on current trends, we expect we expect the ANZ segment to be in line with our operating plans for the year.

So in total S. C. I is off to an extremely strong start in 2022 with all of our key operating initiatives to be either on track or well ahead of plan and we look forward to updating you on our progress throughout the rest of this year and finally and once again I just like to thank all of my colleagues at Sci for their ongoing dedication.

Occasion, and professionalism on behalf of our students.

And with that Blue, we'd be happy to open the call for questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone keypad.

Again that is star one to ask a question to withdraw the question just suppressed bankey.

Please standby, while we compile the Q&A roster.

Your first question comes the line of Jeff Silber from BMO capital markets. Your line is now open.

Thanks, So much Carl I appreciate you're reviewing some of the comments you talked about last quarter in terms of what you were expecting for 2022, one thing I'm not sure. If you mentioned I think last quarter, you talked about full year operating expenses to be roughly flat on a year over year basis is that something we should expect again for this year.

Okay, Yeah, Jeff. This is Dan Yeah, we we we said it would be largely flat and we still expect that so it's gonna be a little uneven over the quarters, but it'll tracks last year in total.

Okay, great and the unevenness over the quarters is actually my next question I know you don't guide specific margins by segment, especially on a quarterly basis, but there was a pretty sizable drop in margins in U S higher education.

I'm just wondering if you could talk about that was there anything specific going on any cohort of expenses et cetera.

No we just had.

A 12, 5% decline in total enrollment, which drove the revenue that we had in the quarter. We said on the last call. We expected expenses to be relatively in line or flat to last year as Dan said, but other than that Jeff just a reduced enrollment and therefore revenue there was nothing else that impacted the margins in the quarter and as I said, we expect for the.

All year this year that total enrollment number two improved from being down 12, 5% in the first quarter.

Being down roughly mid single digits for the full year. So obviously, we expect that to be improving throughout this year.

Okay, Great I'm, sorry, one more margin question. This is an education technology services segment I think you alluded to this in your remarks, but if I could just get a little bit more color margins were also down pretty dramatically year over year in that segment. If we could talk about what happened and what should we expect on those segment margins going forward. Thanks sure well it is the fastest growing part.

Our organization and we obviously want to sustain that growth. So the reduced margin in Etfs just reflects the fact that we continue to invest in products and marketing other services on a go forward basis as that division begins to mature out we expect margins will settle in the mid to high Fifty's Jeff.

Okay, and obviously it will take some time, but it's a good go to half by al I'll jump back in the queue. Thanks, so much.

Sure.

Again as a reminder to ask a question. Please press star one on your telephone keypad.

Your next question comes from Lance Tobey Summer from choice Securities. Your line is open.

Thanks, I wanted to start by asking some sort of labor.

Labor.

Related questions to see how that might be impacting Brazil, everybody is talking about and experiencing wage inflation, whether it's internal or for your own staff and expense structure or you know your students who might be out there working experiencing that.

What are you what are you hearing in terms of that being a.

A factor in.

Students, maybe not rushing back the fact that the labor market and economy are.

Kind of Rolling and then Conversely.

Over the last couple of years, maybe you could comment about how the business composition has changed in case, the fed doesn't kind of adequately thread the needle here in while they raise rates trip up economic growth. Thank.

Thank you.

Sure on the first part of your question, which was I think two parts staff and students first on Sci staff, we haven't really seen a lot of pressure on wage inflation are we obviously plan for and implement our increases in our staff's compensation every year.

Actually we've seen lower the normal turnover over the last year or so I don't think it's adversely impacted us and with respect to students. We also really haven't seen any adverse impacts.

And as I alluded to in my prepared remarks, the demand environment for US right now appears to be quite strong some of the highest levels of demand and interest that we've seen in several years.

So to the to the degree that that's been an impacted it just certainly hasn't impacted the demand that we've seen.

And then in the second part of your question around business composition, Obviously U S. Higher Ed is the largest part of our organization, we see that that business is stabilizing and doing quite well, we expect it to improve throughout this year and we expect the Australia segment to also do well, there's just been it seems a slight delay in getting that country's borders.

Reopened in and returned to normal and then our Ats segment as I just said to Jeff's question is the fastest growing which we expect to continue this year and beyond.

Hey, Tobey this is Rob.

One thing on the macroeconomic side I want to make sure that our shareholders.

At least understand how how we're seeing it is that inflationary pressures actually don't have much of an impact on.

Student demand and as a matter of fact.

Macroeconomically, we're actually in a better situation because labor participation rates have firmed and are starting to increase.

And then you know our our historical experience suggests that in the U S higher Ed market for the types of students that were trying to attract.

At labor participation rates and employment confidence.

<unk> is actually the most predictive macroeconomic indices to demand and as Karl said it.

It appears to be bearing out.

Thanks.

What are you seeing in terms of pricing trends among your.

Your principal competitive sets.

Any any changes that you could.

Update us on would be helpful. Thank you.

We haven't really noticed any material changes in competitive pricing, we've we've notionally kind of always planned for relatively flat pricing or stable pricing.

Which is net of perhaps some modest price increases in various parts of our organization offset.

By realized discounting is associated with increases in our employer affiliated enrollments. So basically it appears to be relatively stable and flat.

Great and then one other one for me from a.

Oh.

Arjun expansion perspective within the company.

What kind of.

Total student growth does the company need to achieve to kind of have visibility and confidence into.

Persistent.

Margin expansion. Thanks.

Well I I would revert to our commentary on what we expected the company to do on a notional basis pre pandemic.

And at that time, we said, we expected mid to high single digit enrollment growth and revenue growth because of what I, just said on stable pricing and that we should have margins in the mid twenties.

And clearly we're below that now, but we're below that because of a multiyear decline in enrollment at strayer for a variety of reasons, mostly pandemic are impacted.

But from where I sit there is nothing in the business that would prevent us from returning to that notional model and we're obviously on a trajectory this year to do quite well given as I said that the first quarter U S higher Ed enrollment was down almost 13%, we expect that to be down only in the mid single digits for the year.

So.

And combined with the fact that as I said, we think we have essentially the expense space that we need so as that enrollment increases over time, we expect significant margin expansion as the enrollment returns to pre pandemic levels.

That's helpful last question from me on the regulatory fronts.

Any changes this has been something that's been in the news ever since the New administration arrived.

And I'm.

I'm just wondering whether that concern may have sort of crested at this point.

Well, it's something that we're obviously monitoring there's nothing specific for us to react to we're very confident in the quality profile of the U S. Higher education institutions, we don't anticipate any issue with complying with any set of reasonable regulations that may be promulgated. So it's something that we'll continue to watch.

And we're quite confident in our risk profile from that standpoint.

Perfect. Thank you for the update.

Thanks.

There are no further questions at this time I would like to turn the call back over to Carl Mcdonald.

Alright, well, thank you everyone and as I said, we look forward to continuing to update you on our progress and we'll talk to you next quarter.

This concludes today's conference call. Thank you for your participation and have a wonderful day you may all disconnect.

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