Q3 2023 Strategic Education Inc Earnings Call

November 2, 2023

We just raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded I would now like to turn the call over to Teresa Wilkie director of Investor Relations for strategic Education Ms. Wilkey. Please go ahead.

Thank you Hello, everyone and welcome to strategic Education's Conference call in which we will discuss third quarter 2023 result.

With us today are Robert Silberman, 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 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.

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-Ks.

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 Carl Carl. Please go ahead.

Thank you Teresa and good morning, everyone.

<unk> third quarter financial results that we released this morning reflect strong continued momentum as our performance has substantially improved over the course of the past year.

Let me just say at the outset all of my remarks with respect to our financial results are referred to in constant currency.

For the third quarter.

<unk> revenue increased 10% from the prior year and was another strong quarter of sequential revenue growth.

The revenue growth was driven by continued strong enrollment within U S higher education.

Another strong quarter of growth in our education technology and services segment and improved revenue per student and our Australia, New Zealand segment.

Our operating expenses.

Increased just 2% from the prior year in line with our expectations and our operating income more than doubled from $12 million to $33 million and lastly on the use of cash item, we did repay $40 million of outstanding debt on our revolver, leaving us with $61 million of debt.

On the revolver.

Now turning to our segments.

U S higher education continues to perform exceptionally well.

Overall demand in the U S remains very strong and both strayer and Capella universities continue to have healthy new student growth driven predominantly by increases in our employer affiliated enrollments, which I believe are owners know is one of our key strategies.

Total employer affiliated enrollment grew 21%, which was more than twice the overall growth rate.

Lawyer affiliated enrollment is now 28% of all U S higher education enrollments, which is up 250 basis points from last year and nearly doubled what it was four years ago.

Finally student student retention remained stable with our trailing one year persistent rate at 87, 3%.

Our education technology and services segment also continues to perform very well E. T. S revenue increased 27% to $21 million driven by growth in Sophia learning subscriptions and employer affiliated enrollment as I just noted E.

E T S operating income increased 60% notwithstanding ongoing continuing investments to build out ETF products and services.

Sofia average subscribers increased 38% and we now have more than 34000 paid subscribers on the platform.

Workforce edge continues to gain market share in the education benefits management space with 60 corporate clients and thus far this year. We now have 1200 students from workforce edge at either strayer or Capella University.

Our Australia and New Zealand segment also had a strong quarter notwithstanding a slight 1% decrease in its total enrollment.

Revenue increased 7% to $66 million driven by increases in revenue per student.

ANZ operating income increased 60% to $14 million and the operating margin increased 720 basis points to 21, 8%.

We continue to be optimistic about returning towards University, who enrollment growth in 2024.

Overall, we were very pleased with all of these results and as always I'd like to thank my colleagues for their ongoing commitment to our students and I'd like to remind our owners that we will be hosting an investor day on November 7th in New York City webcast details can be found on our website.

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

Okay. Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced until withdraw. Your question. Please press star one again, please stand by while we compile our Q&A roster.

And our first question is going to come from the line of Jeff Silber with BMO capital markets. Your line is open. Please go ahead.

Thanks, So much wanted to start with the U S higher education.

The enrollment growth was much better than we had expected I know you've mentioned the employer affiliated enrollment, but can we drill down a little bit more between strayer and Capella University undergrad and grad at any specific program to call out.

I'd say at Capella, Jeff Flexpath continues to remain strong.

All of the health care programs at Capella are strong at Strayer, which is predominantly undergraduate the growth is pretty even across all areas of study, but I have to say given the growth rates that we're seeing employer in our employer affiliated enrollment that's a very broad base set of accounts that have just been growing.

<unk> well all year and that's really been the primary driver of the increased enrollment.

Okay. That's helpful.

Maybe I can switch over to the ANZ segment, if I remember correctly, there was going to be a new rule that come into effect.

Regarding foreign students coming back on campus July 1st can we get a little bit of color that I know it maybe a little bit early but what do you think the impact is well that's definitely helped our revenue per student and revenue per student is driven by two things obviously, it's driven by our tuition and we did have a slight tuition increase in Australia at the beginning of this year, but it's also drew.

Given by the amount of courses that students take and one of the byproducts of that rule with students having to take a full course load prior to July 1st they could take a lower course load and still retain their visa theyre not able to do that anymore. So that's what led to the increase in our revenue per student over there.

Okay, that's really helpful.

Just one final one for me I know you are having an investor and analyst day.

I don't want to steal your Thunder, but what will we be expecting or are you going to be providing long term targets any color would be great. Yes.

Maybe I can switch over to the ANZ segment, if I remember correctly, there was going to be a new rule that come into effect.

We expect to comment both on our full year performance for this year.

Regarding foreign students coming back on campus July one can we get a little bit of color that I know it may be a little bit early but what do you think the impact is well that's definitely helped our revenue per student in revenue per student is driven by two things obviously, it's driven by our tuition and we did have a slight tuition increase in Australia at the beginning of this year, but it's also drew.

With a little more specificity and we do intend to provide a five year outlook, which will include our first pass at 2024.

Okay fantastic. Thanks, so much sure. Thank you Jeff.

Thank you.

One moment for our next question and as a reminder, if you would like to ask a question. Please press star one on your telephone.

Given by the amount of courses that students take and one of the byproducts of that rule with students having to take a full course load prior to July one they could take a lower course load and still retain their visa theyre not able to do that anymore. So that's what led to the increase in our revenue per student over there.

Our next question is going to come from the line of Jasper Bibb with true of Securities. Your line is open. Please go ahead.

Hey, good morning, everyone.

Just wanted to ask about updated expectations for 'twenty three I think you outlined some second half expectations last call, but just any thoughts on how we should think about the cadence of <unk> revenue and Opex growth.

Okay, that's really helpful.

Just one final one for me I know you are having an investor and analyst day, I don't want to steal your Thunder, but.

What will we be expecting or are you going to be providing long term targets any color would be great. Yes.

Relative to that prior view would be great. Thanks, Hey, Joss for its Dan.

We expect to comment both on our full year performance for this year.

As Carl just said, we're actually going to get into that on Tuesday at our Investor day, So probably better to wait until then other than to say, we still believe we're on track with what we laid out at the beginning of the year.

With a little more specificity and we do intend to provide a five year outlook, which will include our first pass at 2024.

Okay fantastic. Thanks, so much sure. Thank you Jeff.

Yes, definitely definitely makes sense.

Following up on the U S higher Ed discussion just.

Thank you.

One moment for our next question and as a reminder, if you would like to ask a question. Please press star one on your telephone.

Just kind of curious what youre seeing as far as student interest levels relative to the last couple of years and any trends from a marketing your perspective there.

Our next question is going to come from the line of Jasper Bibb with true of Securities. Your line is open. Please go ahead.

We've seen improvements in both we continue to see a very robust healthy macro demand environment interest into the universities is relatively high higher than it's been.

Hey, good morning, everyone.

In a long time I would say.

But I'd say that we've also seen improvements in our ability to effectively advertise.

And so our growth is really a product of many things we are.

With them to that probably it would be great. Thanks, Hey, Jasmine stand.

High performing teams, we have a lot of interest on the part of students.

Potentially wanting to study at either strayer or Capella University.

And again not to be a broken record, but our.

Our corporate affiliated enrollments are the strongest frankly that they've ever been and.

Yes, definitely definitely makes sense.

Following up on the U S higher Ed discussion just.

And I'd say, that's that's really one of the predominant reasons why we're seeing such high levels of growth.

Just kind of curious what youre seeing as far as student interest levels relative to the last couple of years and any trends from a marketing your perspective there.

Makes sense.

With respect to U S higher Ed we did get a final gainful employment rule in September just hoping to get your assessment of the outcome there.

We've seen improvements in both we continue to see a very robust healthy macro demand environment interest into the universities is relatively high higher than it's been.

The longer earnings period for certain programs and what do you think that could mean for enrollment levels in your U S higher Ed business over the next couple of years.

In a long time I would say.

But I'd say that we've also seen improvements in our ability to effectively advertise.

Yeah, we've obviously carefully reviewed the rule, we don't anticipate to have any failing programs at either strayer or Capella University I'm not sure it's going to have any impact on enrolment. So we're quite comfortable with that rule.

And so our growth is really a product of many things.

High performing teams, we have a lot of interest on the part of students.

Great.

Potentially wanting to study at either strayer, or Capella University, and again not to be a broken record, but our.

Last one for me.

Segment margins were really strong at.

40% in the quarter I know you've talked about a longer term objective to get to 50%. There. So looking ahead should we think about this margin level is sustainable or do you expect etfs margins to normalize back to that low 30% ish range had been running out the last couple of quarters well over the last couple of years, we've said that we've been making a lot.

Our corporate affiliated enrollments are the strongest frankly that they've ever been and.

And I'd say, that's that's really one of the predominant reasons why we're seeing such high levels of growth.

Makes sense.

With respect to U S higher Ed we did get a final gainful employment rule in September just hoping to get your assessment of the outcome there.

Investments in Etfs. So the margin has actually been deliberately depressed while we made those investments the investments that we've made in preceding years are starting to generate a fair amount of revenue now.

The longer earnings period for certain programs and what do you think that could mean for enrollment levels in your U S higher Ed business over the next couple of years.

So we've always believed that this is a business that we can grow at relatively high rates with very high margins and I would still say I would expect over time Etfs margins to hover around 50%.

Yes, we've obviously carefully reviewed the rule, we don't anticipate to have any failing programs at either strayer or Capella University I'm not sure it's going to have any impact on enrolment. So we're quite comfortable with that rule.

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

Great.

Last one for me.

Thank you and one moment as we move on to our next question.

<unk> segment margins were really strong at.

And our next question is going to come from the line of Heather <unk> with Bofa. Your line is open. Please go ahead.

Hi, Thank you I was hoping you could talk about the Australia, and New Zealand enrollment trend.

Well over the last couple of years, we've said that we've been making a lot of investments in Etfs. So the margin has actually been deliberately depressed while we made those investments the investments that we made in preceding years are starting to generate a fair amount of revenue now.

It did decline or are obviously coming down and we're now in the period, where you where enrollment is I guess.

She started to pick back up what are you. What are you seeing with regard to I guess the early part of fourth quarter enrollment do you think youre going to be up year over year in the fourth quarter.

So we've always believed that this is a business that we can grow at relatively high rates with very high margins and I would still say I would expect over time Etfs margins to hover around 50%.

And I guess, where is the demand coming from versus pre COVID-19.

Yeah. So.

First of all for the fourth quarter, it's a pretty small term, it's not a big number what we're really focused on is our first academic term of 24, which is the largest term for tourism in any given year.

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

Thank you and one moment as we move on to our next question.

But in the third quarter, we actually had relatively strong new student growth in our domestic market. There it was up double digits.

And our next question is going to come from the line of Heather <unk> with Bofa. Your line is open. Please go ahead.

More than double digits.

Hi, Thank you I was hoping you could talk about.

We did have a slight decline in international which doesn't alarm US you know, it's still relatively new from the post July 1st rule, requiring students to be on campus and so forth. So I remain very confident that we'll see both domestic and new student growth at towards in 2024.

The Australia, and New Zealand enrollment trend.

Declines are obviously coming down and we're now in the period, where you where enrollment is I guess.

I'm, sorry, I can't pick back up what are you what are you seeing with regard to.

I guess the early part of fourth quarter enrollment, you think youre going to be up year over year in the fourth quarter.

Great that's helpful.

And please correct me here I think you had last spoke about mid single digit.

And I guess, where is the demand coming from versus pre COVID-19.

<unk> growth for for 2023 is that still the case and given the momentum you're seeing in higher education. Do you think you could be at a higher pace next year.

Yes so.

Yes Heather.

Mid single digit was a reference to total enrollment for <unk> not just ANZ is that what you're asking about.

But in the third quarter, we actually had relatively strong new student growth in our domestic market. There it was up double digits.

Yes, yes, yes, and yes as I just said we think we're on track for what we laid out earlier in the year.

More than double digits.

We did have a slight decline in international which doesn't alarm us it's still relatively new from the post July 1st rule requiring students to be on campus and so forth. So I remain very confident that we'll see both domestic and new student growth at <unk> in 2024.

A little bit ahead as of the end of the third quarter and we'll have more to say on Tuesday at our at our Investor Day.

Appreciate it thank you.

<unk>.

Thank you.

I would like to hand, the conference back to Carl Mcdonald for closing remarks.

Thank you everybody hopefully, we'll see many of you in New York next week and if not we invite you to participate in our Investor day on our webcast and we look forward to speaking with you then.

Great that's helpful.

And please correct me here I think you had last spoke about mid single digit.

Enrollment growth for 2023 is that still the case and given the momentum you're seeing in higher education. Do you think you could be at a higher pace next year.

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

Yes Heather.

Mid single digit was a reference to total enrollment for Sci not just ANZ is that what you're asking about yes, yes, total Edmond yeah and yeah. As I. Just said, we think we're on track for what we laid out earlier in the year a little bit ahead as of the end of the third quarter and we'll have more to say on Tuesday at our.

At our Investor day.

Appreciate it thank you.

<unk>.

Thank you.

I would like to hand, the conference back to Carl Mcdonald for closing remarks.

Thank you everybody hopefully, we'll see many of you in New York next week and if not we invite you to participate in our Investor day on our webcast and we look forward to speaking with you then.

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

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Good day and thank you for standing by welcome to strategic Education's third quarter 2023 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 to ask a question during this session.

You will need to press star one on your telephone.

We'll then hear an automated message advising you. Your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to turn the call over to Teresa Wilkie director of Investor Relations for strategic Education Ms. Wilkey. Please go ahead.

Thank you Hello, everyone and welcome to strategic Education's Conference call in which we will discuss third quarter 2023 results with.

With us today are Robert Silberman, 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 995.

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, maybe 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 8-K 10.

Thank you <unk>.

<unk> 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 Carl Carl. Please go ahead. Thank.

Thank you Teresa and good morning, everyone.

<unk> third quarter financial results that we released this morning reflect strong continued momentum as our performance has substantially improved over the course of the past year.

Let me just say at the outset all of my remarks with respect to our financial results are referred to in constant currency.

The third quarter.

<unk> revenue increased 10% from the prior year and was another strong quarter of sequential revenue growth.

The revenue growth was driven by continued strong enrollment within U S higher education.

Another strong quarter of growth in our education technology and services segment and improved revenue per student and our Australia, New Zealand segment.

Our operating expenses increased just 2% from the prior year in line with our expectations and our operating income more than doubled from $12 million to $33 million and lastly on a use of cash item, we did repay $40 million of outstanding debt on our revolver Lee.

<unk> us with $61 million of debt on the revolver.

Now turning to our segments.

U S higher education continues to perform exceptionally well.

Total employer affiliated enrollment grew 21%, which was more than twice the overall growth rate.

Employer affiliated enrollment is now 28% of all U S higher education enrollments, which is up 250 basis points from last year and nearly double what it was four years ago.

Finally student.

Student retention remained stable with our trailing one year persistent rate at 87, 3%.

Our education technology and services segment also continues to perform very well.

<unk> revenue increased 27% to $21 million driven by growth in Sophia learning subscriptions and employer affiliated enrollment as I just noted.

<unk> operating income increased 60% notwithstanding ongoing continuing investments to build out ETS products and services.

Sofia average subscribers increased 38% and we now have more than 34000 paid subscribers on the platform.

Our Australia and New Zealand segment also had a strong quarter notwithstanding a slight 1% decrease in its total enrollment <unk>.

Revenue increased 7% to $66 million driven by increases in revenue per student.

<unk> operating income increased 60% to $14 million and the operating margin increased 720 basis points to 21, 8%.

We continue to be optimistic about returning towards University, who enrollment growth in 2024.

Overall, we were very pleased with all of these results and as always I'd like to thank my colleagues for their ongoing commitment to our students and I'd like to remind our owners that we will be hosting an investor day on November 17th in New York City webcast details can be found on our website.

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

Okay.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.

Your question. Please press star one again, please standby, while we compile our Q&A roster.

And our first question is going to come from the line of Jeff Silber with BMO capital markets. Your line is open. Please go ahead.

Thanks, So much wanted to start with the U S higher education.

The enrollment growth was much better than we had expected I know you've mentioned the employer affiliated enrollment, but can we drill down a little bit more between strayer, and Capella University undergrad and Grad and any specific program types to call up.

I would say.

At Capella, Jeff Flexpath continues to remain strong.

Exceptionally well all year and Thats really been the primary driver of the increased enrollment.

Okay. That's helpful.

Maybe I can switch over to the E&P segment.

I remember correctly, there was going to be a new rule that come into effect regarding foreign students coming back on campus July one can we get a little bit of color that I know it may be a little bit early but what do you think the impact is well that's definitely helped our revenue per student and revenue per student is driven by two things obviously, it's driven by our tuition and we did have a slight two.

An increase in Australia at the beginning of this year, but it's also driven by the amount of courses that students take and one of the byproducts of that rule with students having to take a full course load prior to July one they could take a lower course load and still retain their visa theyre not able to do that anymore. So that's what led to the increase in our revenue per student over there.

Yeah.

Okay, that's really helpful.

Just one final one for me I know you are having an investor and analyst day, I don't want to steal your thunder, but what will we be expecting or are you going to be providing long term targets any color would be great.

Yes, we expect to comment both on our full year performance for this year.

With a little more specificity and we do intend to provide a five year outlook, which will include our first pass at 2024.

Okay fantastic. Thanks, so much sure. Thank you Jeff.

Thank you.

One moment for our next question and as a reminder, if you would like to ask a question. Please press star one on your telephone.

Our next question is going to come from the line of Jasper Bibb with <unk> Securities. Your line is open. Please go ahead.

Hey, good morning, everyone.

Just wanted to ask about updated expectations for 'twenty three I think you outlined some second half expectations last call.

And just any thoughts on how we should think about the cadence of <unk> revenue in the opex growth relative to that <unk> would be great. Thanks, Hey, Joss for its Dan.

As Carl just said, we're actually going to get into that on Tuesday at our Investor day, So probably better to wait until then other than to say, we still believe we are on track with what we laid out at the beginning of the year.

Yes, definitely definitely makes sense.

Following up on the U S higher Ed discussion just.

Just kind of curious what youre seeing as far as student interest levels relative to the last couple of years and any trends from our marketing yield perspective there.

We've seen improvements in both we continue to see a very robust healthy macro demand environment interest into the universities is relatively high higher than it's been in a long time I would say.

But I'd say that we've also seen improvements in our ability to effectively advertise.

And so our growth is really a product of many things.

Have high performing teams, we have a lot of interest on the part of students.

Potentially wanting to study at either strayer, or Capella University, and again not to be a broken record but.

Our corporate affiliated enrollments are the strongest frankly that they've ever been and I'd say thats Thats really one of the predominant reasons why we're seeing such high levels of growth.

Makes sense.

With respect to U S higher Ed we did get a final gainful employment rule on September so just hoping to get your assessment of the outcome there.

The longer earnings period for certain programs and what do you think that could mean for enrollment levels in your U S higher Ed business over the next couple of years.

Great.

Last one for me.

<unk> segment margins were really strong at <unk>.

40% in the quarter I know you've talked about.

Longer term objective to get to 50%. There. So looking ahead should we think about this margin level is sustainable or do you expect etfs margins to normalize back to that low 30% ish range you've been running at the last couple of quarters well over the last couple of years, we've said that we've been making a lot of investments in Etfs. So the margin has actually been.

Deliberately depressed while we made those investments the investments that we made in preceding years, they're starting to generate a fair amount of revenue now.

So we've always believed that this is a business that we can grow at relatively high rates with very high margins and I would still say I would expect over time Etfs margins to hover around 50%.

Appreciate the detail there thanks for taking the questions guys sure.

Thank you and one moment as we move on to our next question.

And our next question is going to come from the line of Heather <unk> with Bofa. Your line is open. Please go ahead.

Hi, Thank you I was hoping you could talk about the Australia, New Zealand enrollment trend.

It did decline are obviously coming down and we're now in a period, where you where enrollment is.

Should start to pick back up what are you what are you seeing with regard to.

I guess the early part of fourth quarter enrollment do you think youre going to be up year over year in the fourth quarter.

And I guess, where is the demand coming from versus pre COVID-19.

Yes so.

First of all for the fourth quarter, it's a pretty small term its not a big number.

We're really focused on is our first academic term of 24, which is the largest term for tourism in any given year.

But in the third quarter, we actually had relatively strong new student growth in our domestic market. There it was up double digits.

More than double digits.

Great that's helpful.

And please correct me here I think you had last spoke about mid single digit.

<unk> growth for 2023 is that still the case and given the momentum youre seeing in higher education do you think you could be at a higher pace next year.

Yes Heather.

With mid single digit was a reference to total enrollment for Sci not just ANZ is that what you are asking about yes, yes total business yes.

And yes as I just said, we think we're on track for what we laid out earlier in the year a little bit ahead as of the end of the third quarter and we'll have more to say on Tuesday at our at our Investor Day.

Appreciate it thank you.

Thank you.

And I would like to hand, the conference back to Carl Mcdonald for closing remarks.

Thank you everybody hopefully, we'll see many of you in New York next week and if not we invite you to participate in our Investor day on our webcast and we look forward to speaking with you then.

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

Yeah.

Q3 2023 Strategic Education Inc Earnings Call

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