Q2 2023 Strategic Education Inc Earnings Call

Nation Miss Wilkie. Please go ahead.

Thank you Hello, everyone and welcome to strategic Education's Conference call in which we will discuss second quarter or 20 twenty-three results with US today are Robert Silberman, Chairman, Karl Mcdonald, 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 assumptions uncertainties and risks that strategic education has identified in today's press release that could cause <unk>.

Actual results to differ materially.

Further information about bees and other relevant uncertainties may be found in strategic Education's. Most recent annual report on Form 10-K <unk>.

10-Q to be filed and other filings with the Securities and Exchange Commission as well as strategic Education's future. A case 10-Q as in 10 case 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.

Theresa and good morning, everyone.

She already second quarter reflects continued strong performance in the U S higher education, another strong quarter from ETS.

And improving trends in Australia, and New Zealand.

But before I discuss our performance. This morning I just wanted to note that all financial figures that I referenced in my prepared remarks or on a constant currency basis.

And the second quarter S. T I's revenue increased 7%.

That's significantly better than our first quarter performance, where revenue with flat to the prior year.

The revenue growth that we had.

Significant revenue growth within E. P. S is strong revenue per student in Australia, and New Zealand.

Based on the current performance, we expect that second half of 2023 revenue will be higher than the 7%.

And the second quarter of this year.

Our second quarter operating expenses increased 8%.

That created a slight reduction in our operating income, but as I've previously discussed our expenses are higher in the first half of 2023, because a majority of the incremental investments that we make this year are trying to occur in the first and second quarters.

Expenses in the second half of 2023, we expect to be up only 2% to 3% from the prior year or.

Our second quarter adjusted earnings per share, where 85 cents and that's flat to the prior year I'd like to note that this is the first time since the second quarter of 2020 that S. T. I's earnings have not been down on a year over year basis.

Given the current visibility into our business, we expect to see significant earnings growth in both the third quarter and the fourth quarter and for the full year 2023.

Now turning to our segments.

U S higher education continues to perform very well.

The demand environment remains very strong and we continue to see strong increases year over year inquiries into the University.

Both strayer and Capella universities continue to pose strong new student enrollment we.

We also see strong persistent increases are trailing one year persistence increased 30 basis points in U S higher education to 87.4%.

Employer affiliated enrollments also remain very strong.

Total employer affiliated enrollments increased 16%, which was well ahead of the five per cent increase across all of U S higher education.

I'd like to also note that the stray a recovery continues to be well ahead of our expectations and we expect stray your total enrollment to be increasing in the high single digits by year end.

E T S education technology and services segment had another very strong quarter E. T. S revenue increased 22% to $20 million.

E T S. Adjusted operating income increased 16% notwithstanding that we continue to make significant new investments in both Sophia and workforce edge.

Sophia average paid subscribers increased 30% and we now have over 30000 paid subscribers on the platform.

[noise] workforce edge continues to gain traction in the market place, we added seven new corporate clients, bringing our total to 62, who now collectively employ more than 1.4 million people.

Australia and New Zealand also had a strong second quarter revenue increased 4% to $70 million. Despite a slight decline in enrollment on the basis of strong revenue per student the.

The revenue per student increase based on a plan pricing increase for 2023 as well as an improved course load on on the part of our students.

ANZ operating income increased 25% to $15 million, an operating margin increased 400 basis points to 22% and that's the highest operating margin that we've had it ANZ since making the acquisition.

But more important than their financial results. We were more pleased with the results from the Australian government annual survey on post secondary academic quality.

It is known as the quality indicators on learning and teaching.

And in that report Torrens University fared quite well.

On the over on the measure of overall quality of education experience Torrens University ranked seventh.

43, federally recognized University and that's an increase from their 14th position in the prior year.

On the measure of students support and teaching Torrens within the top 10, which was up from 16th in 2021.

And for overall satisfaction of recent graduates tourist scored 80.3% satisfied which is 270 basis points higher than the Australian National average. So we were very pleased to see the significant gains in academic quality at Torrens University.

Lastly, I'd like to remind all of our owners, we will be hosting an investor day on November 7th in New York City, and there's more information on our website, if you'd like to participate or attend and finally as always I'd like to thank all of my colleagues at Sci for their ongoing commitment and professionalism on behalf of our students.

And without Amy we'd be happy to take questions.

Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, please standby will be compiled acuity roster.

Our first question comes from Jeff Silber with B M O capital markets. Your line is open.

Thanks, So much wanted to start on a U S higher education and strong enrollment trends that you've been seeing I know you mentioned the employer affiliated programs I know, that's driving a lot of growth, but can we grill and a little bit further in terms of the type of schools or programs, where you're really seeing that growth.

Well, you're right, Jeff clearly his employer health care, a capella remains the strongest segment with nursing being at the top of the list and Flexpath in particular.

But we've seen equally strong growth that stray are in fact, a little bit higher growth rates are on the new students side and we attribute that just the fact that we continue to operate in a normal stray or environment, meaning campuses open and staffed so I I've said that Australia recovery is a little ahead of what we might have expected.

But on the other hand, given that we saw no structural barriers to stray a recovering its enrollment. The fact that we're just opening and we have that strong demand environment that I was talking about I.

I I think that speaks to why the the results are where they are.

Okay. That's really helpful. If I could switch over to Australia, New Zealand.

I know Enrolments <unk>, we're down a bit.

Are you still being affected by the timing issue was there something else going on actually our domestic new students in Australia, we're up in the quarter. They were also up in the first quarter. So the decline continues to be in the international news student category as I said in the last quarter July 1st is the.

Implementation date of the changes that require international students to be taking a full course load to be in country and so forth. We continue to be optimistic that the international news students are gonna turn around but that's the source of the decline in Australia.

Okay, and then from an overall company perspective.

You said last quarter, you you would expect revenues to be up in the mid single digits for the year and if that happens you will will you wouldn't see operating expenses rising more than 3%.

Are you still comfortable with that it sounds like you might've raise that bar a little bit yeah.

Yeah, I think our revenue is going to be higher Jeff then mid single digits. As a result, whenever you have more revenue you're gonna have some variable expenses that you have to add for you know more courses teachers and so forth.

So if you if you just go back to my prepared remarks, I sit in the back half of the year.

We expect a R Q3, and Q4 expenses combined if you will to be up no more than 2% to 3%.

Okay. That's really helpful. I'll jump back in that case, thanks, so much.

And as a reminder to ask a question. Please press star one one on your phone.

Our next question comes from Jasper bed with Truest Securities. Your line is open.

Hey, good morning, everyone I, just wanted to start with the U S or an operating margin, they're the enrollment screw there, but the operating margin actually fell year over year would that be due to the timing of growth investments that you mentioned and what what would be be able to expect for you a segment margins over the balance of the year.

If your moderating those growth investments in a second.

It's it is predominantly the growth investments.

We like to make those investments early in the year. So that we have the the benefit for the for the full year and we.

Similar to what I was just saying to Jeff. We we expect all of our operating expenses in U S. Higher education is our largest segment to moderate in terms of growth from the prior year in the back half of the year and then what would what do you think on margin I think we're going to see margin expansion for you is higher Ed and and the second half of the year Jasper and then one other thing that I.

But we did have a year over year.

Increase in bad debt, that's contributing to the U S higher margin, which is now I'd say, we're at a more normalised rate of bad debt relative to last year, where it was it was lower due to some one off benefits related system revenue recognition changes we made.

Okay got it and then since the last call we have a new gainful employment proposal from Education Department.

Yeah, I was just hoping to get your thoughts on that rule and how more stringent gainful employment standards could eventually impact enrollment levels in the U S. <unk>.

Well obviously.

We're continuing to monitor all the developments across the full regulatory spectrum, including potential new gainful employment regulations.

But until we see the final rule Jasper it's difficult for us to to comment with any specificity. What I can say is we remain very comfortable with the overall risk profile of both strayer and capella.

And will do whatever is required to comply with any new regulation once it goes into effect.

Okay last question for me May be following up on that are you managing the business any differently today due to the G proposal like maybe that would entail shifting marketing dollars away from programs that might be at risk of noncompliance under the new threshold.

Well first just you know as a matter of principle, we always manage to the highest academic quality standard that we think we can.

And that in part is well, it's primarily intended to create the most value that we can for our students, but it's also ah geared to making sure that we are well within compliance with any proposed regulation or current regulation, rather and and also any proposed regulation, but to answer your question specifically no we have not made.

Any changes tactically to things like marketing as a result of this particular proposed regulation.

Oh, that's that's helpful color. Thanks, Okay. Thanks for taking my questions Sir.

Mmm moment for our next question.

Our next question comes from Alex Perez with Barrington Research. Your line is open.

Hey, guys. Thanks for taking my question Congrats on the very strong performance in the second quarter at a follow up question on ANZ segment.

The.

The.

Alien governments requirement that international students are are in country, and taking a fulltime load as effective July 1st.

Uh-huh.

And I think you had commented in the past that you view that as a potential catalyst for the business <unk>.

Both on a new student enrollment total student enrollment and potentially revenue per student as some of these international online sentence were taking less than full loads is that still the expectation and when would you expect that that would show up in in the numbers.

Yes that is still our expectation.

The primary reason that we see it as a benefit is Australia is a very popular destination for foreign students, it's third or fourth globally in terms of number of international students that immigrate in for the purposes of education.

That all prevented obviously all the way up from the beginning of the pandemic till July 1st of this year.

And although some students still enrolled and took their classes online in their home country. They took a lighter course load than they otherwise would have so it ah depressed or revenue per student for close to two years.

Get posted July 1st Ah, we see that as a benefit and in terms of when we when would we expect to see that I personally would expect to see it in the back half of this year and all of next year moving forward.

Right. That's helpful. And then just to follow up on U S. Higher education revenues were higher than expected enrollment was higher than expected revenue per student was higher than expected.

Just to be clear revenue per student was driven by did you say price increases.

Pricing Alice was the biggest driver we also had slightly lower scholarships and the U S on a year over year basis.

Okay. Thank you and then.

Employer affiliated enrollment at U S. Higher education was up 250 basis points just 27.1%. This from the press release, what was the gross in employer affiliated room. It by University I think you've given that in the <unk>.

<unk> in the first quarter I think straighter was up 25 per cent, a capella was up 13%.

Yeah, I don't have it in front of me, Alex, but I I know roughly that stray hair was up call it 17% to 20% in the second quarter Capello was above 30 per cent.

Great. Thanks, and then last couple of Quickies restructuring costs ban were up more than I had modeled in up year over year. What's included in there and how should we think about restructuring costs going forward on a.

Year to date basis, we think the majority of plan restructuring costs are have been incurred in the first half half of them roughly are related to facilities that were rationalizing and the other half is related to severance costs.

For restructuring related Raul terminations.

Great and the last one on the regulatory side too I think.

You will likely talk about 90 10 in your 10-Q, which is not yet filed do you do you know those numbers from Australia, and Capello know that you can disclose.

No we have anticipated for some time, obviously the change in the department's categorization of veterans benefits and active duty military flipping from the from the 10, so called into the 90.

We're working to to manage it as carefully as we can and we believe will have no compliance issues by the end of the year and Alex just to follow on and clarify cause I think you're asking specifically about our normal disclosures, yes, they will be in the queue.

That will file following the call and <unk>.

<unk>, roughly 80, and compel us as well below.

I think it's in the high sixties late seventies.

20th stray rooms like 68.

And that's that's under the new calculation, including veterans in the numerator no no last that's what calendar. That's for 22, so the new the new rugs for twenty-three, which have gotcha, okay, good, but but it seems like this plenty of room. There to lead you to conclude as you had said that you should have no regulatory.

Issues by year round.

Yeah, we believe that we're under under the new calculation yeah.

Yes, that's what we believe.

Right. Thank you that's it for me.

One moment for our next question.

Our next question comes from Heather Bosky with <unk>. Your line is open.

Hi, good morning, Thanks for taking my question.

I was curious about the broader macroenvironment and everything that's going on I think.

And data for the labor market, it's been relatively Max what are you focusing on what do you think the data me into your business in the near term and into next year.

Well as I've said I go it seems.

It seems like going on a year now the demand environment in the United States.

For both Strayer and Capella has been strong for over a year.

And to be more specific what I mean by that is the sum of people that are enquiring about potentially enrolling in either Australia capella.

We've been growing those inquiries pretty significantly for the last year.

But what I would point too is again, how strong our employer affiliated enrollment has been that has the growth rate an employer affiliated enrollment has been double if not triple in some cases the growth in non employer. So I would take that to mean that employees at these companies are feeling good about.

Their labor prospects their job the security that they have and periods, where there's been less certainty or confidence on the part of the labor force, we tend to see less or lower employer affiliated enrollment.

So the demand environment for both stray or a capella has been strong and remain strong we haven't seen any leading indicators suggest it would weaken.

Heather drive also just specifically on the macroeconomic statistics.

May be mixed across the broad spectrum of things do you look at but the the one statistic. We look at most closely Ah to Carl's point is labor force participation rates and I think that that they were the labor force participation rate in the last month for 25 to 50 year olds, which is you know sort of our target market.

Was at a 20 year high so the.

The the data the.

The underlying macroeconomic data does reflect.

Reflect the kind of strikes at a carl's describing.

[laughter], that's really helpful and I'm just curious cause you you have called out to strengthen inquiries, how how did levels compare to 2019 level is right now.

I I would suspect there higher I don't have the 2019 numbers in front of me.

But ah inquiries.

Into both stray or a capella had been growing consistently.

For as long as I can remember looking at our internal reporting but to answer your question, specifically about 2019, I couldn't speak to that with any specificity, but other than to say the environment has been strong for some time now.

What I can say.

Is.

Terms of absolute enrollment certainly a capella University Capella University is on track to have the highest enrollment it's ever had in 2023 stray.

Australia or will be below 2019, because they had a sharp decline as a result of having to close all of our campuses for a couple of years, but.

But the the recovery is very much sort of in a V shaped it stray or.

We expect over time that it will surpass it's 2019 enrollment.

That's really helpful. And then just follow up question.

And and it may be a little premature, but hey, right. Now you know, there's a lot going on around student loan repayments, and the timing and and and forgiveness and I'm. Just curious if you're hearing from you know the folks you work with at the bank or anything with regards to kind of how potential default rate.

Or being managed and and kind of you know how the industry is just carrying up for for kind of this change and then returned to your payments.

Hello. This is Dan we're we're not hearing a lot. We are of course planning to start working with our own students are really students that are that are that are not in school anymore, and thus will be in repayment Ah to help make sure that they know what their obligations are ah, but beyond that we're not hearing much of anything.

[noise] got it thank you.

And I'm showing no further questions at this time I would not like to turn the conference back to Carl Mcdonalds for closing remarks. Thank.

Take care everyone. We appreciate your time this morning, and we look forward to discussing our results next quarter and hopefully seeing as many of you as we can at our Investor day in November .

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

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