Q1 2024 Strategic Education Inc Earnings Call

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Operator: Thank you for standing by, and welcome to Strategic Education's first quarter 2024 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'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again.

Terese Wilke: It has been answered I do like to remove yourself from the queue simply press Star one one again as a reminder, today's program is being recorded I will now turn the call over to tourists Wilkie director of Investor Relations for strategic Education Milwaukee. Please go ahead.

Terese Wilke: As a reminder, today's program is being recorded. I will now turn the call over to Terese Wilke, Director of Investor Relations for Strategic Education. Ms. Wilke, please go ahead.

Terese Wilke: Thank you. Hello, everyone, and welcome to Strategic Education's conference call, in which we will discuss the first quarter 2024 results. 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.

Terese Wilke: Thank you Hello, everyone and welcome to strategic Education's Conference call in which we will discuss first quarter 2024 results.

Terese Wilke: With us today are Robert Silberman, Chairman, Karl Mcdonnell, President and Chief Executive Officer, and Daniel Jackson, Executive Vice President and Chief Financial Officer.

Terese Wilke: Following today's remarks, we will open the call for questions.

Terese Wilke: 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.

Terese Wilke: 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 may be found in Strategic Education's most recent annual report on Form 10-K, the 10-Q to be filed, and other filings with the Securities and Exchange Commission, as well as Strategic Education's future 8-Ks, 10-Qs, and 10-Ks. Copies of these filings and the full press release are available for viewing on the website at strategiceducation.com. And now, I'd like to turn the call over to Karl. Karl, please go ahead.

Terese Wilke: The statements are based on current expectations and are subject to a number of assumptions and.

Karl: Certainties and risks that strategic education has identified in today's press release that could cause the actual results could differ materially.

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

Karl: Q to be filed and other filings with the Securities and Exchange Commission.

Karl: As well as strategic Education's future 8-K.

Karl: He was in 10-Ks.

Karl: Copies of these filings and the full press release are available for viewing on the website at strategic education Dotcom and.

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

Karl McDonnell: Thank you, Terese, and good morning, everyone. Our first quarter 2024 results reflect continued strength across all of our segments. And before we begin, and as is normally the case, I'd like to start by pointing out that all of my references to our financial results are to our adjusted results, and they assume a constant currency for foreign exchange purposes. For the first quarter, our revenue grew 14% to $292 million. Our operating expenses grew 3 percent, which was in line with our expectations, and our operating income grew by more than four times to $36 million.

Karl: Thank you Terry and good morning, everyone. Our first quarter 2024 results reflect continued strength across all of our segments.

Karl McDonnell: Before we begin and as is normally the case I'd like to start by pointing out that all of my references to our financial results are to our adjusted results and they assume a constant currency for foreign exchange purposes for.

Karl McDonnell: For the first quarter, our revenue grew 14% to $292 million, our operating expenses grew 3%, which was in line with our expectations and our operating income grew by more than four times to $36 million.

Karl McDonnell: Our operating margin increased 910 basis points, and during the quarter, we generated an incremental $28 million of operating income from $36 million of incremental revenue. That 78% marginal contribution is a bit more than we would normally expect, and it reflects the fact that many of our planned investments this year are timed to occur in the second half of the year to support our growth initiatives for 2025.

Karl McDonnell: Our operating margin increased 910 basis points and during the quarter, we generated an incremental $28 million of operating income from $36 million of incremental revenue.

Karl McDonnell: That 78% marginal contribution is a bit more than we would normally expect.

Karl McDonnell: And it reflects the fact that many of our planned investments. This year are time to occur in the second half of the year to support our growth initiatives for 2025 during.

Karl McDonnell: During the quarter, we generated $1.11 in earnings per share, which was more than a 350% increase. Turning now to our segment, U.S. higher education delivered another quarter of strong growth driven once again by employer-affiliated enrollment. Total enrollment in U.S. higher education for the first quarter grew 10%, with total employer-affiliated enrollment growing more than double that rate at 22% from the prior year, reflecting continued strength in our corporate partnership. During the quarter, the percentage of total U.S. higher education enrollment coming from our corporate partnerships increased 300 basis points to 29 percent. Student retention at U.S. higher education has remained stable at 87%.

Karl McDonnell: During the quarter, we generated $1.11 earnings per share, which was more than a 350% increase.

Karl McDonnell: Turning now to our segments U S higher education delivered another quarter of strong growth driven once again by employer affiliated enrollment.

Karl McDonnell: Total enrollment in U S higher education for the first quarter grew 10% with total employer affiliated enrollment growing more than double that rate at 22% from the prior year, reflecting continued strength in our corporate partnerships.

Karl McDonnell: During the quarter the percentage of total U S higher education enrollment coming from our corporate partnerships increased 300 basis points to 29%.

Karl McDonnell: Student retention that U S higher education remains stable at 87% in.

Karl McDonnell: In the first quarter, U.S. higher education revenue grew 11% and operating income grew 192% from the prior year. Our education, technology, and services segment also continued to see strength, with both SOFIA and Workforce Edge continuing to gain market share. In the first quarter, ETS revenue grew 30 percent and operating income increased 74 percent from the prior year. Sophia Learning, our direct-to-consumer portal of college-level classes, grew its revenue in the first quarter by 45% and generated a 51% operating margin, which is up from 44% in the prior year. Average total paid subscribers grew 42% to more than 39,000 paid subscribers. Workforce Edge now has 68 corporate partners who collectively employ approximately 1.5 million employees.

Karl McDonnell: In the first quarter U S higher education revenue grew 11% and operating income grew 192% from the prior year.

Karl McDonnell: Our educational technology and services segment also continued to see strength with both Sofia and workforce edge continuing to gain market share.

Karl McDonnell: In the first quarter ETS revenue grew 30% and operating income increased 70, 474% from the prior year.

Karl McDonnell: Sophia learning our direct to consumer portal of college level classes grew its revenue in the first quarter by 45% and generated a 50%, 51% operating margin, which is up from 44% in the prior year.

Karl McDonnell: Average total paid subscribers grew 42% to more than 39000 paid subscribers.

Karl McDonnell: Workforce edge now has 68 corporate partners, who collectively employ approximately $1 5 million employees workforce edge enrollments into either strayer or Capella University grew 62% to approximately 1600 students.

Karl McDonnell: Workforce Edge enrollments into either Strayer or Capella University grew 62% to approximately 1,600 students. Our Australia-New Zealand segment returned to total enrollment growth in the first quarter, with enrollment increasing 5% from the prior year to 20,197 students. In the first quarter, revenue on a constant currency basis grew 19% from the prior year, driven by higher enrollment and revenue per student. The higher enrollment was driven by onshore international enrollment, meaning international students already in Australia that either re-enrolled or transferred to Torrin University during the quarter.

Karl McDonnell: Our Australia, New Zealand segment return to total enrollment growth in the first quarter with enrollment increasing 5% from the prior year to 20197 students.

Karl McDonnell: In the first quarter revenue on a constant currency basis grew 19% from the prior year driven by higher enrollment and revenue per student.

Karl McDonnell: Higher enrollment was driven by onshore international enrollment, meaning international students already in Australia that either re enrolled or transferred to torn university during the quarter.

Karl McDonnell: An increased course load contributed to a 14% increase in revenue per student, which, as we've previously noted, is partly due to the resumption of the Australian requirement for international students to take more courses on campus. On a constant currency basis, loss from operations was $2.2 million in the first quarter, improving from a loss from operations of $7.2 million in the prior year. As we've noted before, ANZ's first quarter revenue is the lowest point in the year due to relatively fewer instructional days during the quarter as it's the Australian summer.

Karl McDonnell: Increased course load contributed to a 14% increase in revenue per student, which as we've previously noted is partly due to the resumption of the Australian requirement for international students to take more courses on campus.

Karl McDonnell: On a constant currency basis loss from operation was $2 $2 million in the first quarter improving from loss from operations of $7 $2 million in the prior year.

Karl McDonnell: As we've noted before ANZ first quarter revenue is the low point in the year due to relatively fewer instructional days during the quarter as its the Australian summer our expenses on the other hand, our incurred somewhat evenly throughout the year.

Karl McDonnell: Our expenses, on the other hand, are encouraged somewhat evenly throughout the year. In closing, we are very pleased with our continued momentum across our business and are working towards a successful 2024. And once again, I'd like to thank all of my colleagues within SEI for your ongoing commitment to our students. And with that, Jonathan, we'd be happy to take questions.

Karl McDonnell: In closing we are very pleased with our continued momentum across our business and are working towards a successful 2024 and once again I'd like to thank all of my colleagues within Sci for your ongoing commitment to our students and without Jonathan we'd be happy to take questions.

Operator: Certainly one moment for our first question, and our first question comes from Jeff Silber from BMO Capital Markets. Your question, please.

Jeffrey Marc Silber: Certainly one moment for our first question.

Operator: And our first question comes from the lined up Jeff Silber from BMO capital markets. Your question. Please.

Jeffrey Marc Silber: Thank you so much. You had given some prior guidance, I guess, or an outlook for 2024, I think, on your investor day last November, and you gave a little bit of an update last quarter. If I remember correctly, we're looking for something like four to 6% revenue growth and adjusted operating margins of 200 basis points for the year. Are you still comfortable with that, given the strong performance in 1Q?

Jeffrey Marc Silber: Thank you so much you had given some prior.

Jeffrey Marc Silber: Guidance, I guess or an outlook for 2024 I think on your Investor Day last November gave a little bit of an update last quarter. If I remember correctly, you were looking for something like 4% to 6% revenue growth and adjusted operating margins up 200 basis points for the year are you still comfortable for that with that given the strong performance in one camp.

Karl McDonnell: Well, Jeff, the outlook that we provided in Investor Day was intended to be illustrative to educate owners about how the business works and the relationship between revenue growth that we have and our disciplined expense management, where we do expect margin expansion, but it's not guidance, and we don't provide forward-looking outlooks ever.

Speaker Change: Well, Jeff the outlook that we provided at Investor day was intended to be illustrative to educate owners about how the business works and the relationship between revenue growth that we have in our.

Karl McDonnell: Disciplined expense management, where we do expect margin expansion, but it's not guidance and we don't provide forward looking outlooks ever.

Jeffrey Marc Silber: Okay, forgive me. Let me just ask another question then that might be forward-looking but isn't specific guidance. You know, a lot of press has been talking about the fiasco with the Department of Education and the FAFSA rollout. How do you think that is going to impact your business going forward?

Jeffrey Marc Silber: Okay forgive me.

Jeffrey Marc Silber: Let me just ask another question then that might be forward looking but not specific guidance.

Jeffrey Marc Silber: A lot of press has been talking about the the fiasco with the department of education and the fast the Rollouts.

Jeffrey Marc Silber: How do you think that is going to impact your business going forward.

Karl McDonnell: All I can say is we've not seen any impact to date. As I just said, I can't speak to what might happen in the future, but so far, we haven't seen any disruptions across either Strayer or Capella.

Jeffrey Marc Silber: All I can say is we've not seen any impact to date.

Karl McDonnell: As I, just said I can't speak to what might happen in the future, but so far we haven't seen any disruptions across either strayer or capella.

Jeffrey Marc Silber: Okay, I guess it's a little bit too early to see that. All right, I'll jump back in the queue. Thanks, Jeff.

Speaker Change: Okay, I can take a little bit too early to see that alright, I'll jump back in the queue. Thanks, so much thanks, Jeff.

Operator: Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star one one on your telephone. One moment for our next question. And our next question comes from the line of Jasper Bibb from True Securities. Your question, please.

Speaker Change: Thank you and as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone.

Jasper James Bibb: For our next question.

Operator: And our next question comes from the line of Jasper Bibb from true Securities. Your question. Please.

Jasper James Bibb: Hey, good morning. I was just kind of curious how we should think about enrollment growth in U.S. higher education over the balance of the year. I mean, enrollments were up 10% this quarter. I think in the annual report, you talked about 10% plus new students at both Strayer and Capella. So, I mean, has there been any change in, like, retention that would drive moderating enrollment growth over the balance of the year, or do you think staying in that, like, low double-digit range would be achievable?

Jasper James Bibb: Hey, good morning.

Jasper James Bibb: I guess just kind of curious how we should think about enrollment growth in U S higher Ed over the balance of the year I mean enrollment.

Jasper James Bibb: Enrollments were up 10% this quarter I think in the annual report you talked about 10% plus new adds at both Strayer and Capella.

Jasper James Bibb: I mean is there has there been any change in like retention that would drive moderating enrollment growth over the balance of the year or you think staying in that like low double digit range would be achievable.

Karl McDonnell: Actually, retention has either been stable or improving throughout 2023 into the first quarter. It's probably good to remind owners that one of the dynamics of our business is the momentum that's generated across, say, four to six quarters. That momentum continues forward. And as we've said before, Even if we were to stop growing, we'd likely continue to grow for several quarters just based on what happened in the previous year. And because we had such a strong 2023, both new student growth and total enrollment growth, that momentum is carrying through through 2024. I can't speak to what enrollment is going to be in quarters two, three, and four, other than to point out that the momentum that we had last year definitely helps us this year.

Jasper James Bibb: Actually retention has either been stable or improving throughout 2023 into the first quarter.

Karl McDonnell: It's probably good to remind owners that one of the dynamics of our business is the momentum that's generated across let's say four to six quarters that momentum continues forward and as we've said before.

Karl McDonnell: Even if we were to stop growing wed likely continue to grow for several quarters just based on what's happened in the previous year and because we had such a strong 2023, both new student growth in total enrollment growth that momentum is carrying through through 2024, I can't speak to what the enrollment is going to be in.

Karl McDonnell: Quarters, two three and four other than to point out the momentum that we had last year definitely helps us this year.

Jasper James Bibb: Thanks, maybe just following up on that, like student interest; new enrollment for the U.S. seems pretty strong right now. I guess if you just look back to maybe the experience of 2020 to 22 versus what you've seen in 23 in this year to date, what do you think has been driven, I guess an inflection there as far as student interest in new enrollment?

Karl McDonnell: Thanks.

Jasper James Bibb: Maybe just following up on that like the student interest new enrollment for the U S seems pretty strong right now.

Jasper James Bibb: I guess, if you just look back.

Jasper James Bibb: Maybe the experience of 2020 to 22 versus what you've seen in 'twenty three and that's year to date, but do you think spec driven.

Jasper James Bibb: I guess inflection there.

Jasper James Bibb: As far as student interest in new enrollment.

Karl McDonnell: Well, 20 to 22, we were really adversely impacted on the Strayer side with the complete closing of all the campuses. The fact that those have reopened has definitely been a catalyst, but I'd say across U.S. higher education the biggest catalyst by far is the ongoing momentum and strength in our corporate partnerships. We have over 1,000 of those partnerships, and we see strength across all of the sectors that are represented in that portfolio of partners.

Jasper James Bibb: While 'twenty to 'twenty, two we were really adversely impacted on the strayer side with the complete closing of all the campuses. The fact that those have reopened has definitely been a catalyst, but I'd say across U S. Higher education. The biggest catalyst by far is the ongoing momentum and strengthen our corp.

Karl McDonnell: <unk> partnerships.

Karl McDonnell: We have over 1000 of those partnerships, we see strength across all of the sectors that are represented in that portfolio of partners.

Karl McDonnell: As I said in my prepared remarks, the mix of those students increased another 300 basis points. So basically, one out of every three U.S. higher education students is coming from a corporate partnership. That is the clear differentiator in what's driving a lot of our performance.

Karl McDonnell: As I said in my prepared remarks, the mix of those students increased another 300 basis points. So basically one out of every three U S. Higher education students is coming from our corporate partnership.

Karl McDonnell: That is a clear differentiator and what's driving a lot of our performance. He Jasper it's Rob I I'd also say that you know it.

Robert S. Silberman: Hey Jasper, it's Rob. I'd also say that, as Karl pointed out, we were severely impacted in 20, uh, 21, 22, uh, with our campus shutdowns but also with a, uh, damaged macroeconomic situation. I mean, employment confidence was shook. And we've always thought that employment confidence and labor participation rates are kind of the most telling metric for our future student enrollment in the United States. Right now, the macroeconomic situation is pretty healthy, mildly inflationary, but very strong employment confidence and very strong labor participation rates. And that's what tends to drive macroeconomic demand for our working adult students.

Robert S. Silberman: As Karl pointed out we were severely impacted in 2020.

Robert S. Silberman: 'twenty one 'twenty two.

Robert S. Silberman: With our canvas shutdowns, but also with a.

Robert S. Silberman: Damage macroeconomic situation I mean, the employment confidence was was shuck and we've always thought that employment confidence labor participation rates are kind of the most.

Robert S. Silberman: Telling metric for our future.

Robert S. Silberman: Student enrollment in the United States.

Robert S. Silberman: Now the macroeconomic situation is pretty healthy mildly inflationary, but very strong employment confidence in that very strong labor participation rates and that's what tends to drive.

Robert S. Silberman: Macroeconomic demand for our working adult students.

Jasper James Bibb: That was a very helpful context. I guess the last one for me, like the enrollments in Australia this quarter are a bit stronger than we anticipated. Just hoping you can give a bit more detail on what you're seeing with international enrollments, I guess both domestic transfers and also new international. Also, just kind of curious how the changes to the visa and immigration rules there might be impacting your business.

Speaker Change: Got it.

Jasper James Bibb: Very helpful context.

Jasper James Bibb: I guess last one for me like the enrollments in Australia, this quarter a bit stronger than we anticipated.

Jasper James Bibb: Just hoping you could give a bit more detail on what youre seeing with international enrollments I guess, both domestic transfer or is that also a new international also just kind of curious how the changes to the visa and immigration rules there might be impacting your business.

Karl McDonnell: I'd say that the visa situation continues to be slightly murky in terms of what the Australian government's plans are. We continue to see some delays in getting visas approved, and our understanding is that's nothing specific to Torrens.

Speaker Change: Yes, I would say that the visa.

Karl McDonnell: The visa situation continues to be slightly murky in terms of what the Australian government's plans are we.

Karl McDonnell: We continue to see.

Karl McDonnell: Some delays in getting visa proved and our understanding is that's nothing specific to Torrance I think most.

Karl McDonnell: I think most Non-G8 universities in Australia are seeing something similar, and that portion of the business actually contracted in the first quarter year over year. However, the number of students already on a visa in Australia who are able to transfer. That number was up double digits, and it was more than enough to offset the decline that we had in the new visa application for international students. That plus some growth in our domestic market, we were able to grow total enrollment 5%, so we were very pleased to see that.

Karl McDonnell: Non G. Eight universities in Australia are seeing something similar and that portion of the business actually contracted in the first quarter year over year. However.

Karl McDonnell: The number of students already all of visa in Australia, who are able to transfer.

Karl McDonnell: That number was up double digits.

Karl McDonnell: It was more than enough to offset the decline that we had in the new visa application international students.

Karl McDonnell: That plus some growth in our domestic market.

Karl McDonnell: We were able to grow total enrollment 5%. So we were very pleased to see that.

Jasper James Bibb: I appreciate the detail there. Thanks for taking the questions. Sure.

Speaker Change: I appreciate the detail there thanks for taking my questions sure.

Operator: Thank you. One moment for our next question, and our next question comes from the line of Heather Balsky from B of A. Your question, please.

Speaker Change: Thank you one moment for our next question.

Heather Nicole Balsky: And our next question comes from the line of Heather Polsky from Bofa. Your question. Please.

Emily Margiland: Hi, good morning. This is Emily Margiland on behalf of Heather Balsky. The first question is when it comes to AMV and the increased course load and revenue per student, can you give us some color on how we should think about that moving forward through the rest of the year?

Operator: Alright. Good morning. This is Michael on for Heather Bellini.

Emily Margiland: First question is when it comes to and the year and the increase of course slowed in revenue per student can you.

Emily Margiland: Give us some color on how we should think about that moving forward.

Speaker Change: Thank you.

Karl McDonnell: Yeah, so if you recall the rule change on having to take courses in the country on the ground that happened mid-year last year. So as we begin to anniversary that in 24, some of the increase is going to moderate. We also did slightly less of a tuition increase this year than has been done in previous years. Do you have any specific...

Speaker Change: Yeah. So if you recall the the rule change on.

Karl McDonnell: On having to take courses in country on ground that happened mid year last year. So.

Karl McDonnell: So as we begin to anniversary that in 'twenty for some of the increase is going to moderate.

Karl McDonnell: We also did slightly less tuition increase this year than it has been done in previous years. So.

Speaker Change: Do you have any specific.

Karl McDonnell: Yeah, Emily, I think the improvements that Karl just mentioned that we are calendaring in the latter half of the year will likely lead to more stable revenue per student, which is generally, as I've told you before, that's what we plan around.

Karl McDonnell: Yes.

Emily Marzo: The improvements that Carl just mentioned.

Emily Marzo: That we our calendaring and the latter half of the year will likely lead to more stable revenue per student, which is generally as I've told you before we that's what we plan around.

Emily Margiland: Great. And you had some great corporate partnerships. I'm wondering if you could give us any color on Capella and any specific program that's drawing interest, or any color you could give us on the two different programs there. Sure.

Emily Margiland: Okay, Great and you have some great corporate partnerships I'm wondering if you could give us any color on strayer and capella and if theres any program that's wrong interests or any color you could give us on that program Sir.

Karl McDonnell: Sure, at Capella, it's significantly weighted to health care. [inaudible] Depending on the quarter, and certainly throughout last year, the mixed percentage of new students from corporate partnerships at Capella has increased substantially, in some quarters getting close to or if not over 40%. So healthcare is the clear driver at Capella. Strayer is more business-oriented, more undergraduate, and we've seen strong growth, albeit slightly stronger growth at Capella, but nevertheless, we continue to see strong growth across U.S. higher education with really a wide array of partners.

Emily Margiland: Sure.

Karl McDonnell: Capella its significantly weighted to health care.

Karl McDonnell: And.

Karl McDonnell: Depending on the quarter and certainly throughout last year, the mix percentage of new students from corporate partnerships that capella has increased substantially and in some quarters getting close to or if not over 40%.

Karl McDonnell: So health care is the is the clear driver at Capella Strayer has more business oriented more undergraduate.

Karl McDonnell: And we've seen strong growth.

Karl McDonnell: Be it slightly stronger growth of capella, but nevertheless, we continue to see strong growth across U S higher Ed and really a wide array of partners.

Karl McDonnell: Thank you. This does conclude the question and answer session for today's program. I'd like to hand the program back to Karl McDonnell for any further remarks.

Speaker Change: Thank you.

Karl McDonnell: Thank you.

Karl McDonnell: Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Carl Mcdonald for any further remarks.

Karl McDonnell: Thank you everyone for joining us this morning, and we look forward to discussing our second quarter results with you in a few months.

Karl McDonnell: Thank you everyone for joining us this morning, and we look forward to discussing our second quarter results with you in a few months. Thank you.

Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Operator: Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Operator: Yeah.

Operator: Okay.