Strategic Education Inc
NASDAQ:STRA
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Strategic Education Inc
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Welcome to Strategic Education’s Fourth Quarter 2019 Earnings Call. I will now turn the call over to Terese Wilke, Manager of Investor Relations for Strategic Education. Mrs. Wilke, please go ahead.
Thank you, Victor. Good morning everyone, and welcome to Strategic Education’s conference call in which we will discuss fourth quarter 2019 results.
With us today to discuss results are Robert Silberman, Executive Chairman; Karl McDonnell, President and Chief Executive Officer; and Daniel Jackson, Executive Vice President and Chief Financial Officer. Following 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 Annual Report on Form 10-K, the most recent 10-Q, 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 Rob. Rob, please go ahead.
Thank you, Terese, and good morning ladies and gentlemen. We have a lot of ground to cover this morning as we normally do for our year-end earnings call. First, Karl will comment on our Q4 operational and academic results and give us thoughts on the upcoming year. Next, Dan will cover our financial results for Q4 as well as the full year 2019, and finally, I will walk through our capital allocation in 2019 and our capital plan for 2020. Suffice it to say, it was a great quarter, a great year, and based on what we seen so far, we expect very strong results in 2020. Karl?
Thank you, Rob. Good morning everyone. 2019 by nearly every available measure was the most successful year in our company’s history. It was the first full year of our merged company, which brought together Strayer Education and Capella Education Company and during the year, we completed our integration ahead of schedule and fully achieved our $50 million synergies target.
Both of our universities, Strayer and Capella generated outstanding results both in student academic achievement as well as strong enrollment growth, and in many cases, these results were among the best that we’ve achieved in more than a decade. Pro forma revenue increased 8% for both the fourth quarter and the full year 2019 and the combination of our realized synergies and our ongoing productivity efforts generated substantial operating leverage in the business.
Our adjusted operating margin increased 520 basis points to 23.8% in the fourth quarter and increased 480 basis points to 19.5% for the full year. In both cases, half of that increase was due to merger related synergies and the other half was due to organic productivity improvements. These gains, particularly the fourth quarters are well ahead of the margins in our notional five-year plan in which we get our operating margin into the mid-20% range over the next two years.
Both Strayer and Capella generated strong new student enrollment throughout 2019 growing year-over-year in every quarter and for the full year, Strayer generated 7% new student growth, which is the university’s sixth consecutive year of new student growth and Capella generated 9% new student growth. The company opened six new campuses in 2019 including the first ever Capella Campus Center in Atlanta, Georgia and each of these new campuses is performing better than our notional investment plan and again, the company intends to open between eight and 10 new campuses in 2020 including our first ever co-located campus in which we represent both university brands, that will open in Augusta, Georgia. We also had a substantial improvement in our non-degree segment, which generated an operating profit for the first time and that’s opposed to a nearly $10 million loss in 2019.
And before turning the call over to Dan to go through our financials, I just want to make a brief comment on the coronavirus. Given that more than 95% of our students are already taking all of their classes online and given that we have the capability to operate our company with our entire workforce working remotely, if required, we see little to no risk as a result of the virus. And while it is not our practice to comment on the current or future quarter, I think it’s fair to provide some level of visibility for the stability of our business and I can say that our first quarter’s enrollment results including our new student enrollment are actually better than our fourth quarter performance and we expect pre-tax and net income will both be up more than 20% from the prior year in the first quarter.
And lastly, for me, the greatest achievement in 2019 is the mission-driven and student-focused culture that we nurture here every day. I would like to extend my deepest appreciation and gratitude to the thousands of SEI employees whose work helps make our students’ lives better each and every day. Dan?
Thanks, Karl, and good morning everyone. Today we’re reporting consolidated 2019 results for Strategic Education, Inc. which include three segments, the Strayer University segment, the Capella University segment, and the Non-Degree Program segment. Note that our consolidated results exclude the financial results of Capella Education Company that occurred prior to August 1, 2018. For a pro forma view of our 2019 segment level results, please see the fourth quarter earnings release slide deck that we posted this morning to the Investor Relations section of our website.
I also want to remind everyone that our earnings release references as reported or GAAP results and adjusted results, which are non-GAAP. This format is intended to illustrate the financial performance of the core business as reflected in our adjusted numbers in addition to our GAAP results. Please refer to the non-GAAP financial information included in the fourth quarter earnings release we issued this morning for additional information.
Now, moving on to our Q4 results. Revenue for the fourth quarter of 2019 grew 8% to $263.8 million compared to adjusted revenue of $244.6 million in 2018. Our adjusted income from operations for the quarter grew 39% to $62.9 million from $45.4 million for the same period in 2018.
Our adjusted operating margin for the quarter expanded 520 basis points to 23.8% from 18.6% in 2018. Approximately 73% of our Q4 G&A costs were related to marketing investment compared to about 73% in Q4 2018 and 77% in Q3 2019. Our bad debt expense for the fourth quarter was 5% of revenue compared to 6.1% for the same period in 2018.
Fourth quarter 2019 adjusted net income grew 37% to $47 million compared to adjusted net income of $34.4 million for the same period in 2018 and adjusted diluted earnings per share grew 37% to $2.13 compared to $1.56 in 2018. Our adjusted effective tax rate for the fourth quarter 2019 was 28% and we expect our adjusted effective tax rate for the first quarter of 2020 to be approximately 28%.
Moving on to the full year results, our adjusted revenue for the year increased 50% to $997.1 million from $662.9 million in 2018. Our full year revenue increased 8% compared to the pro forma 2018 revenue of $923.9 million. Our adjusted income from operations for 2019 grew 99% to $194.1 million from $97.4 million in 2018. Adjusted income from operations grew 43% compared to pro forma 2018 adjusted income from operations of $136 million.
Our adjusted operating margin for 2019 expanded by 480 basis points to 19.5% from 14.7% in 2018. 2019 adjusted net income grew 41% to $147.3 million from pro forma net income of $104.8 million in 2018 and adjusted earnings per share grew 39% to $6.67 from pro forma adjusted earnings per share of $4.79 in 2018.
Our adjusted effective tax rate for the year was 27.8%. We expect our full year adjusted effective tax rate in 2020 to be approximately 28%.
And finally regarding capital expenditures, we spent $38.7 million in 2019 compared to $27.5 million in 2018 and for the full year 2020, we expect capital expenditures to be between $40 million and $45 million. Rob?
Thank you, Dan. As is our custom at this time of year, I’d like to take just a moment to run through our capital allocation decisions in 2019 and our plans for 2020. And by the way we track this every quarter with our Board of Directors, not just at the end of the year, it’s a major part of our discussions.
We started 2019 with $387 million in cash and marketable securities on our balance sheet. During 2019, the strong operating results which Karl has discussed across all of SEI’s segments generated $242 million in owners cash flow before taxes. Now, we used this generated capital during the year as follows: first, we paid $49 million in federal and state taxes; next, we allocated $42 million to capital expenditures and other non-capitalized investments in our business. Roughly one-half of that amount went to information technology upgrades and infrastructure, one-quarter went to physical campus facilities, that’s both new openings and routine maintenance on the existing plants, and then the final one-quarter we invested in course development, academic technologies, and artificial intelligence. We were then left with $151 million of what we refer to as owners’ distributable cash flow.
Now, I wrote in last year’s letter to shareholders that our owners’ distributable cash flow per share should roughly equal our reported adjusted net income per share. That way, you can keep track of us from our financial statements and in 2019 that owners’ distributable cash of $151 million or $6.86 per share slightly exceeded our adjusted net income that Dan just mentioned of $147 million or the $6.67 per share that we reported this morning.
So, we’re tracking according to plan and that’s important for all of us on the management team and our Board looks at what is the cash generative nature of our business after we have fully funded all of the improvements in academics that we think are necessary. So, out of this owners’ distributable cash flow, we paid $47 million in dividends and we added the remaining $104 million to our balance sheet. So, in rough terms, when you think back over the year, in 2019, we invested 25% of our after-tax cash back into our business, we returned 25% to our owners, and we held 50% for future use. That left us at year-end 2019 with a rock solid balance sheet of $491 million in cash, an undrawn $250 million revolver, and no debt.
In 2020, we are very well positioned to financially support both of our universities to continue to return capital to owners and to take advantage of any opportunities that come our way. I think it is important to point out to shareholders that having fully integrated Capella Education into SEI, including successfully executing on all the planned savings and synergies that we laid out at the beginning of the merger – the announcement of the merger, that as of year-end 2019, we believe we are now fully capitalized and therefore, based on our very favorable projections for 2020, we are confident we will be generating truly excess owners capital this upcoming year.
So for 2020, we have increased our common dividend by 20% to $2.40 per share and we have increased our share repurchase authorization to $250 million. And importantly, that $250 million is roughly the amount of capital we’ve calculated we could return to owners either in share repurchases or increased dividends, and still maintain our perfect 3.0 financial composite score with the U.S. Department of Education, which is one of our Board’s overriding objectives.
And with that operator, we would be pleased to answer any questions.
[Operator Instructions] And our first call – our first question will come from the line of Jeff Silber from BMO Capital Markets. You may begin.
Thanks so much. That’s close enough. First of all, congratulations on a…
Good morning, Jeff.
Good morning. Congratulations on another good year and it sounds like a great start to the current year as well. When we were at your Investor Day a few months back, you talked about your new marketing campaign. And I’m just wondering how that’s been rolling out and what kind of results you have from that?
Yes, sure. Good morning, Jeff. It’s been great. We track that actually weekly and what we’re looking for is what we refer to as proper attribution, which is people recognizing the advertising and it creating an impression on them that lasts. Those kind of metrics are all favorable. The demand environment has been strong, organic inquiry growth has been strong. So, we’re very pleased with our marketing campaigns with both Strayer and Capella.
Okay, fantastic. You also talked a lot about the 10X instructional model. I just wondered if we can get an update on that, how that’s been rolling out?
Well, it’s nearing maturity at Strayer. There is probably another 10% of courses that we might apply the 10X methodology too, but we’ve begun to implement that both the technology and the instructional approach inside of Capella and the early indications are it’s also having a favorable impact on the instructional model there meaning completion rates seem to be improved, increased retention and so forth. So, I think the focus on 10X predominantly in 2020 is going to be the continued roll out of it inside of Capella University.
And Jeff, just one other thing on that, although it’s – we’ve reached maturity in terms of the number of courses that we’re going to apply it as a methodology within Strayer University, you still get – you get the compounding effect of the higher continuation rates, the better academic performance, and we expect that to continue through the year and into next year as those students continue through their progression.
Okay, that’s helpful. I appreciate it. And finally, one more and then I’ll jump back in the queue. I think you had a slide – I know you don’t give official guidance, but I think you called the 2020 modeling assumptions. I’m just wondering are those still valid for this year? Thanks.
Jeff. Yes, they are.
Okay.
They both are and I think Karl’s comment is at least with regard to first quarter, we’re ahead of them.
Yes, yes. I got that, okay. Really appreciate it and thanks again.
Sure.
[Operator Instructions] Our next question will come from the line of Corey Greendale from First Analysis. You may begin.
Hey, good morning and congratulations on a another good year.
Thanks, Corey.
First question I had is just I imagine given the new campuses haven’t spent open that long, that they didn’t make a huge contribution to enrollment, but is there any way to quantify what their contribution was to the enrollment in the year?
It would be on the Strayer side, it might be 100 basis points, Corey. We kind of model the campuses when they reach maturity, which in our estimation in the new smaller footprint is probably 18 months to 24 months, but any one campus on a full-year basis should generate about 100 basis points of new student growth.
Okay, good. And then with the integration of Capella done, could you just maybe, give us a little bit of the state of the nation on the status of any collaboration and I heard you on the 10X at Capella, but more broadly, anyways that the institutions are collaborating on opportunities with employers or any other cross-pollination?
Yes. there is widespread collaboration. Throughout the course of the integration, we created a number of shared services that support both institutions. So basically, all of the corporate functions are shared service. So, IT and finance and marketing, we’ve also began to share best practices on student support models, advising models, the new gen ed curricula is being leveraged in both institutions. So, I’d say there is considerable collaboration, which includes obviously, taking some of the technologies that Strayer had developed in deploying those inside of Capella. The Strayer academic team is evaluating Flexpath and to determine if that’s something that the Strayer University might want to adopt and pursue. So, I’d say, honestly, Corey, that’s one of the big achievements of the merger is the level of collaboration that exists.
Great. then, I’ll just ask one last one, which is – and I suspect that I might know how you are going to answer this, but I’ll ask anyway. As you might imagine, we get questions about what the impact of Sanders Presidency would be on the sector and on you in particular, and I know that you’re good with gainful employment, anything like that, but who knows if it could be broader than that, just any thoughts you have on the impact of Sanders Presidency.
I think the best way to think about any political impact or change of administration is it is a highly-regulated industry and it deserves to be given that the taxpayer supports through very generous credit in our case, roughly 70% of our revenue through loans to our students, but our belief has always been that the fundamental mission of the institution and the best defense against any criticism is great academic outcomes. So, our focus is on every day teaching well in the classroom, developing academic technologies that help our students succeed and other than that, you deal with and modify your operations to adjust to whatever regulations exist.
Great. thank you very much.
Thank you.
Thank you. And I’m currently not showing any further questions at this time. I’d like to turn the call back over to Mr. Silberman for any closing remarks.
Thank you, operator and thank you, ladies and gentlemen. We appreciate your participation. If you have any other specific calls, please contact us directly and we look forward to talking to you at our next earnings call in April. Thank you.
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.