Strategic Education [STRA] Conference call transcript for 2022 q1
2022-04-30 13:07:04
Fiscal: 2022 q1
Operator: Welcome to Strategic Education’s First Quarter 2022 Results Conference Call. I will now turn the call over to Terese Wilke, Director of Investor Relations for Strategic Education. Mrs. Wilke, please go ahead.
Terese Wilke: Thank you. Good morning, everyone and welcome to Strategic Education’s conference call in which we will discuss first 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 maybe 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, Teresa and good morning everyone. Our first quarter results, which we reported this morning included year-over-year declines in revenue, operating income and earnings per share, reflecting the impact of nearly 2 years of declining enrollment at Strayer University. Improving Strayer’s performance has been and remains the company’s highest priority, and this morning, I can share that substantial progress has been made in this respect and that Strayer’s current performance is ahead of where we expected them to be at this point in the year. The vast majority of Strayer campuses have reopened. We’ve implemented dozens of enhancements to our systems to enable us to more effectively interact with both prospective and current students. Academic achievement has been consistently improving throughout the past year. Our employer-affiliated accounts are performing much better and amongst our largest agreements showing strong growth versus prior quarters and the prior year. We’ve seen significant stabilization in new student enrollment at Strayer, including within our employer-affiliated accounts as well as improvements in student retention. Total enrollment for employer-affiliated students in U.S. Higher Education increased to 23% of enrollment, which is up 200 basis points from the prior year. Across all of U.S. higher education, we’ve seen a significant increase in demand and interest into our universities, and we now have enough visibility into the second quarter to reiterate our indicative outlook for this year that we expect new student growth in U.S. Higher Ed for the full year – sorry, new student growth for the full year in U.S. Higher Ed, and that total enrollment will be down in the mid-single digits for 2022. And finally, on U.S. Higher Ed, the current expense run rate is approximately 8% below its pre-pandemic levels, reflecting savings generated over the past 2 years as a result of various technology and productivity investments, which were all designed to improve our ability to effectively teach much larger cohorts of students without having to add substantial levels of expense. As a result, our – as our U.S. Higher Education enrollment increases moving forward, we expect significant improvement to our operating margin. Our Education Technology Service division also continues to perform very well. During the first quarter, Sophia added more than 15,000 new paid subscribers, which was a 15% increase from the prior year as well as a 37% increase sequentially from the fourth quarter of last year. Average total paid subscriptions were more than 22,000 for the first quarter, which is an increase of approximately 95% from the prior year. Sophia’s revenue grew 73% from the prior year to $6 million, and Sophia’s operating income was $2.4 million, and its operating margin was 45%, which is down slightly from the prior year, reflecting continued higher investments in product development and marketing. Our 2022 operating plans for Sophia included a 50% revenue growth rate from 2021, and we expect that they will be significantly ahead of that number for the full year. Workforce Edge finished the quarter with 37 corporate agreements with a total employee population of 920,000 people. We also have seen some early progress in enrollments from Workforce Edge into SEI institutions, which again is ultimately our monetization strategy for Workforce Edge. Our goal is to have close to 1,000 students from the platform by the end of this year and several thousand beginning in 2023 and beyond. Turning now to our Australia/New Zealand division, we are following 2 years of borders being closed. We are working to normalize our enrollment practices, which includes having foreign students traveling to Australia and New Zealand on student visas. Given the backlog of demand to enter Australia, we’ve seen some delays in the processing of the student visas, which helped contribute to a slight enrollment decline in the first quarter. Student achievement within the ANZ segment remains very strong and some of the highest within SEI and Torrens University for the first time achieved a student continuation rate for the quarter in excess of 90%. Based on current trends, we expect the ANZ segment to be in line with our operating plans for the year. So in total, SEI is off to an extremely strong start in 2022 with all of our key operating initiatives to be either on track or well ahead of plan, and we look forward to updating you on our progress throughout the rest of this year. And finally, and once again, I’d just like to thank all of my colleagues at SEI for their ongoing dedication and professionalism on behalf of our students. And with that, Blue we would be happy to open the call for questions.
Operator: Your first question comes from the line of Jeff Silber from BMO Capital Markets. Your line is open.
Jeff Silber: Thanks so much. Karl, I appreciate you reviewing some of the comments you talked about last quarter in terms of what you were expecting for 2022. One thing, I am not sure if you mentioned, I think last quarter, you talked about full year operating expenses to be roughly flat on a year-over-year basis. Is that something we should expect again for this year?
Daniel Jackson: Yes. Jeff, this is Dan. Yes. We said it would be largely flat and we still expect that. So, it’s going to be a little uneven over the quarters, but it will track last year in total.
Jeff Silber: Okay. Great. And the unevenness over the quarters is actually my next question. I know you don’t guide specific margins by segment, especially on a quarterly basis. But there was a pretty sizable drop in margins in U.S. Higher Education. I am just wondering if you could talk about that. Was there anything specific going on, any pull forward of expenses, etcetera?
Karl McDonnell: No. We just had a 12.5% decline in total enrollment, which drove the revenue that we had in the quarter. We said on the last call, we expected expenses to be relatively in line or flat to last year, as Dan said. But other than that, Jeff, just reduced enrollment and therefore, revenue, there was nothing else that impacted the margins in the quarter. And as I said, we expect for the full year this year that total enrollment number to improve from being down 12.5% in the first quarter to being down roughly mid-single digits for the full year. So, obviously, we expect that to be improving throughout this year.
Jeff Silber: Okay. Great. And I am sorry, one more margin question. This is on the Education Technology Services segment. I think you alluded to this in your remarks, but if I could just get a little bit more color. Margins were also down pretty dramatically year-over-year in that segment. If we could talk about what happened, what should we expect on those segment margins going forward? Thanks.
Karl McDonnell: Sure. Well, it is the fastest-growing part of our organization, and we obviously want to sustain that growth. So, the reduced margin in ETS just reflects the fact that we continue to invest in products and marketing, other services. On a go-forward basis, as that division begins to mature out, we expect margins will settle in the mid to high-50s, Jeff.
Daniel Jackson: Okay. And obviously, it will take some time, but it’s a good goal to have.
Karl McDonnell: Alright. I will jump back in the queue. Thanks so much.
Karl McDonnell: Sure.
Operator: Your next question comes from the line of Tobey Sommer from Truist Securities. Your line is open.
Tobey Sommer: Thanks. I wanted to start by asking some sort of labor market related questions to see how that might be impacting. So, everybody is talking about and experiencing wage inflation, whether it’s internal for your own staff and expense structure or your students who might be out there working experiencing that. What are you hearing in terms of that being a factor in students maybe not rushing back the fact that the labor marketing economy are kind of roaring? And then conversely, over the last couple of years, maybe you could comment about how the business composition has changed in case the Fed doesn’t kind of adequately thread the needle here in while they raise rates trip up economic growth? Thank you.
Karl McDonnell: Sure. On the first part of your question, which was, I think two parts staff and then students. First on SEI staff, we haven’t really seen a lot of pressure on wage inflation. We obviously plan for and implement increases in our staff compensation every year. Actually, we have seen lower than normal turnover over the last year, so I don’t think it’s adversely impacted us. And with respect to students, we also really haven’t seen any adverse impacts. And as I alluded to in my prepared remarks, the demand environment for us right now appears to be quite strong, some of the highest levels of demand and interest that we have seen in several years. So, to the degree that, that’s been an impact, it just certainly has an – impacted the demand that we have seen. And then in the second part of your question around business composition, obviously, U.S. Higher Ed is the largest part of our organization. We see that, that business is stabilizing and doing quite well. We expect it to improve throughout this year. And we expect the Australia segment to also do well. There has just been – it seems a slight delay in getting that country’s borders reopened and returned to normal. And then our ETS segment, as I just said to Jeff’s question, is the fastest growing, which we expect to continue this year and beyond.
Robert Silberman: Hey Tobey, this is Rob. The one thing on the macroeconomic side, I want to make sure that our shareholders at least understand how we are seeing it is that inflationary pressures actually don’t have much of an impact on student demand. And as a matter of fact, macroeconomically, we are actually in a better situation because labor participation rates have firmed and are starting to increase. And then our historical experience suggests that in the U.S., Higher Ed market for the types of students that we are trying to attract that labor participation rates and employment confidence is actually the most predictive macroeconomic indices to demand. And as Karl said, it appears to be bearing out.
Tobey Sommer: Thanks. What are you seeing in terms of pricing trends among your principal competitive sets, any changes that you could update us on would be helpful? Thank you.
Karl McDonnell: We haven’t really noticed any material changes in competitive pricing. We have notionally kind of always planned for relatively flat pricing or stable pricing, which is net of perhaps some modest price increases in various parts of our organization offset by realized discounting as associated with increases in our employer-affiliated enrollment. So, basically, it appears to be relatively stable and flat.
Tobey Sommer: Great. And then one other one for me, from a margin expansion perspective within the company, what kind of total student growth does the company need to achieve to kind of have visibility and confidence into persistent margin expansion? Thanks.
Karl McDonnell: Well, I would revert to our commentary on what we expected the company to do on a notional basis, pre-pandemic. And at that time, we said we expected mid to high-single digit enrollment growth and revenue growth because of what I just said on stable pricing and that we should have margins in the mid-20s. And clearly, we are below that now, but we are below that because of a multiyear decline in enrollment at Strayer for a variety of reasons, mostly pandemic impacted. But from where I sit, there is nothing in the business that would prevent us from returning to that notional model. And we are obviously on a trajectory this year to do quite well, given as I said that the first quarter U.S. Higher Ed’s enrollment was down almost 13%. We expect that to be down only in the mid-single digits for the year. So – and combined with the fact that, as I have said, we think we have essentially the expense base that we need. So, as that enrollment increases over time, we expect significant margin expansion as the enrollment returns to pre-pandemic levels.
Tobey Sommer: That’s helpful. Last question for me. On the regulatory front, any changes. This has been something that’s been in the news ever since the administration arrived. And I am just wondering whether that concern may have sort of crested at this point?
Karl McDonnell: Well, it’s something that we are obviously monitoring. There is nothing specific for us to react to. We are very confident in the quality profile of the U.S. Higher Education institutions. We don’t anticipate any issue with complying with any set of reasonable regulations that may be promulgated. So, it’s something that we will continue to watch, and we are quite confident in our risk profile from that standpoint.
Tobey Sommer: Perfect. Thank you for the update.
Karl McDonnell: Thanks.
Operator: There are no further questions at this time. I would now like to turn the call back over to Karl McDonnell.
Karl McDonnell: Alright. Well, thank you, everyone. And as I said, we look forward to continuing to update you on our progress and we will talk to you next quarter.
Operator: This concludes today’s conference call. Thank you for your participation and have a wonderful day. You may all disconnect.
