Strategic Education, Inc. (STRA) Q3 2022 Earnings Call Transcript

Strategic Education, Inc. (NASDAQ:STRA) Q3 2022 Results Conference Call November 3, 2022 10:00 AM ET

Company Participants

Terese Wilke - Director of Investor Relations

Karl McDonnell - President and Chief Executive Officer

Robert Silberman - Executive Chairman

Daniel Jackson - Executive Vice President and Chief Financial Officer

Conference Call Participants

Jeff Silber - BMO

Tobey Sommer - Truist

Operator

Welcome to Strategic Education's Third Quarter 2022 Results Conference Call.

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. Good morning, everyone, and welcome to Strategic Education's conference call, in which we will discuss third quarter 2022 results.

With us today are Robert Silberman, Executive 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

Thank you, Terese, and good morning, everyone. Overall, we were very pleased with our third quarter academic, operational and financial results that we reported this morning, as they reflect continued progress in improving our results and returning the Company to revenue and earnings growth.

Excluding the impact of foreign currency fluctuations in the third quarter, our revenue was down less than 1% from the prior year. We continue to see significant strength in our U.S. Higher Education segment, with all key metrics at both Strayer and Capella Universities posting improvements from the prior year. The overall demand environment remains very robust, and inquiries into Strayer and Capella increased more than 30% from the prior year.

Our employer affiliated enrollment from our network of corporate partnerships is the strongest that it's been in years. New student and total student growth rates from corporate partnerships are significantly higher than our nonaffiliatedenrollments at 40% and 60%, respectively.

At Capella, we continue to see strong growth in FlexPath program, with both strong levels of new student and total student enrollment. As a result, FlexPath now comprises approximately 21% of all U.S. higher education enrollments, an increase of 200 basis points from a year ago.

Strayer's enrollment continues to experience a rapid recovery and remains on track to grow its total enrollment on a run rate basis by the end of this year, and both Strayer and Capella had year-over-year increases in core success and student retention.

Our Education Technology Services segment, or ETS as we call it, continues to perform well and having grown its revenue in the third quarter by 27%. Operating income for ETS was flat to the prior year, notwithstanding this revenue growth as we continue to invest in additional resources to further support ETS' growth.

These investments in ETS have helped us to achieve the necessary scale to serve both our existing customer base and much of the anticipated growth for next year. As a result, we expect expense growth will moderate significantly in 2023, resulting in margins much closer to our notional plans of 50%-plus.

During the quarter, Sophia Learning, our direct-to-consumer portal of high-quality ACE recommended general education courses, grew its average subscriber base by 33% and its revenue by 45%.

Workforce Edge, our SaaS-based education benefits management platform, grew an additional six clients during the quarter and increased the employee base by 200,000 people. We expect to have between 800 and 1,000 employees from Workforce Edge clients enrolled in Strayer and Capella by year-end and to have a significant multiple of that enrolled in 2023.

Our Australia/New Zealand segment continues to work to return to normal operations, but is still experiencing visa application processing delays that is adversely impacting our enrollment of international students.

During the quarter, ANZ's total enrollment grew 2% and its revenue grew 1% on a constant currency basis. Measured in Australian dollars, our ANZ segment has been remarkably stable during the pandemic. Its academic outcomes and student retention remain strong and among the highest in SEI, and notwithstanding the significant headwinds, returning to a normal operating environment has continued to grow throughout.

We remain optimistic that continued progress will be made easing the immigration delays throughout the rest of this year and into next year. And those -- and as those barriers begin to be removed, we will see higher rates of growth at Torrens University.

During the quarter, we also launched SEI's Faculty Action Center at Torrens, a proprietary software that enables significantly more robust faculty and student interaction. We expect that to have a meaningful impact on student satisfaction, teaching effectiveness and ultimately, student retention.

So overall, we continue to make considerable progress on our goals thus far this year. I can, again, reiterate, we expect to see new student growth on a full year basis across each of our universities. And we've not yet seen anything that would suggest our performance in the fourth quarter would lag behind where we are now. And based on that momentum, this year, 2022, will be our trough year for revenue and earnings and that our enrollment revenue and earnings will be substantially higher in 2023.

Finally, and as always, I'd like to thank all of my colleagues at SEI for their continued hard work and dedication on behalf of our students around the world.

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

Question-and-Answer Session

Operator

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

Jeff Silber

I was wondering if I could start with some questions on U.S. higher education enrollments. I know you gave a lot of details on the call, but I wanted to drill down a little bit further. Can we get a little bit more color in terms of either student-type grad versus undergrad or program type, where you're seeing more strength on a relative basis?

Karl McDonnell

Well, it's pretty much strength across the board, Jeff. As I said in the prepared remarks, FlexPath certainly continues to be a major driver of growth at Capella. And within FlexPath, health care continues to be very strong.

As I also said, we continue to see very, very high levels of corporate partnership enrollments, levels, frankly, that we haven't seen in many years. And at Strayer, I'd say it's pretty much across the board, as they just continue their general enrollment recovery having had most of our campuses reopened for the full quarter. So I can't say that it's any one area over another, it's pretty broad-based and across the board.

Robert Silberman

Jeff, just one add -- additional point to that. I think it's fair, Karl, to say that the single strongest program is nursing at Capella, right?

Karl McDonnell

Across all of our programs. That's true.

Jeff Silber

Okay. That's actually very good color. If I could shift over to ANZ, you mentioned some visa application issues. I don't know if it's possible to quantify what the impact has been. What would have enrollment been if you hadn't had those issues?

Karl McDonnell

Well, we can't speculate on what enrollment would have been because it's hypothetical. What we can say is we know we have many hundreds of students who have made applications and who have expressed interest into entering the country and attending Torrens. Pre-COVID, my understanding is those visas were processed normally in a period of somewhere between 30, 45 days. We've seen delays now in excess of 200 days.

As I said, we see that it's getting better and we hope that it will continue to improve throughout the rest of this year and next year. And I'm very confident that once those delays return to a more normal processing time, we'll see more significant growth there.

Jeff Silber

Okay. Appreciate that. If I could just sneak in one more. I think I'm probably watching too much CNBC, where all they're talking about is a pending recession, not if, but when and how bad. Can you tell us what you think or how you think your different business segments or lines of business might do if we enter into a U.S. recession and then obviously with ANZ it's more global?

Karl McDonnell

Well, again, it obviously depends on the depth of that recession, its duration and so forth. But fundamentally, we believe that demand remains very strong for postsecondary education, certainly in the United States as well as Australia.

And that given any normalized range of economic activity, be that recessionary or not, we wouldn't expect it to dramatically adversely impacting us, barring some major shock that could happen to the economy.

And frankly, Jeff, notwithstanding all of the macroeconomic headwinds that are out there, as I said, the demand environment that we're seeing right now is very, very robust.

Robert Silberman

Jeff, at its simplest level, any macroeconomic shock that crushes labor participation rates in the past in the U.S., particularly at Strayer, that's where we've seen enrollment weakness. But a business cycle recession, during which unemployment might rise slightly, but participation rates remain within a normalized band, I don't see that having much of a negative impact on our operations.

Operator

[Operator Instructions] Our next question comes from the line of Tobey Sommer with Truist.

Tobey Sommer

Are there any modeling inputs that you would care to share with us? Sort of at any level of detail as we refine 2023 expectations? You talked about sort of substantial improvements, but any way you could help frame that for us?

Daniel Jackson

Tobey, this is Dan. For 2022, we're still pretty in line with what we said early in the year, which was we think total enrollment, given the cycle of recovery mostly at Strayer, is likely to decline in the mid-single digits. And we think with stable revenue per student, revenue is likely to track similarly. And we think that total expenses will be flattish year-over-year, and we're still on track with that.

I think the one other thing I would add maybe is that we've normally indicated that our tax rate -- our adjusted tax rate would be in the neighborhood of 30%. It's probably going to be a little higher, closer to 31% this year.

Robert Silberman

He was actually asking about '23, Dan. But the reality is we don't ever give any kind of forward guidance that could be reflected in modeling. So the -- beyond what Karl said, which is we've had several quarters now of new student enrollment growth.

And given that the average duration of one of our students is six to eight quarters, that lags through. And so we expect both enrollment growth and revenue growth in '23. And as we've said in the past, we've got a -- given our focus on academic quality, we have a relatively fixed expense base, which hurts us on the way down when revenue is shrinking and is quite advantageous in terms of margin when revenue grows. So I think that's as specific as we can be for next year at this point.

Tobey Sommer

Sure. And I can appreciate the start momentum because you've referenced that. But since you retracted that as a metric that you disclosed, it's difficult for us to use that as an input. What are you seeing in terms of pricing trends from key competitors and anything changing on that front?

Karl McDonnell

I can't speak to pricing at other institutions. I haven't followed it as closely recently. But in terms of SEI institutions, we think there may be very, very modest tuition increases over the next several years at Capella, given the enormous value that FlexPath creates for its learners and its graduates.

I would say that we plan for no pricing increases at Strayer. Over in Australia, Torrens, there may be a little bit of pricing increases over the next several years. But one thing you have to consider is we have this enterprise-level goal to continue to drive these corporate-related enrollments, which almost always come at a discounted level of tuition. And so the realized pricing or the realized revenue per student could be decreasing as it has done over the last several years.

And given the very high rates of growth that we have in our corporate channels right now, that's likely to continue. We always work to offset that with as much expense productivity as we can so that the margin impact is de minimis, but I wouldn't be planning for any large increases in our actual revenue per student.

Tobey Sommer

Okay. Are there -- could you offer some color on the bad debt in the quarter? Because with enrollments down and the shift towards more sort of corporate activity, I would expect there to be sort of a decrease in -- or at least some downward pressure on bad debt?

Daniel Jackson

Tobey, this is Dan. The majority of the deterioration is just a reflection of we're getting a lot of growth in new enrollment. And new students typically pay at a lower rate. Over time, that will normalize as continuing students become, on a relative basis, a bigger share of enrollment.

Tobey Sommer

Okay. So it's a reflection of the increase in new starts that you referenced earlier? Okay.

Daniel Jackson

Correct.

Tobey Sommer

Anything on the regulatory front? And I guess I don't mean just in terms of U.S. domestic regulations around the education industry, but also on the immigration front in Australia and New Zealand in terms of time line or catalysts that we should be aware of, where a decision or a change may be forthcoming?

Karl McDonnell

Well, starting in Australia. During the pandemic, the Australian government put a waiver in place for people on education visas that did not require them to enter the country because they couldn't, obviously, which enabled those students to maintain their studies in their home country of residence.

Government has announced their intention to rescind that waiver June of next year. So that certainly will be a catalyst for international students returning to actual immigration into Australia, which I think will very much help us.

Within the United States, we continue to be very confident in the quality profile of both Strayer and Capella. And nothing that we've seen, either by the way of rules, actually being published or discussions that we've been made aware of, of potential rules. Nothing gives us any concern that either Strayer or Capella would have any significant problem complying with any rule or regulation.

Tobey Sommer

And to double-click, last question for me on the performance and impact on the business from labor participation. If the labor participation were to decline, what are the key metrics in the business that would be impacted?

Karl McDonnell

Well, it would be certainly inquiries into the universities. So these are people that reach out to either Strayer or Capella, request information on a particular program, or request to speak to an enrollment adviser. We would expect that would be impacted.

Applications for new enrollment would likely be adversely impacted. Enrollment itself follows all of that. But the leading indicators would be the number of people actually making inquiries for additional information from the universities.

Robert Silberman

And Tobey, I think it's fair to say that it would -- we would anticipate it would have a greater impact on Strayer University than Capella University given its higher percentage of undergraduate students for which that labor participation rate tends to be more of a bellwether around demand.

Tobey Sommer

Okay. And then from a timing perspective, are -- those impacts on the business at Strayer, are they a coincident lagging or leading the changes in labor participation?

Robert Silberman

They're slightly lagging, maybe three or six months, I mean, if we just think historically.

Operator

And I'm currently showing no further questions at this time. I'd like to hand the call back over to Karl McDonnell for closing remarks.

Karl McDonnell

Thank you, everybody. We appreciate your time today and look forward to talking with you next quarter.

Operator

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