Strategic Education, Inc. Q3 FY2025 Earnings Call

Welcome to Strategic Education's Third Quarter 2025 Results Conference Call. I will now turn the call over to Terese Wilke, Senior 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 third quarter 2025 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. We are pleased with our third quarter results, especially the sustained strength in our Education Technology and Services segment, supported by strong growth at Sophia and Workforce Edge. On an adjusted constant currency basis, SEI's revenue rose 5% from the previous year. We continue to advance our efforts to leverage technology, resulting in operating expense growth of less than 1%, operating income growth of 39%, and a 400 basis point margin expansion. We did incur restructuring costs in the third quarter related to our ongoing productivity initiatives, which accounted for most of the difference between our GAAP and our adjusted results in the third quarter. Adjusted earnings were $1.64 compared to $1.16 from the prior year, an increase of 41%. Turning now to our segments. Our Education Technology Services division generated continued strong growth during the quarter with revenue and operating income increasing by 46% and 48% from the prior year to $38 million and $16 million, respectively. And notwithstanding our continued strong investment in ETS, which included a 44% increase in expenses, ETS' operating margin increased slightly on a year-over-year basis to 41.7%. Sophia Learning, our direct-to-consumer portal that offers high-quality college-level courses and has increasingly become a key component of many of our strategic corporate partnerships, grew both average and total subscribers and revenue by 42%, driven by strong growth in both consumer and employer-affiliated subscribers. ETS' share of SEI's operating income continues to grow and now represents one-third of consolidated operating income, reflecting progress with our employer-focused strategy. U.S. Higher Education total enrollment decreased slightly from the prior year, but was more than offset by higher revenue per student driven by fewer drops, less discounting, and students taking more courses on average. This resulted in revenue growth of 3% from the prior year. Employer-affiliated enrollment once again remained strong, increasing approximately 8% from the prior year and now represents 33% of all U.S. Higher Education enrollment, an increase of 290 basis points from the prior year. In addition to the strength in our employer affiliate enrollment, U.S. Higher Education's health care portfolio generated strong total enrollment growth of 7% from the prior year. Health care is a critical part of our portfolio, representing half of all U.S. Higher Education enrollments and almost 40% of enrollment from employer partners. Recently, we commissioned a survey in partnership with The Harris Poll, which highlights the ongoing burnout facing the health care workforce and the projected shortfall of clinical health care workers. This research emphasizes the importance of investing in employees' growth and making continuous education a key part of strategies to retain talent. Full survey results can be found on our website at strategiceducation.com. U.S. Higher Education operating expenses decreased by $6 million from the prior year or a reduction of 3%. As a result, U.S. Higher Education operating income almost doubled from the prior year to $23 million, and its operating margin increased 520 basis points. Turning now to our Australia and New Zealand segment. ANZ's third quarter total enrollment decreased 2% from the prior year, driven by the continued regulatory restrictions on international student enrollment. Using constant currency, revenue decreased 2% to $70 million and operating income decreased from $15 million in the prior year to $13 million this year. Notwithstanding the decline in total international enrollment, we are encouraged by the continued progress with domestic enrollment growth and recent guidance from the Australian government that our international caps will increase 3% in 2026. Finally, regarding capital allocation, in addition to our regular quarterly dividend, we repurchased approximately 429,000 shares during the quarter for a total of $34 million. As of the end of the third quarter, we have repurchased over 1.1 million shares for $94 million, leaving us with $134 million remaining on our share repurchase authorization through the end of this year. And finally, as always, I'd like to take this opportunity to thank all of my colleagues here at SEI for their ongoing commitment and support to our students and our employer partners. And with that, Shue, we'd be happy to take questions.

And our first question will come from Jasper Bibb with Truist Securities.

I wanted to ask two on U.S. to start. I guess, first, what drove the healthy revenue per student gain in the quarter? And what should we expect on a revenue per student basis over the next few quarters? And then second, a lot better margin than we anticipated in the U.S., too. Just hoping to get a bit more detail on the expense reductions there.

Jasper, it's Dan. On the revenue per student, Karl mentioned lower drops and higher seats per student. It was also some lower discounts, and I think we'll see some benefit from that through the balance of the year. So there'll be some upside on revenue per student at U.S. Higher Ed.

Regarding margins, we are currently implementing an aggressive productivity initiative aimed at fundamentally overhauling our entire expense structure. Through advancements in technology and artificial intelligence, we have identified six areas that impact all parts of the organization. We expect to achieve savings of over $100 million in operating expenses by the end of 2027.

Okay. No, that's great. Could you maybe frame where you're at on that journey to $100 million in annual operating expenses? And is that only coming out of the U.S. business or that's company-wide?

It's company-wide. In my prepared remarks, I referenced the restructuring that we completed at the end of the second quarter, beginning of the third quarter. On a run rate basis, that equated to probably $30 million of expense reduction. So I'd say there's another $70 million or so over the next 2.5 years. Some of that, we're going to reinvest as growth capital to continue to support the various businesses and some of it will show up as increased margin.

Okay. That's great. For U.S., could you maybe frame the relative growth rates for Strayer and Capella at this point? And can you talk about how you're managing each of those businesses in the context of trying to get back to mid-single-digit enrollment growth at the segment level? It sounds like you might already be at mid-single digit for Capella and Strayer is declining. Is that accurate?

Capella has performed better. The challenges at Strayer mainly come from a decrease in non-affiliated students, similar to previous cycles, but they are also due to more effective marketing strategies at Capella. We are not strictly focused on maintaining equal spending at both institutions. We advise the U.S. Higher Education management team to prioritize whatever yields the highest overall growth for the division. Recently, that has meant more growth for Capella. We've aimed to accelerate Capella's growth rate compared to Strayer, which is reflected in our current performance.

And then I wanted to ask about Australia/New Zealand, encouraging news on the international student caps. Are you still expecting that business to return to total enrollment growth in 2026?

Total enrollment growth, I would like for it to return in 2026. Definitely new student growth in 2026 when we anniversary the caps. It generally takes 4 to 6 quarters of new student growth to overcome any declines you've had over the preceding 4 to 6 quarters. So getting to total enrollment growth by the end of '26 would be a little bit of a stretch goal, but I would definitely expect new student growth beginning in the first part of '26.

Okay. Got it. Maybe I misremembered the comment from the last call. Last one for me. As you see it today, do you think the '26 for the company level would align with the notional framework you outlined a few years ago at the Investor Day?

Yes. We are very anchored on our notional model. Nothing that I see now at either the revenue line or the expense line, which we obviously control, leads me to believe that we won't be able to hit the targets that we laid out at our Investor Day.

Our next question will come from Jeff Silber with BMO Capital Markets.

I wanted to start with Australia/New Zealand. I know many folks on the line don't necessarily follow what's going on on a daily basis. Can you just remind us exactly what has happened, what the changes were compared to what we thought might have happened a few months ago?

The change since we acquired it is that the Australian government has implemented strict enrollment limits for international students. This has led to a reduction of about 30% from the numbers we had without these caps. Historically, international students have made up around half of our new student cohort at Torrens. Additionally, a further unanticipated change at the beginning of this year involved the government imposing stricter controls and restrictions on existing international students with visas who want to transfer to another institution. This transfer process was a key driver of growth for us, as it is common practice for universities in Australia to charge a higher tuition fee for international students. At Torrens, we have equal tuition rates for international and domestic students, creating a strong incentive for students to enroll with us and save money. Now, we need to essentially evaluate any transfer student as we would for someone applying from overseas, examining their financial situation in Australia and their commitment to return to their home country after completing their studies. This represents a significant challenge, resulting in many fewer students transferring. Regardless of whether they are new offshore students or international transfer students, we expect to reach the anniversary of these caps by mid-2026. We have seen robust growth in new domestic student enrollments throughout 2025, so I anticipate that we will see an increase in new students in 2026, which should lead to overall enrollment growth by the end of 2026. By the time we completely adjust to these restrictions heading into 2027, we expect our business to be on an upward trajectory.

Okay, that's really helpful. I appreciate it. Why don't I move back to U.S. Higher Education, and I appreciate you highlighting your health care exposure. Can you remind us of the exposure in pre-licensure and post-licensure programs?

We are not in the pre-licensure field in nursing. We are in the post-licensure with the RN to BSN program, and that's a FlexPath program, which is the largest program at Capella. And we've seen, I'd say, a little softness in that program. They are in the BSN throughout 2025. But we further believe that we're advantaged because that's also our largest program from an employer-affiliated enrollment standpoint. And as I've said in my prepared remarks, that part of our business remains strong.

Okay. Great. And just one more. I know also there's some concern on the government shutdown, specifically those companies that might have exposure to military and veteran students. Can you talk about any potential impact you've seen and what you think the impact might be going forward?

Yes. To my knowledge, we haven't seen any impact. And when I think about our largest clients like CVS Health or Best Buy or Dollar General, they're not really impacted by the government shutdown per se. So as of yet, Jeff, we haven't seen any adverse impact.

Jeff, this is Dan. We have very few direct military students. So the exposure there is really insignificant.

I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Karl McDonnell for any closing remarks.

Thank you, everyone, and we look forward to joining you in February to discuss our fourth quarter and full year results.

This concludes today's program. Thank you all for participating. You may now disconnect.