Welcome to Strategic Education First Quarter 2023 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.

Thank you. Hello, everyone, and welcome to Strategic Education's conference call in which we will discuss first quarter 2023 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.

Thank you, Terese, and good morning, everyone. Our financial results for the first quarter, which we reported this morning, were in line with our expectations. As mentioned in our last earnings call, we anticipated that some timing-related issues would affect our first quarter results, and we expected our revenue to remain approximately flat year-over-year while our expenses would increase by about 5%. That is precisely what occurred. Our U.S. Higher Education division saw total enrollment rise by 2.3% compared to the previous year, marking the first growth in enrollment since the third quarter of 2020. This growth is due to strong new student enrollment at both Capella and Strayer, along with an increase in employer-affiliated enrollments. Total employer-affiliated enrollment grew by 13% at Capella, 25% at Strayer, and 17% across all of U.S. higher education, far surpassing the growth in non-employer-affiliated enrollments. These employer enrollments now make up 26.3% of all U.S. higher education enrollments, reflecting a 330 basis point increase from 2022. Revenue from U.S. Higher Education rose just over half a percent to $197 million. Revenue per student saw a slight decrease from the previous year, mainly due to the ongoing strength of employer-affiliated enrollments. The overall demand environment in the U.S. remains strong, and we expect new student growth at both Strayer and Capella Universities for the full year, similar to last year. Our Education, Technology & Services division experienced a 25% revenue growth and a 23% increase in operating income in the first quarter. ETS' operating margin slightly contracted to 31.8% from 32.3% in the previous year as we continue to invest in both Sophia and Workforce Edge. Average paid subscribers for Sophia grew by 24% in the first quarter, and Sophia revenue increased by 36%. Enrollments from Workforce Edge increased by 230% year-over-year to 986 enrollments. Our first quarter results in Australia and New Zealand were negatively affected by the previously announced changes to the academic calendar at Torrens University, which caused their total first term enrollment to be split between the first and second quarters. This adjustment is the key reason behind the 8% decrease in revenue on a constant currency basis. However, we remain optimistic about the improving operating environment in Australia and look forward to the second half of the year, marking the first fully normalized period for international student immigration in Australia since the pandemic began in 2020. Lastly, I invite all of our stakeholders to join us for our Investor Day on November 7 at the Palace Hotel in New York City. We will provide additional details as the date approaches. Now, Kevin, we are ready to take questions.

First question comes from Jeff Silber with BMO. Your line is open.

I believe on last quarter's call, you gave some guidance for 2023 in terms of revenues and enrollments going up mid-single digits and operating expenses going up low single digits. Can we revisit that? Is that something you're still looking for?

Well, based on our current trends continuing, Jeff, we would expect our revenue to be up around mid-single digits. We said that we would expect expenses in that scenario to be up no more than 3%. If by chance our revenue increases more than mid-single digits, we'd have a slight uptick in expenses due to the variable nature of instructional results or operational expenses as a result of having more students.

All right. That makes sense. If I could switch to the different segments. Can we get a little bit of color on U.S. higher education enrollment trends by either program type or degree type?

Well, FlexPath at Capella continues to be a major source of growth. It continues to be very popular, and continues to increase as a mix of overall U.S. higher education enrollments. At Strayer, I'd say the growth is across the board, predominantly at the undergraduate level. But as I said in my prepared remarks, at both Strayer and Capella, the bulk of the strength is coming from our employer affiliated enrollments, both new and total growth.

And in terms of any specific program type to call out?

Well, within the corporate channel, healthcare remains the strongest channel for Capella. And at Strayer, it would be our business program, which remains our largest program, but the strength is relatively even and across the board.

All right. Great. If I could just sneak in one more. It looks like enrollment trends at Australia and New Zealand worsened a little bit from what we've seen. Is there anything going on specifically then if we can get any guidance for the rest of the year, that would be great.

No. Nothing beyond what we said that would happen as a result of splitting their first term enrollment between the first and second quarter, it was down modestly in the first quarter. I think the way that we'll look at it is when we get through the second quarter, we'll be able to normalize that and we'll have a better sense for what their enrollment growth looks like through that part of the year.

Karl, the actual shift pushes that by way the way to the fourth quarter, right? The additional students in the revenue will hit in the fourth quarter versus the second.

Yes. The bulk of the revenue that we'll get from the continuation of those students will hit in the back half of the year and specifically, Jeff, in the fourth quarter.

Okay. That's really helpful. I'll jump back in the queue. Thanks so much.

One moment before our next question. Our next question comes from Alex Paris with Barrington Research. Your line is open.

First question on the ANZ segment. In the last call, you mentioned that the Australian government has decided that all students on active Visas must be in the country and attending classes full-time by June, which you see as a potential catalyst for the second half, moving towards truly normalized results. Have there been any changes regarding the Australian government or your expectations?

No, no change. That rescinding of that Visa waiver is due to take effect on June 1, and we continue to see that as a positive catalyst for ANZ enrollment moving forward.

Got you. And then just following on Jeff's question, enrollment was down 6.3% in ANZ. Revenues were down about 14% or 8% on constant currency. Those are both a little bit below my unguided expectations. Were they in line with your expectations?

Yes. I would say they were in line, Alex. The thing you have to remember is the prior year comparable didn't have a split first term. So it's kind of noisy from that standpoint. I would wait until we get our second quarter enrollment, look at it holistically through the first half of the year to get a better sense of their enrollment trajectory.

Thank you. I have a couple of clarifications. The restructuring costs for the quarter were $5.6 million, which I hadn't anticipated in my model. However, since your operating expenses increased as you indicated, it seems you had already accounted for that. Is this where you expected the costs to be? It's a bit higher than I anticipated. I believe there were lease impairment charges related to the restructuring. What are your expectations moving forward? Are we finished with this, or should we expect more?

Alex, this is Dan. That was exactly what we had expected. And we don't necessarily plan it out quarter by quarter. We're looking opportunistically where we can consolidate real estate. And when we see that opportunity, we take it, and that's what you're seeing in those restructuring charges.

Got you. So do you see other opportunities for consolidation over the balance of the year and into next year?

Nothing like what we just took advantage of, but there could be some smaller opportunities later this year.

Okay. Good enough. And then lastly, just in going through your 10-K recently that was filed on February 27, you had said with regard to 90-10 that the 22 calculation hadn't been finalized. Have they been finalized at this point? And what are they?

The 22 is not final yet. We report that information to the department by the end of June. So we don't have anything to report to you now. But other than that, we expect to be compliant.

Got you. Obviously, in 2021, Strayer was about 83%. Capella was 67%. Do you have much exposure at either Strayer or Capella to VA and TA?

We have a little bit more exposure at Strayer on VA than we do at Capella. But as Dan just noted, we don't expect to have any compliance-related issues on 90-10. And given the strength of our corporate channel moving forward, we would expect that our 90-10 would get better over time.

Got you. Very helpful. I appreciate the color. That's all for me.

Thanks, Alex.

All right. I'm not showing any further questions at this time. I'd like to turn the call back to Karl for any closing remarks.

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

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.