Welcome to Strategic Education's Fourth Quarter, 2023 Results Conference Call. After the speaker presentation, there will be a question and answer session. I will now turn the call over to Terese Wilke, Director of Investor Relations for Strategic Education. Mrs. Wilke, please go ahead.

Thank you. Hello, everyone. And welcome to Strategic Education's conference call, in which we will discuss fourth quarter 2023 results. With us today are Robert Silberman, Chairman, Karl McDonald, 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 to be filed, 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. Before I turn the call over to Karl to report our fourth quarter and full year results, I wanted to make just a couple of high-level comments on our 2023 capital allocation. Strategic Education started the year with $236 million of cash and marketable securities and roughly $100 million of outstanding debt drawn on our bank revolver. During 2023, we generated $159 million in pretax cash from operations. We also sold one of our campus properties during the year for roughly $6 million. Out of that $165 million in generated cash, we paid $42 million in taxes and we invested $37 million in various capital expenditures and growth expenditures. That left us with $86 million in what we refer to as owners' distributable cash, from which we returned $74 million to our owners, comprised of our $2.40 per share annual common dividend as well as the repurchase of roughly $15 million of our common stock at an average price of around $77 per share. Finally, during the year we paid down $40 million of our outstanding debt. That left Strategic Education at year end 2023 with $208 million of cash and marketable securities, $60 million of debt, and $24 million shares outstanding. We are confident as we enter 2024 that our balance sheet is well-positioned to support all of our academic institutions, to fund any upcoming opportunities, as well as to continue to return capital to our shareholders. And with that, Karl, can you walk them through the operating and financial results.

Yes. Thank you, Rob, and good morning, everyone. Strategic Education's fourth quarter and full year 2023 financial results that we reported this morning reflect continued momentum across all of our segments. I'd like to start by pointing out that all of my references to our financial results are to our adjusted results and assume constant currency for foreign exchange purposes. For the fourth quarter, our revenue grew 12.5% to $304 million. Our operating expenses grew just 1.6%, which was in line with our expectations, and our operating income more than doubled to $57 million. Our operating margin increased 870 basis points. During the quarter, we generated an incremental $30 million of operating income from $34 million of incremental revenue. Our earnings per share also more than doubled from the prior year to $1.70 per share. For the full year, our revenue grew 7.4%, our operating expenses grew 4%, which was slightly higher than our initial plan, but was due to much higher enrollment than that plan. Our operating income grew 43% for the full year, and our operating margin increased 280 basis points. Turning now to our segments. U.S. Higher Education had an exceptional year. Total enrollment in U.S. Higher Education for the fourth quarter and full year grew 11% and 7% respectively. Total employer-affiliated enrollment was even stronger. Fourth quarter employer-affiliated enrollment grew 24% from the prior year and 19% for the full year, reflecting continued strength in our corporate partnerships. During the fourth quarter, the percentage of total U.S. Higher Education enrollment coming from our corporate partnerships increased 300 basis points to 28%. For the full year, 70% of our incremental U.S. Higher Education total enrollment came from our corporate partnerships. Student retention at U.S. Higher Education remained stable at approximately 87.4%. U.S. Higher Education revenue grew 9% for the fourth quarter and 6% for the full year, and operating income grew 149% for the fourth quarter and 55% for the full year. Our Education Technology and Services segment also had a tremendous year as both Sophia and Workforce Edge continued to gain market share. ETS revenue for the fourth quarter and full year grew 31% and 26%, respectively. Operating income at ETS increased 119% for the fourth quarter and 51% for the full year. Sophia Learning, our direct-to-consumer portal of college-level classes, grew its revenue for the fourth quarter 42% and generated a 50% operating margin, which is up from 22% in the prior year. Average total paid subscribers grew 44% to more than 35,000 paid subscribers. Workforce Edge now has 65 corporate partners, who collectively employ just under 1.5 million employees. Workforce Edge enrollments into either Strayer or Capella University grew 112% to just under 1,500 students. Our Australia/New Zealand segment grew revenue 20% for the fourth quarter and 6% for the full year using constant currency. All of this growth was the result of significantly higher revenue per student as enrollment was down slightly for the quarter and the full year. As we said throughout last year, we expected our revenue per student to normalize from COVID-era quarters as course load increased in response to a resumption of the Australian requirement for international students to take their courses on campus. This was a big driver of our increase in revenue per student, which grew 23% in the fourth quarter and 10% for the full year. Adjusted operating income increased 53% and adjusted operating margin increased 510 basis points. In closing, we are very pleased with the results for 2023, and we look forward to a successful 2024. And as always, I'd like to thank all of my colleagues within Strategic Education for your ongoing commitment to our students and learners. And with that, Latif, we'd be happy to take questions.

Thank you. Our first question comes from the line of Jeff Silber of BMO. Your question, please, Jeff.

Thank you so much. Wanted to first focus on the operating margin expansion. It was obviously very strong for not only the fourth quarter, but for the year, specifically in U.S. Higher Education, how sustainable are these gains and what should we be looking for going forward?

Well, Jeff, if you go back to the very beginning of the year, just the timing of our investments in 2023 was weighted to the first part of the year. So we expected very small expense growth in the second half of the year. In terms of kind of long term, notionally, as we've said before, we expect at the consolidated level for our margins to be in the low to mid 20s. That's going to ebb and flow based on particular investments that we make in any given quarter, any given year, but that's where we'd expect to settle out.

Okay, great. And then focusing just on the strong enrollment growth across all your properties, are there any specific programs to call out that might have done better than others?

Actually, it's pretty strong across the board, Jeff. I mean, FlexPath continues to do very well at Capella. Healthcare is very strong. As I said in my prepared remarks, corporate is exceptionally strong, and that's true at both Strayer and Capella. So it's really a very broad-based strength right now.

Okay, great. And then at your Investor Day in November, I think you put out a preliminary 2024 outlook. And I'm just wondering if you can address that. Are we still comfortable with that? Any changes, et cetera?

Hey, Jeff, this is Dan. Yes, that model we think is still on track.

Okay, fantastic. All right, thanks so much.

Thanks, Jeff.

Thank you. Our next question comes from the line of Jasper Bibb of Truist. Please go ahead, Jasper.

Hey, good morning. Impressive results here. Maybe just following up on the preliminary '24 outlook. Like, I think you gave a bit of detail, like a preliminary outlook at the Investor Day about the composition of growth between the segments in '24. So would you say there's been any change in the mix of the drivers there? Like you'd seem to be running a bit ahead of the U.S. Higher Ed enrollment target, while ANG might need to accelerate a little bit to get to the 3% to 4% enrollment growth you talked about? Thanks.

Hey, Jasper, it's Dan again. I'd say at this point the performance across the board is likely. We don't see anything changing from what we modeled for Investor Day at this point in the year.

Hey, Jasper, this is Rob. The one thing I want to clarify is what we put out at Investor Day is a model of how our business operates. We're not making a prediction on where enrollment will be. It is what it is. We want our institutions to run at the highest efficiency and we want to attract as many qualified students as we can. But the way the model works is it's highly operationally levered. If we get more students, there'll be more revenue and more margin expansion. And if there's fewer students, there'll be less. But we don't predict quarter-to-quarter where that's going to be. It's strong right now and we hope it remains so, but it's not a predictive model.

Thanks. I understand that. Focusing on ANZ, the Australian government announced in December some stricter student visa qualification rules, including higher scores on English exams. Do you think this will impact your enrollments at Torrens, and could you provide an update on the current mix of domestic and international enrollments there? Thank you.

Sure. The mix is roughly 50-50 between domestic and international students. And our team in Australia takes a measured approach to international recruitment, meaning we don't get overly aggressive in trying to recruit students who don't meet the requirements for an Australian visa. And as such, we wouldn't expect those changes to adversely impact us.

Got it. Last question for me. You talked about capital deployment in '23. Just curious if you could frame some expectations for this coming year from a cash conversion standpoint and then would you be thinking about drawing the balance on the revolver down to zero? And how would kind of opportunistic share repurchases fit into the picture? Thanks.

Yes, Jasper, the cash conversion of the operating model I don't think will change. We tend to have a fairly high cash conversion of our net income. We do want to, as a priority, pay down the entire amount of the revolver draw and most importantly return our financial composite score as quickly as possible to the full 3.0. We do intend to continue to pay our annual common dividend. The payout ratio has been rather high the last couple of years while the earnings were depressed. I think that payout ratio will start to get back to the roughly one-third that we've tried to support in the past. And then we always think of opportunistic share repurchases, it's a price-based concept. We measure all of our uses of cash against basically all various opportunities. And share repurchases are always something that's in the mix and it's a question of where is our stock trading relative to what we believe the intrinsic value is. And to do share repurchases, we only want to do that at a significant discount to intrinsic value and so we'll continue to look at that through the year.

Hey Jasper, one thing to add on conversion, I think I've told you and the rest of the analysts that we target cash conversion or distributable cash at the same level as adjusted net income. We were a little light on that measure in '23, because of some unfavorable timing at Australia/New Zealand. Moving forward, that's the planning metric now moving forward. So I think it's a good one to plug into your assumptions.

Understood. Thanks for taking the questions.

Thank you. Our next question comes from the line of Heather Balsky of BofA. Your question please, Heather.

Hi. Thank you. This is Heather Balsky. I guess first off, when you think about the outperformance you've seen in enrollment in the quarter and what do you attribute it to, how much do you think is the recovery? How much do you think is sort of operationally driven? And I know you don't guide the quarters, but given sort of where you're exiting the year, how does that make you think about the first half of next year and how you can do an enrollment? Thanks.

Well Heather, clearly the primary driver of the outperformance in U.S. Higher Education is our network of a thousand-plus corporate partnerships. If you just look at the growth rate, total enrollment growth rate of corporate affiliated students versus non-affiliated, it's been way ahead of our average total enrollment in U.S. Higher Education throughout the year. It actually accelerated a little bit in the back half of the year. So it's that, it's the fact that Workforce Edge enrollments doubled on a year-over-year basis and that's continuing to mature. So that's the primary driver. And then in addition to that, as we've said throughout the year, it's just been a very strong demand environment for us. So we continue to see robust demand. So it's a combination of factors, but I'd say clearly the primary factor is our corporate partnerships.

Is there anything we should consider in the environment that could impact your ability to maintain this momentum at least into the first half of next year? Are there any macro factors we should be aware of or anything we might be overlooking?

Well, obviously I can't speculate into the future, but what I can say is, we've not seen anything at a macro level or within our corporate partnerships that's changed materially.

And Heather, the macro statistic that we tend to look at that tends to most accurately predict future demand is labor force participation rates, which really is a proxy for employment confidence, which for working adults tends to be a prerequisite to be able to go back to school. And that remains fairly strong in the U.S. right now. But as Karl said, we put the programs together, we try and run the universities as efficiently as possible with the highest academic quality, and then we're sort of beneficiaries of the strength of demand, and we'll just continue to be there for that.

Helpful. And then when you think about Australia enrollment, can you just realize that it's tough to control? I don't know how much visibility there is in terms of how they're managing visas, but any signs that things are picking up? Any changes in the quarter that were kind of green shoots around that?

Yes, we saw a little uptick in the back end of the fourth quarter in demand, both domestic and international. We remain very confident in the quality of Torrens University, the Media Design School in New Zealand. We think it's a terrific set of assets. Actually, we intend to make some substantial investments in that business in 2024 to support their growth, and I'm confident that over time the growth will be there.

That's helpful. And actually, just final question, since you mentioned those investments in terms of the cadence of operating expenses during the year, anything that we should keep in mind? You mentioned how '23 was first half weighted. Is it similar cadence this year? Anything different?

I'd say ironically, this year might be the opposite of last year. When we look at the calendarization of a lot of our investments, we think they're going to happen in the second half of the year, with the exception of Australia. As I just said, we intend to make those investments throughout the year, but we're still benefiting in the first part of this year from the investments we made in '23. So when we think about exiting '24, heading into '25, we have some investments we know we're going to make that are going to show up in the third and fourth quarter.

Okay, that's helpful. Thank you very much.

Thank you, Heather.

Thank you. Our next question comes from the line of Alex Paris of Barrington Research. Your line is open, Alex.

Thank you. And thanks for taking my questions. I just got a couple of cleanup questions on the segments. Starting first with U.S. Higher Education. Total enrollment up 10.5%. I think you give this in the 10-K, but can you discuss total enrollment at Strayer and at Capella?

No, Alex, we're just reporting U.S. Higher Ed.

Okay. Is that usually given in the 10-K. I seem to remember.

There is some detail in the 10-K which we file later today. I don't have it in front of me, but there'll be some institution level data in there.

Okay, great. And then sticking to U.S. Higher Education. New student enrollment was up all four quarters for each Strayer and Capella. I think that's where we stood at the end of the third quarter?

Yes, we had very strong new student growth across U.S. Higher Education all year.

Okay. And then moving to ANZ, you had just responded to a question by saying domestic enrollment and international enrollment is roughly 50-50. Last quarter, you did make a comment about new student enrollment in domestic, which was up 20% year-over-year in the third quarter, while international new students declined slightly. I was wondering if we can get the same sort of color on the fourth quarter.

The fourth quarter was similar. Domestic new students were up, and international was down slightly. It definitely bounces around, Alex, based on the timing of visa approvals. But overall, between the two, we're nicely hedged. We have two sources of students there, and we've got a very long-term view as Karl said, the attractiveness of that property. So, we see that on an overall basis, having a higher rate of growth in the future.

Excellent. Well, thanks for answering my question, guys. Congrats on the quarter.

Thank you, Alex.

Thanks, Alex.

Thank you. I would now like to turn the conference back to Karl McDonnell for closing remarks. Sir.

Thank you, everyone, for joining us this morning, and we look forward to talking to you again next quarter.

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