Strategic Education Inc

NASDAQ:STRA

Earnings Call Analysis

Strategic Education's Strong Second Quarter Growth Across All Segments

In the second quarter of 2024, Strategic Education experienced a 9% revenue increase to $313 million, with operating income surging over 60% to $44 million and an operating margin up 460 basis points. Earnings per share grew over 60% to $1.34. U.S. Higher Education saw total enrollment grow 8%, with a 17% rise in employer-affiliated enrollments, boosting revenue by 7% and operating income by 194%. The Education Technology Services segment also saw a 26% revenue rise and a 63% jump in operating income, driven by products like Sophia, which saw a 40% increase in revenue. These results showcase the company’s robust growth and widespread operational improvements.

Strong Financial Performance Reflecting Growth

In its second quarter 2024, Strategic Education Inc. (SEI) showcased robust financial metrics, with revenues increasing by 9% to $313 million. Operating expenses were managed effectively, rising only 3%, which contributed to a remarkable 60% surge in operating income, reaching $44 million. This substantial growth is indicative of operational efficiency, as the company's operating margin improved significantly by 460 basis points, a promising trend for investors. Additionally, earnings per share hit $1.34, marking a more than 60% increase from the same period last year. These results suggest that the company's strategic initiatives are translating effectively into financial performance.

U.S. Higher Education Segment Thrives

The U.S. Higher Education segment exhibited strong performance, driven by a surge in employer-affiliated enrollment, which grew by an impressive 17%. Overall enrollment in this segment climbed by 8%, while revenue increased by 7% and operating income skyrocketed by 194%. Notably, corporate partnerships contributed significantly to this success, with the share of corporate-affiliated enrollments rising by 200 basis points to 29%. Furthermore, student retention remained stable at 86.9%, a reassuring figure that reflects student satisfaction and reduces risks of enrollment attrition.

Expansion in Education Technology Services

SEI's Education Technology Services (ETS) segment displayed remarkable growth, with revenue jumping by 26% and operating income increasing by 63%. Noteworthy was the performance of Sophia Learning, which saw revenues soar by 40%, achieving a 49% operating margin, up from 46% the previous year. The average number of paid subscribers grew significantly, reaching over 42,000 - an increase of 37%. The company added 23 new corporate partnerships, bringing the total for Workforce Edge to 71, thus broadening its market footprint and enhancing its growth prospects.

Investment in Growth to Fortify Future Prospects

Building on its success, SEI announced increased investments in the second half of 2024 to support the growth of its Sophia and Workforce Edge platforms. This proactive investment strategy aims to capitalize on strong market traction and is expected to slightly raise total operating expenses for the year beyond prior expectations. The company aims to enhance its market position and foster growth moving forward, demonstrating management's commitment to innovation and expansion.

Positive Developments in Australia and New Zealand

The Australia and New Zealand (ANZ) segment maintained its growth momentum, with total enrollment increasing by 6% compared to the previous year, topping 19,000 students. Revenue growth on a constant currency basis was recorded at 10%, driven by higher enrollment figures and increased revenue per student generated through continuing student enrollment. This improvement reflects the successful adjustments made to course and enrollment strategies in response to regulatory changes, reinforcing SEI's responsive management approach.

Looking Ahead: Guidance and Future Outlook

Looking forward, SEI remains optimistic about its growth trajectory. The continued investments in its strategic initiatives are expected to yield positive results. SEI has reaffirmed its dedication to enhancing its operational capabilities while managing costs effectively, ensuring sustainable profitability. Investors can look forward to further updates as the company navigates the evolving education landscape, backed by strong fundamentals and strategic foresight.

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to Strategic Education's Second Quarter 2024 Results Conference Call. [Operator Instructions]. As reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program Terese Wilk, Director of Investor Relations for Strategic Education. Ms. Wilke, please go ahead.

[Terese Wilke, executive]

Thank you. Hello, everyone, and Welcome to Strategic Education's conference call in which we will discuss second 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. 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.

[Karl McDonnell, executive]

Thank you, Terese, and good morning, everyone. Our second quarter 2024 results reflect continued strength across all of our segments. But 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 that they assume constant currency for foreign exchange purposes.

For the second quarter, SEI's revenue grew 9% to $313 million. Our operating expenses grew 3%, which was in line with our expectations, and our operating income grew by more than 60% to $44 million. Our operating margin increased 460 basis points.

During the quarter, we generated $1.34 earnings per share, which was more than a 60% increase from the prior year. Turning now to our segments. 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 second quarter grew 8% with total Employer affiliated Enrollment growing more than double that rate at 17% from the prior year. again, reflecting continued strength in our corporate partnerships.

During the quarter, the percentage of total U.S. higher education enrollment coming from our corporate partnerships increased 200 basis points to 29%. Student retention at U.S. higher education remained stable at 86.9%. In the second quarter, U.S. higher education revenue grew 7% and and operating income grew 194% from the prior year.

Our Education Technology Services Segment also continued to see strength with both Sophia and Workforce Edge continuing to gain market share. In the second quarter, ETS revenue grew 26% and operating income increased 63% from the prior year. Sophia Learning, our direct-to-consumer portal of college level classes which is also a key component of many of our strategic corporate partnerships, grew its revenue in the second quarter by 40% and generated a 49% operating margin which is up from a 46% margin in the prior year.

Average total paid subscribers grew 37% to more than 42,000 paid subscribers. During the Quarter, ETS added 23 total new corporate partnerships and Workforce Edge now has 71 corporate partners who collectively employ more than 1.5 million employees.

Workforce Edge enrollments into either Strayer or Capella University grew 36% to approximately 1,500 students. Given the strong traction within our ETS division, we have decided to increase our investments in the second half of 2024 from our previous plans to support accelerated growth of both Sophia and Workforce Edge. These investments combined with other previously planned investments in the rest of our segments, Including increased marketing spend in Australia means that on a full year basis, our operating expenses will be slightly higher than our notional model that we communicated last November.

Our Australia New Zealand segment posted another quarter of total enrollment growth with enrollment increasing 6% from the prior year to just over 19,000 Students.

In the second quarter, Revenue on a constant currency basis grew 10% from the prior year driven by higher enrollment and revenue per student. The Higher Enrollment was driven predominantly by strong continuing Student enrollment. increased course load contributed to a 4% increase in revenue per student as we lap the resumption of the Australian requirement for international students to take more courses on campus.

On a constant currency basis, ANZ operating income increased sequentially from an operating loss last quarter to $14 million in the second quarter, growth of 1% from the prior year. I should note that ANZ's second quarter is generally the high point of the year for revenue and expenses with a back-to-school quarter after the Australian Summer.

In closing, we are very pleased with the strong results across our business and continue to work towards a successful full year 2024. And once again, I'd like to Thank all of my colleagues within SCI for their ongoing commitment to our students.

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

[Operator]

[Operator Instructions]. Our first question comes from the line of Jeff Silber from BMO Capital Markets.

[Jeffrey Silber, analyst]

Karl, you mentioned because of the increased investments you think operating expenses will be slightly higher than what you put out in your notional model last year. Can you remind us what you told us last year? And can you help us quantify what we should expect this year?

[Daniel Jackson, executive]

Jeff, it's Dan. What we said was that we thought operating margin would expand by a couple of hundred basis points. And given this additional investment through the balance of the year, it's likely to be below that, probably between $150 million and $175 million. [indiscernible]

[Jeffrey Silber, analyst]

And will most of that be in both ETS or ANZ? Or should we also expect more spending in U.S. higher education?

[Daniel Jackson, executive]

It's going to be across all 3, but ETFs and ANZ definitely more like expense growth in the latter half of the year relative to U.S. Higher Ed.

[Jeffrey Silber, analyst]

Okay. Great. And then just looking at the results in the quarter, you had really strong operating margin leverage in U.S. higher education. I know when enrollment goes up, you see that, but it was pretty outsized. Was there anything specific going on? Any timing issues we should be aware of?

[Karl McDonnell, executive]

No. Other than what you pointed out yourself, Jeff, that we've had quite high enrollment and revenue. We don't have that much variable expense in U.S. Higher Ed. So when we see the levels of revenue growth that we've had, it obviously impacts the margin quite favorably. .

[Jeffrey Silber, analyst]

Okay. Fair enough. If I could just sneak in one more. I'm going to have to ask the [ fast ] question. Obviously, with some of the delays we saw this past enrollment cycle, I know it probably doesn't have an impact on you as of yet. But do you expect any impact maybe in the back half of the year from some of those delays?

[Karl McDonnell, executive]

Well, as you just said, we have not seen any impact from [ fast ] delays as of yet. We are in the midst of our largest enrollment intake quarter so it remains to be seen if we'll have any impact, but we haven't had any so far. .

[Operator]

And our next question comes from the line of Jasper Bibb from Truist.

[Jasper Bibb, analyst]

pou talked about updating the notional model on margin and all that makes sense. But the notional model also contemplated revenue growth of 4% to 6%, and it seems like at the start to the year, that would imply a flat revenue growth in the back half of the year. So to be clear, are you also updating the revenue growth for '24 and the notional model? And any way to frame what second half revenue growth might look like?

[Karl McDonnell, executive]

Sure. Well, we don't provide an outlook on revenue because, Frankly, we don't know what our revenue is going to be in the back half of the year. We thought it was important to update our expenses since obviously, that's something we control. We have plans to make those investments. I would just note, Jasper, that particularly in U.S. Higher ed, we've had revenue and enrollment growth that substantially higher than what we would normally expect on a run rate basis. We always say notionally that we think these businesses can support roughly 5% to 10% revenue and enrollment growth. it would not be surprising to me if we saw our enrollment moderate down to that notional level that we expect over long term.

[Jasper Bibb, analyst]

That makes sense. And then I wanted to ask what you're seeing as far as immigration rules in Australia, and ability to get international students into the country. I did see the government there announced vis-a-vis would, I think, more than double early in July, curious if that's having any impact on your new enrollments for towards at this point?

[Karl McDonnell, executive]

We have seen that the timing of Approvals for Visas in Australia has started to lengthen again. But I would remind our owners that there's actually two sources of growth international students.

There's the students who are offshore who need to get a Visa Immigrated into Australia. But then there's also students who are already in Australia on a Visa who are able to transfer to another institution after 6 months at their host university. And frankly, that's an area where we've seen significant market share gains by Torrens, because primarily, we have a very high-quality product, and we have very favorable tuition vis-a-vis what other institutions charge. So I would expect that part of international growth to continue the rest of this year and into next year.

[Jasper Bibb, analyst]

Got it. Last question for me. I know the Education Department has typically regulated this industry primarily through rule making. Maybe a broader question, curious if you see regulatory framework changing following the Chevron decision? .

[Robert Silberman, executive]

Jasper, this is Rob. I don't know if it will change, but it it won't really change our Operating Parameters. I mean we understand that we operate in a heavily regulated sector and Frankly, appropriately so, our universities are supported by very generous and favorable credit terms to our students that are borne by the taxpayer. And so the federal government has regulations and types of regulations that protect the interest of the taxpayer. The relative priority of regulation making between the legislative branch and the Executive Branch which is addressed in the Chevron decision, doesn't really affect how we think about what those regulations will be or how we're going to operate.

We're going to run these universities to meet the intent of the people that are concerned about maintaining that balance. And Frankly, it's important to us as well, regardless of what the source of the regulations or the overarching control mechanisms are.

[Operator]

[Operator Instructions]And our next question comes from the line of Heather Balsky from BofA. .

[Emily Marzo, analyst]

This is a Emily Marzo for Heather Balsky. Starting -- so starting with the U.S., you're starting to lap tough comparisons in the second half. Could you share your thoughts on the growth rate from the first half to the second half and the momentum and the enrollment you're seeing in the second half so far?

[Karl McDonnell, executive]

Well, I can't comment on the second half because we're still in that quarter, obviously, still Enrolling Students. We were obviously pleased with first half results.

I'd say the demand environment remains healthy and robust. As I said in my prepared remarks, the corporate affiliated enrollment channel is quite strong. We continue to add new clients every quarter. I would note again that the enrollment that we've had and corresponding revenue growth in particularly the U.S. higher Ed segment has been significantly higher than what we expect, What we planned for. And so over some period of time, and I can't Predict when that period of time would be, we would expect U.S. higher ed to Normalize down into sort of the 5% to 10% range on both enrollment and revenue growth.

[Emily Marzo, analyst]

And as a follow-up, how much of the incremental enrollment is coming from corporate partnerships? And where do you think that could reach I don't have the exact number in front of me, but I would just note that corporate affiliate enrollment grew more than 2x noncorporate affiliate enrollment. Basically 1 in 3 students in U.S. higher ed is now affiliated with 1 of our corporate partners.

As we continue to add large partnerships, that mix percent will continue to grow. Over a multiyear period, I could see that number getting well above 50%. .

[Operator]

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Karl McDonnell, President and CEO, for any further remarks. .

[Karl McDonnell, executive]

Thank you, Jonathan, and thank you, everyone, for joining us, and we look forward to discussing our third quarter results in November. 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.