Q4 2022 Strategic Education Inc Earnings Call

February 22, 2023

Okay.

Thank you for standing by and welcome to strategic Education's fourth quarter 2022 results conference call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one one on your telephone.

I would now like to hand, the call over to Teresa Wilkie director of Investor Relations for strategic Education. Mrs. Wilkie. Please go ahead.

Thank you Hello, everyone and welcome to strategic Education's Conference call in which we will discuss fourth 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.

Please note that this call may include forward looking statements made pursuant to the safe Harbor provisions of the private.

Securities Litigation Reform Act 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.

Further information about these and other relevant uncertainties may be found in strategic Education's annual report on Form 10-K to be filed.

Most recent 10-Q and other filings with the Securities and Exchange Commission as well as strategic Education's future 8-K.

And 10-K's copies of these filings and the full press release are available for download.

Our web site.

At strategic education Dot com.

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

Thank you Terry.

I just want to make sure everybody can hear us we're actually doing this call from Sydney, Australia, and we've had a little bit of telephone difficulties.

Please.

Bear with us on that.

Good evening, ladies and gentlemen.

I turn it over to Carl to report on our Q4 and full year results I just wanted to make a couple of comments at a high level on our capital allocation in 2022.

We started the year with roughly $310 million of cash and marketable securities and $140 million of outstanding debt drawn on our bank revolver.

We generated $150 million during 2022 and pre tax cash from operations.

We used that cash as follows we paid $24 million in taxes.

We invested $44 million in capital expenditures.

Out of our remaining owners' distributable cash.

$60 million in common dividends, we took the opportunity to repurchase $40 million of our stock at an average price of $65 a share.

Further paid down $40 million of our outstanding debt.

That left us at year end 2022, with $250 million of cash and marketable securities of $100 million of debt and $23 9 million shares outstanding.

We are fairly confident that 2022 will turn out to have been our trough year for earnings. So we feel our balance sheet is well positioned to support all of our opportunities as well as to continue to return capital to our owners through our common dividend.

And with that Carl can you walk everyone through our operating results, yes, sure. Thank you Rob and good afternoon, everyone. The fourth quarter financial results that we reported earlier today.

<unk>.

The stabilization of our enrollment.

Performance throughout 2020.

Total enrollments across.

Was essentially flat at just under 98000 students and decreased 80 basis points in U S higher education, which is our largest segment.

Reflecting the continued new student growth that we've experienced that both strayer and Capella University.

Our revenue for the full year declined five 8% to just under $1 1 billion and in the fourth quarter revenue declined 1%.

$270 million.

The rate of decline improved as a result of strong enrollment results throughout the year.

And while we were disappointed by the year over year declines in our full year financial results in 2022, which were primarily driven by the enrollment declines that we had in 2020 and 21, we have been more than pleased with our current operating performance, which will inform 2023 financial performance.

And to be honest.

In 2022, our U S higher education segment had a strong year.

U S higher Ed revenue in the fourth quarter grew almost 1% due to essentially flat enrollment and an increase in revenue per student.

Demand at Strayer, and Capella universities continues to be among the strongest that we've seen in several years and is back to pre pandemic.

Both universities as we previously indicated.

Due to the full year in 2022.

Quarter affiliated enrollment are at all time high.

New employer affiliated enrollment.

<unk>, 17% from the prior year and total enrollments grew 13%.

Total employer affiliated enrollments now comprise more than 24% of total U S higher education enrollment, which is up approximately 350 basis points from the prior year.

The enrollment recovery at Strayer University continued throughout the year and is on track to have total enrollment growth in the first quarter of 2023, which is again about one full year faster than we originally anticipated.

Our education and.

Services segment also continues to perform well.

<unk> revenue increased 20% to approximately $17 million.

Operating income decreased slightly reflecting the continued investment in ETF technology and products, which helped drive our revenue growth last year.

As I previously indicated we expect ETF expense growth to moderate beginning this year and to essentially be flat on a year over year basis.

During the quarter Sofia grew at an average total subscribers by 29% and we had more than 700, SDI total enrollments coming from workforce edge, which is up from fewer than 102022.

Our Australia, New Zealand segment grew.

By approximately 4% in the fourth quarter.

And as revenue was essentially flat on a constant currency basis.

Students as offshore onward international students took fewer average classes per student.

These processing issues and delays that we experienced throughout 2022 have been approved and are close to returning to pre pandemic level.

The Australian government has ruled that all students on active students.

B any country and attending classes in person by June of this year, which we see as a positive catalyst for our international student growth.

Now based on the strong results that we've had in 2022.

Assuming that these results continued this year.

1023, we expect enrollment and revenue to be up in the mid <unk>.

Yes.

Yeah.

Sure.

However, I would like to bring to timing related to that.

Okay.

First we've adjusted the academic calendar towards University start later in the quarter. This is to allow students whose visa are currently in the process of being appropriate to start the term without having to miss any classes.

As a result of this pushed more of our A&P revenue from the first half to the second half of the year.

Second we expect the majority of the year over year expense growth to occur in the first half of the year, which will flatten out in the second half of the year, but again on a full year basis to be up no more than 3% from the prior year base.

Based on the timing issues that I've. Just described we expect our revenue in the first quarter will be essentially flat versus the prior year and our expenses will be up approximately 5% in the first quarter.

And once again I'd like to thank all of you for colleagues and SDI for their ongoing commitment on behalf of our students.

And with that Latif, we'd be happy to answer questions.

Thank you to ask a question. Please press star one one on your telephone again Thats Star one one on your telephone to ask a question.

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

Yeah.

Our first question.

Comes from the line of Jeff Silber.

Mo.

Your line is open yes, so much.

Carl I don't know if you broke up for everybody, but you broke up for me. When you started to talk about the outlook for 2023, I think you said enrollment and revenue up mid single digits, and then I lost you.

Hello, you started talking about the timing issues with Torrance can you just repeat what you said please.

Yes apologies for that Jeff what I said is we expect that our revenue will be up in the mid single digits for the full year and that our expenses will be up no more than 3%.

Okay, great. Thank you so much.

If I could just circle back to the U S higher education can we get a little bit more color in terms of where the demand is coming from whether it's Australia or whether its capella program type et cetera anything would be great.

Well demand is consistently high across both strayer and capella.

Across all program level again, some of the highest demand that we've seen really since back to 2019 levels.

So it's across the board, it's up significantly at both Strayer and Capella and both universities experienced quite strong new student growth throughout 2022.

Alright, great.

I know youre, not giving specific guidance, but Rob I appreciate you going through the capital allocation and how you use the distributed free cash flow.

Are those the type of rough percentages, we should expect going forward in terms of how that was allocated.

No I think that percentage as a distribution of free cash flow is much higher than we would expect.

Normally our as I said I think 2022.

It's going to turn out to have been a trough year for both earnings and cash.

And we kept the dividend.

Where it was and we.

A significant opportunity for long term value enhancement by buying back shares at.

At the price that it was at.

So our dividend payout I suspect will go down as a percent.

As our cash flow grows over the next several years in 2019. It was at about 40% if I remember in 2019 and that feels to us as a board is probably.

Fair kind of percentage to think about the.

Share repurchases are truly optimistic if we have if we have distributable cash excess cash.

<unk>.

Excess to our needs in the in the universities and the share price is trading at what we perceive to be a significant enough discount to intrinsic value, we take advantage of those opportunities, but it's price dependent.

So depending on what happens to the stock price, we may or may not do that our capital out Capex I suspect will be fairly consistent.

But our cash flow is growing up so the overall percentage of distribution is probably going down.

Alright, Thats really helpful. If I could sneak in one more and I hate to talk about a regulatory issue, but there was an announcement last week by the department of education and talking about the incentive compensation rule expanding the definition of third party servicers.

Do any of your businesses potentially come under that broader definition, specifically in the ETF Division.

No Jeff.

Don't have any relationships that would fall under that definition.

Thanks.

Is that independent of that we don't have anything thats close to incentive compensation anywhere in our division is just as a matter of culture.

Alright, Thats really helpful I'll jump back in the queue. Thanks, so much.

Okay.

Thank you.

Our next question.

Comes from the line of.

Tobey Sommer of Truest Your line is open Tobey.

Hey, good afternoon. This is Jasper bibb on for Tobey, Thanks for taking our question.

So I guess my first question was I was just hoping you could comment on how you are managing variable expenses.

With the return to total enrollment growth.

Obviously, if we look back at a longer time period, the company's margins were quite a bit higher a couple of years ago than they are now.

So any thoughts around how the current expense base might be able to support.

Higher enrollment levels in future years kind of beyond 'twenty three.

Sure.

Bulk of our expenses are quite fixed.

If we have substantial enrollment growth, we would expect some small variable expense as we expand the number of classes that we're offering to support the higher enrollment.

But I'm confident that the current expense base by and large can handle many thousands of more students than we're educating today so to the extent that our enrollment continues to grow.

And the way that it has over the last year.

This year and beyond I would expect that you would see a very high marginal contribution on the incremental students that were adding.

Thanks that makes sense and then the margins for the fourth quarter just came in a little bit lower than we were expecting was there any particular driver for that or was that effectively in line with your internal plan.

This is Dan John we had.

The only thing that was a little bit of a surprise, we had a little bit higher bad debt than we expected.

That's typical.

Now with the benefit of hindsight, when we have faster growing new students new students pay at a slightly lower rate than existing students, but aside from that it was it was pretty on track with what we expected.

Got it.

Maybe pivoting to the Australia, New Zealand segment.

We've seen some headlines around the security check requirement.

Causing delays and uncertainty.

Greenfield is getting their visa process.

That impacting your ability to get international because it gets into the country or do you think this issue is is kind of in the rearview mirror at this point.

I think theres been some impact with respect to that.

We did see visa delays.

Throughout 2022, we commented on that throughout the year last year, but in the early part of this year, we're starting to see visa approvals and processing timelines return to what we consider to be relatively normal.

And so if that continues to be the case.

In 2022, or sorry, 2023, combined with what I said about the Australian government's rule that all international students have to be in Australia, taking their classes. We see that overall is a net positive for Australia, New Zealand in 'twenty three.

Yes.

One other thing on that Karl.

The one thing that's kind of an immediate impact.

At the start of classes a couple of weeks that.

Although that doesn't change your full year results. It does change your calendar innovation and move some of the margins that the revenue growth and the margin expansion into the latter half of the year.

Makes sense last.

Last one for me in the ANZ segment are you impacted expecting any impact positive or negative.

From China's recent ban on their studies and studying at foreign universities Ahmad.

No. We have we have relatively few Chinese students as a percent of our overall international student cohorts that we wouldn't expect any material impact from that.

I appreciate the detail there thanks for taking the questions guys sure.

Thank you.

Thank you I would now like to turn the conference back to Carl Mcdonald for closing remarks, Sir.

Thank you everyone. We appreciate your time today, and we look forward to connecting 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 and lower Johan during Q&A.

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Thank you for standing by and welcome to strategic Education's fourth quarter 2022 results conference call. At this time, all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one one on your telephone I would now like to hand, the call over to tourists Wilkie director of Investor Relations for strategic education. Mrs. Royalty. Please go ahead.

In today's remarks, we will open the call for questions. Please.

Please note that this call may include forward looking statements made pursuant to the safe Harbor provisions of the private sector.

Securities Litigation Reform Act 1985 this.

These statements are based on current expectations and are subject to a number of assumptions uncertainties and risks.

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 annual report on Form 10-K to be filed.

Most recent 10-Q and other filings with the Securities and Exchange Commission as well as strategic Education's future 8-K.

And 10-K's copies of these filings and the full press release are available.

Our web site.

At strategic education Dot com.

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

Thank you Theresa.

I just want to make sure everybody can hear us we are actually doing this call from Sydney, Australia, and we've had a little bit of telephone difficulties.

Please.

Bear with us on that.

Good evening, ladies and gentlemen.

I turn it over to Carl to report on our Q4 and full year results I just wanted to make a couple of comments at a high level on our capital allocation in 2022.

We started the year with roughly $310 million of cash and marketable securities and $140 million of outstanding debt drawn on our bank revolver.

We generated $150 million during 2022 and pre tax cash from operations.

We used that cash as follows we paid $24 million in taxes, and we invested $44 million in capital expenditures.

Out of our remaining owners' distributable cash we paid $60 million in common dividends. When we took the opportunity to repurchase $40 million of our stock at an average price of $65 a share.

Further paid down $40 million of our outstanding debt.

That left us at year end 2022, with $250 million of cash and marketable securities of $100 million of debt and $23 9 million shares outstanding.

And with that Carl can you walk everyone through our operating results, yes sure. Thank you Rob good afternoon, everyone with fourth quarter financial results that we reported earlier today reflect that.

Stabilization of our enrollment performance throughout 2022.

Total enrollments across desktop was essentially flat at just under 98000 students and decreased 80 basis points in U S higher education, which is our largest segment.

Reflecting the continued new student growth that we've experienced it both strayer and Capella University.

Our revenue for the full year declined five 8% to just under $1 1 billion and in the fourth quarter revenue declined 1%.

$270 million.

Our rate of decline improved as a result of strong enrollment results throughout the year.

And while we were disappointed.

By the year over year declines in our full year financial results in 2022, which were primarily driven by the enrollment declines that we have in 2020 and 21, we have been more than pleased with our current operating performance, which will inform 2023 financial performance and beyond.

In 2022, our U S higher education segment had a strong year.

U S higher Ed revenue in the fourth quarter grew almost 1% due to essentially flat enrollment and an increase in revenue per student.

Demand at Strayer, and Capella universities continues to be among the strongest that we've seen in several years and is back to pre pandemic.

Both University as we previously indicated.

Maybe it's due to the full year in 2022 and are in the quarter affiliated enrollment are at all time high.

New employer affiliated enrollment.

<unk>, 17% from the prior year and total enrollment grew 13%.

Total employer affiliated enrollments now comprise more than 24% of total U S higher education enrollment, which is up approximately 350 basis points from the prior year.

The enrollment recovery at Strayer University.

Throughout the year and is on track to have total enrollment growth in the first quarter of 2023, which is again about one full year faster than we originally anticipated.

Our education.

And services segment also continued to perform well.

<unk> revenue increased 20% to approximately $17 million.

Operating income decreased slightly reflecting the continued investment in ETF technology and products, which helped drive our revenue growth last year.

As I previously indicated we expect ETF expense growth to moderate beginning this year and to essentially be flat on a year over year basis.

During the quarter Sofia grew at an average total subscribers by 29% and we had more than 700, SDI total enrollments coming from workforce edge, which is up from fewer than 102022.

Our Australia, New Zealand segment growth.

Approximately 4% in the fourth quarter as revenue was essentially flat on a constant currency basis.

Student as offshore onward international students fewer average classes per student.

These are processing issues and delays that we experienced throughout 2022 have been approved and are close to returning to pre pandemic level.

The Australian government has ruled that all students on active students.

Must be any country and attending classes in person by June of this year, which we see as a positive catalyst for our international student growth.

Now based on the strong.

So that we've had in 2022.

These results continued this year.

2023, we expect enrollment and revenue to be up in the mid <unk>.

Yes.

Okay.

However, I would like to bring to timing related.

Okay.

We've adjusted the academic calendar towards University start later in the quarter. This is to allow students who are currently in process of being.

To start the term without having the MIT any classes. The result of the pushed more of our A&P revenue from the first half to the second half of the year.

Based on the timing issues that I've. Just described we expect our revenue in the first quarter will be essentially flat versus the prior year and our expenses will be approximately 5% in the first quarter.

Once again I'd like to thank all of our colleagues and SDI for their ongoing commitment on behalf of our students.

And with that Latif, we'd be happy to answer questions.

Thank you to ask a question. Please press star one one on your telephone again Thats Star one one on your telephone SaaS question.

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

Our first question.

Comes from the line of Jeff Silber.

Mo.

Your line is open so much.

So you started talking about the timing issues of Torrance can you just repeat what you said please.

Yes apologies for that Jeff what I said is we expect that our revenue will be up in the mid single digits for the full year and that our expenses will be up no more than 3%.

Okay, great. Thank you so much.

If I could just circle back to the U S higher education can we get a little bit more color in terms of where the demand is coming from whether it's Australia, whether its capella program type et cetera anything would be great.

Well demand is consistently high across both strayer and capella.

Across all program level again, some of the highest demand that we've seen really comes back to 2019 levels.

So it's across the board, Jeff it's up significantly at both Strayer and Capella and both universities experienced quite strong new student growth throughout 2022.

Alright, great.

I know youre, not giving specific guidance, but Rob I appreciate you going through the capital allocation and how you use the distributed free cash flow.

Are those the type of percentages, we should expect going forward in terms of how that was allocated.

No I think that percentage as the distribution of free cash flow is much higher than we would expect.

Normally are.

As I said I think 2022.

It's going to turn out to have been a trough year for both earnings and cash.

And we kept the dividend.

Where it was and we.

A significant opportunity for long term value enhancement by buying back shares at the price that it was at.

So our dividend payout I suspect will go down as a percent.

As our cash flow grows over the next several years in 2019. It was at about 40% if I remember in 2019 and that feels to us as a board is probably fair.

Percentage to think about.

Share repurchases are truly optimistic if we have if we have distributable cash excess cash.

<unk>.

So depending on what happens to the stock price, we may or may not do that our capital out Capex I suspect will be fairly consistent.

But our cash flow is growing up so the overall percentage of distributions probably going down.

Alright, Thats really helpful.

And one more and I hate to talk about a regulatory issue, but there was an announcement last week by the department of education and talking about the incentive compensation rule expanding the definition of third party servicers.

Do any of your businesses potentially come under that broader definition, specifically in the ETF Division.

No Jeff.

We don't have any relationships that would fall under that definition.

At Alphatec.

Independent of that we don't have anything thats close to incentive compensation anywhere in our divisions, just as a matter of culture.

Alright, Thats really helpful I'll jump back in the queue. Thanks, so much.

Okay.

Thank you.

Our next question.

Comes from the line of.

Tobey Sommer of Truest Your line is open Tobey.

Hey, good afternoon. This is Jasper bibb on for Tobey, Thanks for taking our question.

So I guess my first question was I was just hoping you could comment on how youre managing variable expenses.

The return to total enrollment growth.

If we look back at a longer time period, the company's margins were quite a bit higher a couple of years ago than they are now.

So any thoughts around how the current expense base might be able to support higher enrollment levels in future years kind of beyond 'twenty three.

Sure well the bulk of our expenses are quite fixed.

If we have substantial enrollment growth.

We would expect some small variable expense as we expand the number of classes that we're offering to support the higher enrollment.

But I'm confident that the current expense base by enlarge can handle many thousands of more students than we're educating today so to the extent that our enrollment continues to grow.

And the way that it has over the last year.

For this year and beyond I would expect that you would see very high marginal contribution on the incremental students that were adding.

Thanks that makes sense and then the margins for the fourth quarter just came in a little bit lower than we were expecting was there any kind of a particular driver for that or was that effectively in line with your internal plan.

Yes.

As Dan John we had.

The only thing that was a little bit of a surprise, we had a little bit higher bad debt than we expected.

That's typical.

Now with the benefit of hindsight, what we have faster growing new students new students pay at a slightly lower rate than existing students, but aside from that it was it was pretty on track with what we expected.

Got it.

Maybe pivoting to the Australia, and New Zealand segment.

We've seen some headlines around the security check requirement.

Causing delays and uncertainty.

Uncertainty degree fields getting their visa process.

Is that impacting your ability to get international because it gets into the country or do you think that's the issue is is kind of in the rearview mirror at this point.

I think theres been some impact with respect to that we did see.

The delays.

2022, we commented on that throughout the year last year, but in the early part of this year, we're starting to see visa approvals and processing timelines returned to what we consider to be relatively normal.

And so if that continues to be the case.

Yes.

One other thing on that Karl.

The one thing that's kind of an immediate impact.

Duane starting classes a couple of weeks is that.

Makes sense last.

Last one from me in the A&D segment.

<unk> are you impacted expecting any impact positive or negative.

From Chinas recent ban on their savings and studying at foreign universities online.

No. We have we have relatively few Chinese students as a percent of our overall international student cohorts that we wouldn't expect any material impact from that.

I appreciate the detail there thanks for taking my questions guys sure.

Thank you.

Thank you I would now like to turn the conference back to Carl Mcdonald for closing remarks, Sir.

Thank you everyone. We appreciate your time today, and we look forward to connecting with you next quarter.

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

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