Q2 2022 Strategic Education Inc Earnings Call

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The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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As Johan.

Okay.

Okay.

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

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

Thank you good morning, everyone and welcome to strategic Education's Conference call in which we'll discuss second 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 provision of the private Securities Litigation Reform Act of 1995.

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

Further information about these and other relevant uncertainties, maybe found in strategic Education's. Most recent annual report on Form 10-K.

Thank you 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 Carl Carl. Please go ahead.

Thank you Teresa and good morning, everyone.

Quarter results that we reported this morning reflect continued improvement we're making in returning the company to earnings growth as we see continued acceleration in the recovery at Strayer University.

Significant demand strength across all of U S higher education and continued strong growth within our education technology and services segment.

As such I can.

Can radiate reiterate that we expect our total enrollment to be down in the mid single digits for the full year, which is an improvement from the down 11% in the first quarter and the down 7%. We had in the second quarter. We also expect that all three of our universities will have positive new student growth for the full year 2022.

As I said, a moment ago, we've seen a significant inflection in demand in our U S higher education segment.

Inquiry volume is up more than 20% from the prior year.

And within Strayer University branded related search volume meeting people searching for Strayer by name has returned to pre pandemic levels stray.

<unk> recovery is accelerating during the second quarter, we had year over year improvements in both core success and student retention.

And we forecast that <unk> total enrollment should be growing on a year over year basis by the end of this year, which would be roughly one full year faster than we had originally anticipated.

Our education technology and services segment had a very solid quarter with each of the three components within Etfs, having very strong growth.

Employer solutions, which services, our nearly 1000 corporate partnerships in the United States grew total employer affiliated enrollments by 10% and the mix of students from employers grew 410 basis points from last year and is approximately 25% of U S higher education total enrollments.

[noise] workforce edge, our SaaS built corporate education benefits management platform made significant progress over the past year.

In the second quarter of 2021 workforce edge had 20 corporate partners with a total employee base of approximately 415000.

At the end of the second quarter of this year, we have now more than doubled the number of corporate partners at 45 with the total employee base of more than 1 million.

Sophia learning our direct to consumer platform of Ace recommended high quality General education courses grew their average total subscribers, 50% from last year and their revenues, 55%, reflecting the partial benefit of a price increase that was introduced in the quarter.

Across all of ETS revenue increased 24% from the prior year.

During the quarter, we added a little bit of incremental expense to support their continued strong growth for the full year, we expect Etfs as operating margin to be approximately 40%, which is net of these incremental investments.

Our Australia, New Zealand segment continues to work to normalize our operations there post pandemic.

It'll enrollment was up slightly from the prior year, but ANZ revenue declined 10% from the prior year.

Roughly half of this decline was attributable to the timing of enrollments in the second quarter with the bulk starting in June and thus we were able to only recognize the single month of revenue the balance of the decline is attributable to foreign currency fluctuations for the full year, we expect ANZ revenue to be flat or slight.

Down from the prior year, we do remain confident enrollment will grow as the process for international students entering Australia returns to a normal timeline, which we are beginning to see.

In closing as we're halfway through the year.

We're very pleased with the progress that we've made our focus is to finish this year strong and begin to show significant earnings growth in 2023.

Lastly, I'd like to once again, thank my colleagues within Sci for their ongoing commitment and hard work on behalf of our students.

And with that Shannon, we'd be happy to take questions.

Thank you.

A reminder to ask a question you will need to press star one one on your telephone.

Please stand by while we compile the Q&A roster.

Our first question comes from Jeff Silber with BMO. Your line is now open.

Thanks, so much it's great to hear about the improving trends that U S higher education, specifically at Strayer University is there anything specific you can point to.

In terms of what's been driving that and should we expect that to continue going forward. Thanks.

Yes, sure Jeff I'd say the biggest catalyst is getting all of the campuses reopened or predominantly all of the campuses.

Australia has a history of campus based clearly and that had a major adverse impact when we had to close all of them for almost two years I would say in addition to getting the campuses reopen as I said in the prepared remarks, we've seen a very significant increase in the demand environment.

That seems to be continuing into the back half of the year. So as long as we can maintain the campus footprint being open and if the demand the demand environment stays as strong as it is we would expect the recovery at strayer to maintain this V shaped recovery.

That's great.

A little bit about the inquiry trends and Brandon related search volume I'm, just curious from a marketing expense or a cost per lead if you could talk about what's going on there in terms of trends and specifically focused on your U S schools.

Well, it's not just strayer capella branded searches also at multi year highs.

I'd say the efficiency of the advertising spend is very good on a cost per inquiry basis, where we're probably approaching pre pandemic levels.

I would also say that we had very solid new student growth in U S higher education, frankly across all three of our universities, including in Australia in the second quarter.

So the demand environment, the efficiency of marketing or the performance of the campuses Australia all of that is performing very strong.

Alright, that's great to hear if I can sneak in one more.

Hate to ask a regulatory question, but I know the department of education has been making some progress on revising some of the rural specifically with 90 10.

I know, they're talking about including some of the potentially military and veterans funding some of the other federal funding in the 90 10 calculation can you talk about what your exposure would be if that rule change. It. If we do include military and veterans funding in that calculation sure well from a planning standpoint, we're anticipating that.

It will change.

Across both Strayer and Capella, we would not have any exposure.

Okay, great. Thanks, so much.

Thank you.

As a reminder to ask a question at this time. Please press star one one on your telephone.

Our next question comes from Tobey Sommer with Truest. Your line is now open.

Hey, good morning, this is actually vascular bed.

For taking our questions. So I just wanted to ask about new enrollment trends.

And how enquiries have trended there specifically.

You mentioned kind of giving international students back into the market what are the roadblocks that are still remaining to making that happen.

Sure well approximately half of every new cohort of students.

Australia is international.

We've seen processing delays the visas to enter the company in excess of 200 days.

The country sorry.

That is starting to quicken.

I would say that towards University had sizable new student growth in the second quarter. Some of the strongest that we've seen since the lockdowns and the pandemic. So as that backlog of students are visa applications begins to clear we would expect the growth to return.

Okay got it.

<unk> environment for U S higher Ed strengthened significantly in the last couple of months, maybe the first.

First quarter or later last year.

What would you attribute that changes.

I think it's.

Reaching some level close to full employment, giving people confidence that they should be okay. Taking on the added responsibilities of an education. If they have more certainty with their employment picture as I said I think it's the efficiency of our marketing teams to deploy our advertising dollars clearly the fact that branded related <unk>.

Search at both Strayer and Capella is at pre pandemic levels helps us significantly on the strayer side as I said, the the campus openings have been a major catalyst.

I'd say the the inflection that we're seeing in the demand environment really started to take hold in the mid to late first quarter continued all the way through the second quarter and we haven't seen anything that would suggest that it's abating in the second half of the year.

Just maybe following that so you said.

Reaching full employment seems to be a tailwind at this point, but given some of the kind of macro risks.

Investors might be contemplating and can you remind us how you would expect the business to perform if we go into a recession in the next 12 months.

Well historically I think our point of view has been through any business cycle.

There is significant demand to get a degree or said differently for individuals that don't have a degree their ability to feel confident about their ability to sustain a family paying wages quite difficult absent some significant economic shocks. So clearly when you have a very significant recession as we had.

10 years ago, or so that certainly could have in asbury and adverse impact, but anything in a normal business cycle, including a modest recession, we wouldn't expect to have a material adverse impact.

Thanks last question for me here just from a capital deployment perspective, how are you thinking about the dividend I mean, it looks like the payout ratio is going to be maybe 80% or so of your adjusted earnings this year.

Thank you still have the flexibility to reinvest in the business with where it is right now.

This is rob.

Board looks at that every quarter and.

We tend to think about the dividend payout ratio as regards to the long term earnings power of the business.

The earnings have been reduced significantly over the last couple of years because of the enrollment reduction that happened during the pandemic.

But as Karl described we see that ameliorating and recovering so we're not particularly concerned about the dividend as a percent of this year's adjusted income.

And then going forward, our capital allocation strategy always starts with reinvesting as much of the capital as we can back into high returning.

Investments in the business, which tend to be the ones that improve our students' academic performance because the lifetime value of a student is so high if the students succeeding.

That's going to be the greatest return for our shareholders. After that if we have excess cash we do want to return it to our owners and we think.

Relatively predictable steady dividend as is the first way to do that and in excess of that.

We tend to take advantage of market opportunities when we feel like our stock is trading at a significant discount to its intrinsic value and in those circumstances.

Would employ it in share repurchases.

I appreciate the detail there thanks for taking the questions guys you bet.

Our next question comes from Alex Paris, with Barrington Research. Your line is now open.

Alex.

So I think we have him operator.

Alex.

Alex Your line is now open please check your mute button.

Hello.

Hello, Yes.

It's Alex I, sorry, I was on mute.

So.

I just wanted to ask a question about.

The share repurchases I realize you kind of answered that a bit in the last question. It looks like you did.

$4 million in the first quarter $21 million in the second quarter $25 million year to date remind us what is the authorization and.

Plan for repurchases going forward.

While the board authorization was $200 million, it's been in place for a couple of years now.

And our plans going forward are consistent with my answer to the last question Alex.

We look at capital in a cascading.

List of priorities.

The highest priority is investment in our academic outcomes of our students.

And then working our way down through our common dividend and then with.

With access with cash, which is truly excess to our business above that in those circumstances, where we think stock is trading at a significant discount to intrinsic value we tend to measure that value over a very long period of time.

We're happy to return it to owners through share repurchases. So we'll use that same prism.

Or a decision matrix.

Going forward as we have in the past and that's the result.

Great. Thank you.

With regard to foreign exchange rates.

At a product you had made those disclosures in your press release than prior quarters, but there was a negative impact on revenue and a lesser impact on earnings and EPS.

How should we be thinking about FX going forward and in the currencies that we should be most of where it would be obviously the Australian dollar right now.

Alex This is Dan.

Trailing dollars the primary when the majority of our revenue down there and earnings is from Australia, There's a little from New Zealand, but those currencies tend to track the same way anyway.

And I think as earnings grow and we expect them to grow.

The impact of Forex will will grow as well right now earnings.

Got it.

As the dollar has strengthened the U S. Dollar the earnings have been growing a little bit and so you see the pickup or the <unk> <unk> drag on EPS.

Then as the earnings grow proportionately.

It'll be a bigger impact positive or negative depending on how the dollar U S dollar trends.

Alex This is Rob again, the way we thought about this when we originally did the acquisition is the Australian dollar.

Over decades has fluctuated between about 50 cents in the dollar to the U S dollar.

We really made the acquisition assuming it's in the mid to low <unk> on average.

I think it was 72 cents when we actually did it and it was down to <unk> 69 in the last quarter. So there's a little bit of a drag, but we think over the long run that's the kind of the average that we will expect.

And that it should in terms of economic value.

Basically.

Even itself out over time.

Great. That's very helpful. I appreciate the additional color. Thank you you bet.

Thank you I'm showing no further questions at this time I would like to turn the call back over to Carl Mcdonald for closing remarks.

Thank you Shannon and again, we appreciate everyone's time, we look forward to chatting with you next quarter.

This concludes today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly to raise Johan during Q&A, you can dial star one one.

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