Strategic Education, Inc (STRA) Q3 2020 Earnings Call Transcript

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Strategic Education, Inc (NASDAQ:STRA)
Q3 2020 Earnings Call
Nov 5, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Strategic Education’s Third Quarter 2020 Results Conference Call. [Operator Instructions]

I will now turn the call over to Terese Wilke, Manager of Investor Relations for Strategic Education. Mrs. Wilke. Please go ahead.

Terese WilkeManager, Investor Relations

Thank you. Good morning, everyone, and welcome to Strategic Education’s conference call, in which we will discuss third quarter 2020 results and closure of the Australia/New Zealand acquisition we announced this morning. 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. This conference call is also available via webcast with a corresponding slide presentation. We encourage you to log into the webcast as the slide presentation is only available at this time for viewing via the webcast. You can access the webcast strategiceducation.com in the Investor Relations section. After completion of the call, the slide presentation will be posted to the website. 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 Rob. Rob, please go ahead.

Robert S. SilbermanExecutive Chairman

Thank you, Terese, and good morning, ladies and gentlemen. In our earnings release this morning, we reported both our Q3 earnings results as well as announced the closing of our acquisition of Torrance University and related educational assets in Australia and New Zealand. I think it’s important to note at the outset that the regulatory approval for this acquisition by the governments of Australia and New Zealand took less than 90 days in the midst of a worldwide pandemic. I believe that the speed of this approval is a testament to the high regard, which both those governments hold for the academic quality of Torrance University as well as their confidence in SEI’s track record as a responsible steward of academic institutions. Now Karl will cover both of these announcements in his remarks this morning as well as share with you our view of the impact of the coronavirus pandemic on our operations. And I think more importantly, what our company will look like post this acquisition in 2021 and beyond.

Now because there’s a lot of material to cover, we’re going to take a little more time this morning than we usually do in our introductory remarks before we open it up for questions. In fact, to assist you in following along, we’ve included some slides on this webcast, which Karl will refer to in his remarks. Those of you who are using the dial-in and want to see the slides should join the webcast now. And of course, we will stay as long as needed to answer any of your questions. Suffice it to say that 2020 has been an eventful year for our students, our faculty and our universities. I just want to say, on behalf of our Board of Directors, we could not be prouder of the way our entire organization has risen to this moment. Karl?

Karl McDonnellPresident And Chief Executive Officer

Thank you, Rob, and good morning, everyone. Today, we have a slightly different presentation of our earnings information, which is intended to provide you, our owners, with a more detailed view of our outlook for the current year as well as our preliminary view on 2021 notionally. And as Rob just said, my commentary will be accompanied by slides, which will be available on our website, strategiceducation.com following this morning’s call. And to contextualize 2020, I thought it would be helpful to start with SEI’s 2019 results, which are here on Slide 3. In 2019, we educated 91,000 students, which generated just under $1 billion in revenue. And to educate those students, we spent $803 million in operating expenses, which then generated $194 million of adjusted operating income and $6.67 of adjusted earnings per share.

Then in November of 2019, we hosted our Investor Day to lay out our plans for 2020, which included an expected 5% increase in total enrollment, roughly flat revenue per student, and that would yield at least a 10% increase in both adjusted operating income and EPS as well as expanding our operating margin. And actually, through the first half of 2020, as you can see here on Slide five, we were well ahead of that plan. We had a 6% increase in both enrollment and revenue. And that growth, when you combine it with our disciplined approach to cost management, yielded a 30% increase in pre-tax income and a 28% increase in adjusted earnings per share. And you may recall in our last earnings call, I said that the third quarter was the first quarter in which the full impact of the pandemic and associated economic damage was felt by our company. Our two universities, Strayer and Capella are experiencing substantially different effects from the current macroeconomic conditions. And last quarter, we preannounced Strayer’s enrollment results, which again included a 28% decline in new students and a 1% decline in total enrollment.

At that time, we also forecasted Capella’s new enrollment would be down somewhere between 5% and 10% for the third quarter. Capella’s actual third quarter enrollment was substantially better with both new and total enrollment growing 4% over the prior year. And while Strayer’s performance is disappointing to us, it is not necessarily surprising given that it’s an institution that predominantly serves an undergraduate population, including a large percentage of first-time college students, which we know is a segment of the population even pre pandemic that is most sensitive to adverse changes in the economy and employment. And this is in contrast to Capella’s 70% graduate student mix, where that segment of the population, people that have existing four year degrees is faring substantially better. To help offset some of the economic pain for some of our students, we have implemented several scholarship programs, which will likely result in a 2% decrease in revenue per student for the full year 2020. Slide seven provides an overview of our Q3 consolidated results, which we released this morning.

This included a 1% increase in enrollment, a 1% decrease in revenue, a 3% decrease in pre-tax income and an 8% decrease in adjusted earnings per share. And Slide eight provides an outlook for the full year, and it’s important to note, this is, if you assume that Q4’s enrollment results would essentially be in line with the third quarter. And I should note, we obviously don’t know the fourth quarter’s enrollment results as we’re not even halfway through the quarter. So this is simply a notional outlook and excludes Australia and New Zealand. But if the third quarter’s enrollment results continued, you would have full year results that would include a 2% increase in enrollment, flat revenue of $1 billion, a 3% increase in pre-tax income and flat earnings per share. Now in order to maintain our financial strength, should these macro conditions continue next year. The company has already begun a fairly comprehensive expense rationalization, which I’ll speak to momentarily. But more importantly, the company remains committed to increasing investments in our areas of strength for growth, including employer solutions, Sophia and other strategic assets. And our newly closed Torrance acquisition will be a major contributor next year, generating over $1 of earnings per share.

Earlier in the third quarter, the company initiated several strategic reviews of our business. And based on these reviews, we have decided to organize our business into three distinct operating divisions. U.S. Higher Education will consist of Strayer and Capella universities. Alternative learning will consist of all of our employer solution efforts, Sophia, our coding schools and our new digital enablement function, and Australia and New Zealand will include Torrence University, Think Education and the media design school. We have also implemented a series of expense reductions that will reduce our run rate operating expenses next year by approximately $33 million. This includes almost $8 million of real estate savings from reducing our corporate square footage as a result of the effectiveness of working remotely, which is a trend we see continuing for many, even post pandemic as well as the rationalization of the Strayer campus footprint as 95% of Strayer students are already taking 100% of their classes online, and the company intends to take a restructuring charge of approximately $30 million between the third quarter of this year and the first quarter of next year.

And Slide 11 provides detail on these divisions, and it’s important to note that the company will begin new segment reporting reflecting this structure beginning with our Q4 and full year 2020 results, which we will announce next February. And as I said a moment ago, we intend to invest in our growth next year, including significant new investments in our new alternative learning segment. This segment includes all employer solutions, Workforce Edge, which is our new education benefits management solution for corporations that we recently launched, along with our partnership with noodle partners. It includes Sophia, our coding schools and our new digital enablement efforts. Employer solutions is a key differentiator for our universities and has shown steady strength throughout 2020, particularly at Capella University, but also within Strayer. We have set a goal to increase total employer solutions enrollments at both Strayer and Capella from 20% of our student population this year to 30% in 2021, representing a 50% increase in the overall mix percentage.

To assist that team, the company has committed to a 30% increase in total employer solutions related headcount. We also expect significant growth with Sophia and have seen quite good traction with our new subscription-based pricing model. Since August 1, when we introduced the new pricing plan, we have added more than 13,000 paid subscribers, and we expect to grow that by at least 50% next year. Sophia’s revenue, which was on roughly a $3 million run rate pre pandemic, should exceed $12 million in 2021, representing a 300% growth rate. And our digital enablement efforts to license SEI tools, technologies and other assets to other higher education institutions is also off to a strong start. And this morning, as part of our release, we were excited to announce a major new culinary education product with Sir [Indecipherable] and restitutor and chef, Scott Conant, which we expect to grow significantly in the coming years.

Turning now to our now closed acquisitions of Torrence University, Think Education and the media design school. First, I’d like to say that we’re thrilled to be the new owners of these very high-quality assets, and we look forward to investing in their long-term growth, where we see significant opportunities. For 2021, we expect Australia and New Zealand to generate approximately USD270 million of revenue and USD60 million of EBITDA, representing 10% growth for each. And as a reminder, Torrence University is the only federally recognized investor funded university in Australia, uniquely positioning it to innovate within Australia’s Higher Education market. Now in terms of next year, our initial 2021 notional model assumes until we have evidence to the contrary, that our current enrollment trends continue into next year. And specifically, that we see continued weakness in new enrollments at Strayer University through the first half of 2021, stabilizing in the second half. And we also see a continuation of Capella University’s current performance with mid-single-digit new student growth.

The notional model also assumes significant growth within alternative learning, as I just said, and the $270 million of revenue and $60 million of EBITDA in Australia and New Zealand. All of that then would generate consolidated SEI revenue growth in 2021 of approximately 15%. We would also then assume flat EBITDA, a 29.5% tax rate, capital expenditures of between $50 million and $55 million and our new share count of 24.2 million shares. So in summary, we project continued strong cash generation and accumulation of $450 million in liquidity at the end of this year and $500-plus million at the end of next year. We remain committed to our student-first focused on academic achievement. And as has been our practice in other periods of economic downturns, we don’t try to chase or create demand that isn’t there organically. Our solid financial strength enables us to withstand wide variations in enrollment, and we remain highly confident that Strayer’s demand will eventually recover to pre pandemic levels and begin to grow again, particularly as overall demand for high-quality digital learning is now higher than ever.

And operationally next year, our primary focus will remain to serve the highest possible levels of academic quality for all of our students and work to successfully integrate Torrence, Think Education and the media design school into SEI. And importantly, we remain committed to addressing college affordability and will actively work to reduce our cost of attendance and debt levels for all of our students. In our Investor Day last year, I said that we have an aspirational 10-year vision to fully convert 100% of our tuition from Title IV funding to the private sector via our employer partnerships. We remain committed to that vision and, in fact, intend to modify our executive incentive compensation program to include this metric as a qualifier in determining whether incentive compensation has been earned and at what levels. We will also maintain our disciplined cost approach and with the support of our full Board of Directors, will deploy our financial capital toward the highest long-term returns, including returning surplus capital back to our shareholders. And finally, I’d like to thank all of my colleagues within SEI including our newest colleagues in Australia and New Zealand for all of the dedication and continued hard work during this very challenging year.

And with that, Daphne, we’d be happy to open up for Q&A.

Questions and Answers:

Operator

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

Jeff SilberBMO Capital Markets — Analyst

Thank you so much. I want to focus first on, I guess, your core business. The — last quarter, you had given us some color on new enrollment trends. I’m wondering if you can do the same thing right now. What is that tracking both at Strayer University and Capella University?

Karl McDonnellPresident And Chief Executive Officer

Good morning, Jeff, well, we’re still in the fourth quarter, obviously, but I can share that the new student enrollment trends at both Strayer and Capella are largely in line with the third quarter.

Jeff SilberBMO Capital Markets — Analyst

Okay. That’s fine. And why do you think Capella outperformed your initial expectations you gave us last quarter?

Karl McDonnellPresident And Chief Executive Officer

Well, when we provided that initial forecast, it was very early in the quarter. We were cautiously optimistic that the traction that we were seeing early in the quarter would hold. But obviously, we weren’t sure. We were very pleased that they ended up as strong as they did, up 4%. And as I said in my prepared remarks, they serve a student body that is more established professionally, 70% graduate, meaning everyone in a graduate program, obviously, already has a 4-year degree, and that’s just a part of the economy that tends to fare better even in periods of economic distress, which is in contrast to the Strayer student body, which has that rather large portion of the student body that are first-time college students. And that part of the economy, we know tends to suffer the worst. In periods where you have a sizable change in economic activity as we’ve had this year with the pandemic and the immediate shutdown of the economy.

Robert S. SilbermanExecutive Chairman

Jeff, it’s Rob. Just to even simplify it more, think about the fact that the Capella student is more likely to have been able to work from home. And the Strayer student is much less likely to have been able to work from home and much more subject to involuntary employment reductions, layoffs, etc.

Jeff SilberBMO Capital Markets — Analyst

Okay. That’s actually very helpful. Can we talk a little bit about retention trends? I guess we can kind of back into it with your numbers, but it would be helpful if you just give us some color what’s been going on at both schools?

Karl McDonnellPresident And Chief Executive Officer

In the third quarter, Strayer was down slightly. We had a slight increase in drops, which again, given everything that Rob just said, is not surprising to us that, that portion of the student body might be struggling a little bit more. Capella’s retention has been relatively stable and flat.

Jeff SilberBMO Capital Markets — Analyst

Okay. Great. And if I could just sneak in one more. During the quarter, you announced the Workforce Edge product. Can you give us a little bit more color on exactly what this entails?

Karl McDonnellPresident And Chief Executive Officer

Sure. Workforce Edge is a technology platform that allows corporations to market education benefits broadly to their workforce in one place, so that an employee can log in and see all of the educational benefits that the company has negotiated on behalf of the workforce. And then click-through and be able to get information from a particular school and then carry forward and actually enroll as well as get administrative insights into what is the performance of people taking educational benefits within the schools, what’s the participation rate and so forth. So that’s the platform. What’s wrapped around it is the consortia of institutions that we formed with Noodle Partners. So our institutions, Strayer and Capella, along with the 22 or 24 partner institutions with Noodle Partners performed consists of an exclusive consortia that employees of these companies can participate with prenegotiated discount tuition. And we’re going to launch our first client imminently here within the next week or so.

Jeff SilberBMO Capital Markets — Analyst

[Indecipherable]

Karl McDonnellPresident And Chief Executive Officer

Thanks, Jeff.

Operator

Next question comes from the line of Tobey Sommer with Truist Securities.

Tobey SommerTruist Securities — Analyst

Thank you. I had a couple of questions on Sophia. How do you think the growth you’re forecasting for next year compares to competitors? And could you give us a little bit of color on the profile of the sign-ups and how you anticipate that profile evolving?

Karl McDonnellPresident And Chief Executive Officer

Sure. Well, first, on profile. These are what we believe to be people either preparing to attend college for the first time or existing college students who are looking for a low-cost alternative college tuition. Where assuming that you successfully complete the course, you have the opportunity to transfer that credit into another institution. And I should just say that one of the benefits of attending either of our university, Strayer or Capella is those students get free access to Sophia and can really reduce the cost of a degree by transferring in as many as 10 or 15 courses that are predominantly general education. In terms of growth, I can’t speak to the growth of Sophia competitors. But we do expect that Sophia will have significant growth next year, as I said, 300% basically. And we would expect that to be able to continue to add paid subscribers given its very attractive price point of roughly $80 a month.

Tobey SommerTruist Securities — Analyst

Okay. Thank you. With respect to how your corporate programs are trending? What is the growth like — I mean, how does it compare to your overall numbers? And you mentioned sort of a long-term decade-long goal. Does that mean you expect that to approach sort of 100% of the book or in a decade? Or is it — could you give us some perspective on that? Thanks.

Karl McDonnellPresident And Chief Executive Officer

Yes. So in Capella, in particular, through this year, employer solutions related enrollments have been very strong, particularly in healthcare, where we’ve seen year-over-year increases for new students in excess of 30%. So well above with the nonemployer solution channel has been doing. Strayer hasn’t been as strong, but we are seeing traction within strayer because Strayer has many enterprise level, employer solution partnerships, including national retailers like Best Buy or healthcare companies like CVS, Aetna and others, where the entire workforce is covered by an agreement. And our aspirational vision is sort of what you said. It is to transfer the burden of paying for college from the taxpayer for those people that use subsidized student lending to private sector employers via these large enterprise level agreements. Because, frankly, we see it as a win-win. It’s a win for the employer because they can attract or retain a talented workforce. It’s clearly a win for the employee/student because they get a debt-free degree. It’s a win for society because we’re helping to transfer the responsibility of payment away from the government and the taxpayer. So our vision is to replace 100% of our tuition from federally funded dollars into private sector funded dollars.

Tobey SommerTruist Securities — Analyst

Thank you. Last question from me and I’ll get back in the queue. How do you see Strayer market share versus its sort of direct competitor set, given the demographic is more vulnerable to the high unemployment in this recession?

Karl McDonnellPresident And Chief Executive Officer

Yes. I mean, I can’t speak to what is the market share because I don’t know necessarily the enrollment of the competitor set, which is a growing competitor set every day. But suffice it to say, in a period where we’ve seen double-digit declines in new students in a very short term, there’s probably been an adverse impact. But we also, as I said, fully expect that, that demand will recover. I can’t imagine the Strayer students being adversely impacted from employment are necessarily choosing to go somewhere else. I just think life events are such that they’re just having to pause their education. And because the economy over the long-term is such that you still need a 4-year degree to really begin earning a meaningful middle class wage that’s the confidence that we had that the demand will ultimately return when we get to a more normalized set of economic activity.

Robert S. SilbermanExecutive Chairman

Yes. I think I read recently that the overall student enrollment in universities in the fall of ’20 was down about 2%, which would include traditional universities, which obviously have fared much better. So I think working adult undergraduate, first time college enrollment across the entire educational space is probably down at least as high as Strayer’s has been. So I don’t think it’s much of an impact on market share. Overall demand is down in a pandemic created economic distress. And as Karl said, we’re highly confident. We’ve seen this kind of wave before, and we’ve seen how Strayer University response positively, as you get labor force participation rates starting to increase again as the economy strengthens.

Tobey SommerTruist Securities — Analyst

Thank you so much.

Operator

[Operator Instructions] And you have no further questions at this time, and I will now turn the call back over to Mr. Silberman.

Robert S. SilbermanExecutive Chairman

Thank you very much, operator, and thank you, ladies and gentlemen. We are available for questions. If you have follow up, we look forward very much to the coming year and the integration of the ANZ assets. And although it’s late in the evening there, we want to welcome any of them — any of our faculty or staff who are happen to be listening in and say that we couldn’t be more excited to have you as part of the SEI community. And we will talk to all of you in February. Thanks very much.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Terese WilkeManager, Investor Relations

Robert S. SilbermanExecutive Chairman

Karl McDonnellPresident And Chief Executive Officer

Jeff SilberBMO Capital Markets — Analyst

Tobey SommerTruist Securities — Analyst

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