Q4 2024 Strategic Education Inc Earnings Call

Thank you for watching!

Thank you for watching!

Have a lovely day.

Thank you.

Speaker Change: Welcome to Strategic Education's 4th Quarter 2024 Results Conference Call. I will now turn the call over to Terese Wilke, Senior Director of Investor Relations for Strategic Education. Ms. Wilke, please go ahead.

Thank you.

Speaker Change: Thank you. Hello, everyone, and welcome to Strategic Education's conference call in which we will discuss fourth quarter and full year 2024 results.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: Further information about these and other relevant uncertainties may be found in Strategic Education's most recent annual report on Form 10-K to be filed, the most recent 10-Q, and other filings with the Securities and Exchange Commission.

as well as Strategic Education's future 8Ks, 10Qs, and 10Ks.

Speaker Change: 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.

Karl McDonnell: Thank you, Terese, and good morning, everyone. We were very pleased with SCI's 2024 full-year results that we reported this morning, which reflect strong performance consistent with our Notional Operating Model, which we highlighted during our Fall 2023 Investor Day.

Karl McDonnell: For the full year, 2024, our revenue increased 8% and operating income increased 26%, generating almost 200 basis points of operating margin expansion.

Our operating performance was strong across all three segments.

Karl McDonnell: U.S. higher education revenue increased 5% in 2024, but was down slightly in the fourth quarter due to higher scholarships and the mixed-shift of employer-affiliated students.

Karl McDonnell: Our ongoing focus on productivity and disciplined cost management enabled us to keep expense growth well below revenue growth at U.S. higher ed and enabled almost 30% growth in operating income for the full year.

Karl McDonnell: Australia and New Zealand segment grew average total enrolment 5% for the year. The higher enrolment was driven predominantly by strong continuing student enrolment.

Karl McDonnell: Australia and New Zealand segment revenue grew 11% in 2004 on a constant currency basis driven by enrollment growth and higher revenue per student which was aided primarily by students taking more courses per term as well as a small tuition increase.

Karl McDonnell: On a constant currency basis, A&Z operating income increased 3% in 2024.

Karl McDonnell: We continue to monitor and adapt to the evolving political and regulatory environment in Australia. The previously proposed international student caps were recently replaced with a new regulation that will attempt to govern international student immigration through the use of visa processing speed.

Karl McDonnell: Though we believe this change is more favorable than the previously proposed enrollment caps, we're still studying the issue and its potential impact on our ANZ enrollment moving forward.

Karl McDonnell: Sophia Learning, our direct-to-consumer portal, college-level classes exceeded our expectations last year, growing both subscribers and revenue by 35%.

Karl McDonnell: Workforce Edge also had a great year, adding another 11 corporate partners for a total of 76, collectively employing more than 3.8 million employees.

Karl McDonnell: In the fourth quarter, the Workforce Edge team launched our largest-ever employer partner, which includes a new or higher-touch employer support model.

Karl McDonnell: During the fourth quarter, our operating expenses were higher as a result of several one-time implementation-related costs associated with this new partnership.

Karl McDonnell: We also expanded our more-than-decade-old partnership with Best Buy, converting it from a more standard tuition discount program to an all-inclusive Strayer University's Degrees at Work program, which offers eligible employees the opportunity to earn a certificate,

Karl McDonnell: to submit a bachelor's or master's degree from Strayer University at no cost to the employee.

Karl McDonnell: Our network of corporate partners remains one of SEI's major competitive strengths.

Karl McDonnell: In fact, more than 70% of the incremental total enrollment that we had in U.S. higher education last year came through our corporate partners. And we expect these partnerships will be a major driver of ETS revenue and income growth over the next five plus years.

Lastly, regarding capital allocation in 2024.

Karl McDonnell: We generated about $217 million pre-tax cash from operations. We paid $48 million in taxes and invested $41 million in capital expenditures, leaving us with $128 million of distributable free cash flow.

Karl McDonnell: We then repaid $61 million balance on our revolver and refinanced a $250 million revolver, leaving us with just under $200 million of cash and marketable securities at the end of 2024.

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

Speaker Change: Thank you. As a reminder to ask a question please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question press star 1 1 again. One moment while we compile the Q&A roster.

Speaker Change: And that will come from the line of Jeff Silber with BMO Capital Markets. Your line is open.

Jeff Silber: Thanks so much. I want to first focus on enrollment trends. I know you don't guide to it.

specific enrollment number, but growth did slow.

Jeff Silber: to some extent in the back half of the year and was a little bit weaker than we had thought in 4Q. Was it just because the comps got tougher? Is there anything specifically going on either from a new enrollment or retention perspective?

Jeff Silber: Good morning, Jeff. No, I'd say that, as you heard in my prepared remark, certainly our corporate partnership enrollment remains strong.

Jeff Silber: So it's going to move around in any one quarter. Some quarters it'll be above that, other quarters it might be slightly below. But over the long term, we expect that our enrollment would be in that mid-range, which is reflected in our notional model that we presented at our last Investor Day.

Speaker Change: Okay, I appreciate that. Can we shift gears to Australia and New Zealand? Can you give us a little bit more color from a regulatory perspective exactly what the changes might be?

Speaker Change: So the liberal government had proposed these, labor government, sorry, had proposed these international student caps which did not have enough support to pass parliament that was necessary to be implemented.

Speaker Change: So instead, they issued what's called a ministerial direction, which has the effect that instead of having a hard cap through legislation, the government has indicated they're just going to use visa processing time to effectively get to the same level of international enrollment.

Speaker Change: So it remains to be seen in any one quarter or throughout the year what the timing may look like but for the purposes of our own internal modeling, we're modeling as though those caps would be in place because the government has actually said they're going to level out the foreign migration into Australia at those levels.

Speaker Change: And from a timing perspective, has that started already? Is that something you expect to happen over the next few months?

Speaker Change: It has not yet, but that's because when they issued this ministerial directive

Speaker Change: They said that all enrollment up until you hit that cap

Speaker Change: Those visas would be approved kind of at normal speed, and that's where we're at since we're at the very beginning of the year. It wouldn't be until later in the year, as our enrollment starts to buttress up against that cap number, that we may start to see the visas go down.

Yeah.

Okay, great.

Jeff Silber: If I could shift gears to the U.S. government, obviously a lot going on in Washington, D.C. these days and you guys are physically there. Any potential impact on your business in terms of what DOJ is doing? You think you might be able to get some potential students from folks that might be being let go?

Jeff Silber: Well, we've always had a large presence of federal government employees, particularly at Strayer University over the last 15 plus years.

so

Jeff Silber: You know, that is something that we've seen before and could certainly continue.

Jeff Silber: In terms of impact from the new administration, obviously the new political appointees are still in the process of being confirmed.

Jeff Silber: So we're continuing to monitor what's happening and we'll just continue to, you know, update any comments that we have as more policy takes shape.

Alright, I'll get back in the queue, thanks.

Speaker Change: Thank you. As a reminder, if you have a question, please press star one one. One moment for our next question.

Alex Paris: And that will come from the line of Alex Paris with Barrington Research. Your line is open.

Alex Paris: Thank you and thanks for taking my questions. I have a quick follow-up on ANZ.

Speaker Change: I read about the new ministerial directive 111. I heard your response.

Speaker Change: As I recall, Torrens is roughly 50-50, domestic, international, first of all, is that correct? And then second, what will you do later this year when your enrollment

gets closer to that notional cap.

Speaker Change: Well, Alex, over the last year, we've really worked to pivot with our marketing and advertising dollars to emphasize our domestic student enrollment. You're right. Historically, it's been about 50-50.

Speaker Change: But honestly, since the country reopened a couple of years ago, we've been dealing with visa lag times for a couple of years now, so that's something we are used to.

Speaker Change: Torrance has a great reputation in Australia, high quality academic programs.

Speaker Change: We intend to market more than we have in the past to the domestic Australian market and we're confident that notwithstanding whatever delays may exist, we'll be able to continue to grow the Australian enrollment over time.

Speaker Change: Great. Helpful. And then on adjusted operating expense, came in at 271 up about 10% year-over-year, pretty much in line with expectations.

And then I look at the operating income from.

Speaker Change: U.S. higher education ANZ and ETS and see some impact there. I'm wondering number one

The incremental expenditures for growth in ETS

Speaker Change: and, to a lesser extent, U.S. higher education and ANZ. To what extent did those incremental investments impact adjusted operating income generally?

this year.

I do realize that the

Speaker Change: AOI margin was up 190 bps, which is pretty close to where you had forecast at the beginning of the year. And should we expect 200 bps based on the notion of model?

Speaker Change: of Adjusted Operating Income Margin Expansion in 2025-2620 and over the foreseeable future.

Speaker Change: Hey Alex, this is Dan. The fourth quarter happened precisely how we expected it.

Speaker Change: And yes, a big portion of the increase in expense was ETS-related, as we've talked about several times this year, and definitely had an impact on their operating income.

Speaker Change: but we think the expense base right now is in pretty good shape even with the additional investment in ETS continued through this year.

Okay.

Speaker Change: So, just to be clear, the $271 million in adjusted operating expense in 2024 is approximately where it ought to be in 2025 based on need and requirement.

Speaker Change: Yes, but again it won't be uniform throughout the four quarters. The two middle quarters, Q2-Q3, are typically where we have more investment in marketing and are also the higher expense periods for ANZ given that those are their two bigger quarters.

Speaker Change: Sorry, just to address the other part of your question on 200 basis points that's in our notional model. That is what we expect over the next several years.

Speaker Change: Great. And then while we're on this guidance thing, and perhaps you're feeling generous, how should we be thinking about enrollment and revenue growth in 2025? I think

Speaker Change: Enrollment growth at U.S. higher education and ANZ were up about 3%.

Speaker Change: roughly in line with the notional model, I think US higher education a little low and then ANSI at the lower end.

Speaker Change: and I think the long-term forecast is mid-single digits for U.S. higher education and high-single digits for ANZ. Should we expect acceleration in enrollment in 2025 versus 2024?

Speaker Change: the business at roughly mid-single digits over the long term. It wouldn't surprise me if that were the case in 2025. Dan just gave you a pretty good direction on operating expenses, and I reiterated our notional model of roughly 200 basis points of margin expansion.

Speaker Change: It remains to be seen, obviously, what's going to happen with revenue, but I personally feel good about the five-year plan that we laid out at our Investor Day in 2023.

Speaker Change: Great. That's super helpful. Thank you and I'll get back in the queue.

Thanks, Alex. Thank you. One moment for our next question.

Speaker Change: And that will come from the line of Jasper Bibb with Chua Securities. Your line is open.

Speaker Change: Hey, good morning, guys. I apologize as my line has been cutting in and out, so I hope you can hear me clearly. I just wanted to level set on the framework for 25, and I know there's been a couple questions discussing this, but

Speaker Change: Just can you clarify, so the framework is 25, it sounds like that's revenue growth.

Speaker Change: consistent with the notional model and 200 basis points of adjusted operating margin expansion. Do I have that right and is there any other I guess detail on what we should expect for 25 you're prepared to provide on the call today. Thank you.

Speaker Change: Well, as you know, we don't provide any specific guidance. We did introduce a five-year plan back in the fall of 23. We have a pretty good handle of expenses. We made a lot of the...

Speaker Change: We needed to for T.S. in the back half of 24, so to Dan's earlier point

Speaker Change: kind of the current run rate on the expenses seems pretty good for the year. We're not trying to be coy. We just don't know what the revenue is going to be, other than that, you know, we're disciplined cost managers.

Speaker Change: Such that we feel good about the 200 basis points of margin expansion Because we can keep expenses up or down based on the actual volume of enrollment and revenue that we do see But yes, are we confident in that notional model over five years we are

OK.

Speaker Change: Thanks, and I wanted to ask about the cadence of operating margin expansion, maybe we should assume.

Speaker Change: In this 25 plan, I guess hoping you would comment on planned growth investments and what we could expect for a first half, second half split is maybe the normal seasonality has been a little bit off in the past two years with some of the growth investments you've made.

Speaker Change: I think it's probably fair to assume that the margin will improve throughout the year, but to try and give you detailed quarterly would be beyond. That requires a little bit more view on revenue and enrollment.

Thank you. Bye.

Speaker Change: Okay, last one for me. I guess the revenue per student decline at U.S. Higher Ed was a little steeper than we expected in the quarter. Can you maybe explain the drivers of that decline and then how we should think about revenue per student for U.S. Higher Ed in 2025 if the employer channel continues to drive the growth there?

Speaker Change: Yeah, it was it was about what we expected Jasper driven mostly by the continued shift to employer, but also scholarships At US higher ed were higher than we than we we we would typically expect

Speaker Change: The 25 revenue per student, U.S. higher ed is likely to be pretty stable, maybe slightly up, but pretty stable.

I mean, Jennifer, this is Rob. At the broadest level...

Speaker Change: The individual programs may have some variability and some opportunity on tuition, but in general when we think of opportunity on tuition, it's to drive it down.

Okay, thank you guys.

Speaker Change: Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Karl McDonnell for any closing remarks.

Karl McDonnell: Thank you, everybody. We look forward to updating on next quarter's results in about three months.

Karl McDonnell: This concludes today's program. Thank you all for participating. You may now disconnect.

music music music music