Strategic Education, Inc. Q4 FY2025 Earnings Call

Welcome to the Strategic Education Fourth Quarter 2025 Results Conference Call. I will now turn the call over to Terese Wilke, Senior 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 fourth quarter 2025 results. With us today are 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 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 Karl. Karl, please go ahead.

Thank you, Terese, and good afternoon, everyone. We are very pleased with our fourth quarter and 2025 full year results that we released earlier today. At the outset, and as is normally the case, let me say that the results I referenced today are adjusted and reflect a constant currency comparison. For the fourth quarter, our revenue increased 4% from the prior year, and our operating expenses declined 1%, resulting in operating income growth of 35% and a 390 basis point expansion in our operating margin to 16.9%. Earnings per share was $1.75, which was an increase of 38%. For the full year 2025, our revenue increased 4%, and our operating income increased 25%, generating 260 basis points of operating margin expansion to 15.5%. Our adjusted earnings per share was $6.21, an increase of 28% from the prior year. Our ongoing AI-driven productivity improvements across the portfolio resulted in approximately $30 million of expense reductions, which was used to both fund new growth opportunities and expand our operating margin. We remain on track to generate at least an additional $70 million of expense savings through the end of 2027. As was the case this year, those savings will be used both to fund additional growth and continue to expand our operating margin. 2025 was another record year for our Education Technology Services segment, which grew revenue by more than 40% to nearly $150 million. Notwithstanding our continued strong investment in ETS, which included a 44% increase in expenses, ETS' operating income increased 38% to $59 million, generating an operating margin of 40%. ETS' share of SEI's operating income grew to roughly one-third of consolidated operating income in 2025, reflecting progress with our higher-margin technology and services business. Sophia Learning grew average total subscribers by 47% and revenue by 41% in the fourth quarter and by 42% and 40%, respectively, for the full year. These results were driven by strong growth in both consumer and employer-affiliated subscribers. Workforce Edge also had a record year, with strong revenue growth driven by employer-affiliated enrollment, platform fees, and new employer partnerships. Employer-affiliated enrollment grew 6% for the quarter and ended the year at an all-time high of 33.5% of total U.S. higher education enrollment. The employer-affiliated mix of new students in U.S. Higher Education was 40%. Another key part of our overall employer strategy is to grow our healthcare portfolio, which remains quite strong. It now represents half of all U.S. Higher Education enrollment and 37% of total employer-affiliated enrollment. Workforce Edge ended 2025 with 80 corporate agreements collectively employing more than 3.9 million employees. Our network of corporate partners remains one of SEI's major competitive strengths. Turning now to U.S. Higher Education. Revenue increased 2% for the fourth quarter and 1% for the full year due to a 6% increase in revenue per student, driven by fewer student drops, lower discounts, and scholarships. In 2025, the bulk of our AI-driven productivity improvements were focused in U.S. Higher Education, which enabled a 3% decline in operating expenses for the fourth quarter and a 2% decline for the full year. This resulted in a 58% increase in operating income in the fourth quarter and a 32% increase for the full year. U.S. Higher Education's operating margin increased 470 and 270 basis points, respectively, for the fourth quarter and full year. U.S. Higher Education also recorded record average student retention of 88% for the full year. Our Australia/New Zealand segment's total enrollment decreased by 2% for both the fourth quarter and the full year, driven by continued regulatory constraints on international enrollment, which was partially offset by domestic new student growth. ANZ's revenue also decreased by 2% in the fourth quarter and was flat on a year-over-year basis. As was the case in U.S. Higher Education, we also had significant productivity gains in Australia, with operating expenses decreasing 6% for the quarter and were flat for the full year. This resulted in a 16% increase in fourth quarter operating income at ANZ and an operating margin of 19%, a 290 basis point improvement. Next, regarding capital allocation in 2025. We generated $247 million in pretax cash from operations. We paid $49 million in taxes and invested $44 million in capital expenditures, leaving us with $154 million of distributable free cash flow. We used this cash and our existing cash balance to return approximately $58 million to our owners through our $2.40 common dividend and just under $140 million in share repurchases, including $45 million in the fourth quarter for a total of 1.7 million shares repurchased in 2025, or approximately 7% of our outstanding shares. As of the end of 2025, we still have more than $200 million remaining on our share repurchase authorization. We ended the year with $153 million of cash and marketable securities and no debt. Our plans for 2026 reflect continued performance in line with the notional model that we outlined in our 2023 Investor Day. 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, Kevin, we'd be happy to take questions.

Our first question comes from Jeff Silber with BMO Capital Markets.

I want to start by discussing the enrollment trends in U.S. Higher Education. While I understand you don't provide specific guidance, it appears that the declines are worsening. They seem particularly pronounced in your non-employer affiliated area. First, I was hoping you could provide more insight on this. Second, what steps can you take to turn U.S. Higher Education enrollment around and achieve positive growth again?

Sure. Jeff, so you're right. The declines that we're seeing in U.S. Higher Education enrollments are exclusively, I would say, in our unaffiliated employer channel. As I mentioned in my prepared remarks, our employer-affiliated enrollment remains strong. As we've said before, our new student enrollment can be somewhat cyclical and move around quarter-to-quarter. In terms of what we can do, we just stay focused on our marketing strategy and our brand strategy across both Strayer and Capella. I am confident over the long term that enrollment will normalize. There's nothing that I see that would take me off what I said a moment ago that we expect our performance this year to be in line with our notional plan.

Okay. Great. Shifting gears a bit, the margin expansion was very impressive. And you mentioned a few times AI-driven operational improvements. Can we get a couple of examples of what you've been doing there?

Sure. We have an overall productivity effort that has three subcategories. The first would just be internal productivity. This involves figuring out ways to automate processes and expand people's reach with technology so that any given enrollment counselor or student adviser can have a greater scope. That would be one of the three. The second is anything that we can do to enhance revenue. The third would be student outcomes and assessment. All three are quite robust. Dan here, our CFO, leads the productivity efforts, and he can give you a couple of examples.

Yes. Jeff, two more tangible examples. One is on the back office front, where we've developed a tool that automates the vast majority of transcript intake and evaluation, which used to be a very manual effort. This is something that we've rolled out almost across the entire platform. By the end of this year, I think it will be rolled out everywhere. Another example is really focused more on the front-end admissions process, starting with how we evaluate and distribute inquiries and how we ensure that our enrollment counselors and admissions officers know how to prioritize those inquiries. Those are two areas. There's quite a few more that we're working on, and by the end of the year, we'll have them rolled out. We'll provide more information as we go along each quarter.

Our next question comes from Alex Paris with Barrington Research.

Just a follow up on the previous question regarding U.S. Higher Education. The total enrollment was down for the year and probably the biggest decline was in the fourth quarter on a year-over-year basis. I understand that it's unaffiliated enrollment, and that is not a focus area for the company. You're focused on employer affiliated. But with that said - and I also know that you run marketing as a portfolio. You invest where the return is the greatest. That might be Capella over Strayer, and it's certainly employer-affiliated over unaffiliated. But we've known of this problem pretty much all year long. Have you done anything to stem that - anything deliberate to stem the flow on the unaffiliated side? And if not, are you planning to? And what can you do there?

Sure, Alex. To answer your question, have we done anything deliberate? Yes, of course. We have our operating plans, which involve our annual marketing and quarterly marketing spend. You're correct that we do manage it as a portfolio, and we task the U.S. Higher Education management team with solving for what we think will be the strongest overall growth. There really isn't a change to our strategy, which is we're leaning heavily into Workforce Edge, ETS, and employer-affiliated enrollment. I don't see anything that gives me alarm about any sharper declines in U.S. Higher Education enrollment, and I'm confident that in time, it will normalize to mid-single-digit growth. Between now and then, we'll just be patient and continue to execute our plans.

Okay. Fair enough. I appreciate that. Regarding the notional model in lieu of formal guidance, that calls for a revenue CAGR of 4% to 6% and AOI margins, adjusted operating income margins, increasing 200 basis points per year. Did you say that that is a good proxy for 2026?

Yes.

Okay. The makeup of that could be a little different, right? When you put these targets out in 2023, you were looking for enrollment growth in U.S. Higher Education of 4% to 6% and ANZ enrollment growth of 6% to 8%. What underpins that revenue growth in 2026? I'm assuming heavily towards ETS.

Clearly, we expect ETS to continue to post strong growth. I would also say, though, that in Australia, the level of domestic new student growth we've seen has been pretty encouraging, such that I think there is a very good chance Australia will turn to total enrollment growth this year. I believe on our last quarterly call, I indicated that it probably wouldn't be until the first part of 2027. I think it will probably be by the end of this year. So we expect good contributions from Australia. I am confident, as I mentioned earlier, that U.S. Higher Education is going to normalize, and while I can't predict their contribution to revenue this year, I am confident in the notional model that we laid out in 2023.

Got you. Lastly, you mentioned that you expect to return to total enrollment growth in ANZ before the end of the year, which implies new student growth now, right, because there's a lag between term-up and new student enrollment growth. What will new student enrollment growth be driven by? Last time we talked about it, we discussed an increase in the soft caps. Can you also provide an update on international students' ability to transfer from one domestic institution to another once in the country?

Yes. Regarding international enrollment, we did receive an approximately 3% increase from the Australian government for international enrollment. We expect to fulfill that, and that will contribute to growth. There has been one change. This is not new; we have known this was coming, where there will be a ban on paying agent fees for any onshore transfers. Transfers can still happen, and we expect them to continue, though the volume may change slightly. I believe the bulk of the new student growth will be from domestic, which has been positive for us over several quarters, and we expect that trend to continue through 2026.

Our next question comes from Jasper Bibb with Truist Securities.

Maybe just following up on some earlier questions. I'd imagine a lot of that unaffiliated non-healthcare exposure in the U.S. business is at Strayer. Could you talk about what trends at Strayer have been like and how you intend to manage the cost structure there as part of the cost-cutting you announced? Would you consider downsizing the campus count there as your leases come up?

Over the last two years, just as more of our marketing dollars have been focused on healthcare and Capella, which both have been performing well, we've steadily been taking advantage of lease expirations to reduce the campus count. We may continue to do that, although we still see significant value in having campuses in local communities. A fair amount of expenses have already been reduced from that expense base. Moving forward, and not just with Strayer but across the rest of our portfolio, any expense reductions will come from our automation efforts. I am confident that through 2026 and 2027, those efforts will generate significant productivity for us.

Circling back to the notional model in '26, in the context of the cost-cutting, can you frame how much of that you're going to let drop to the bottom line versus reinvesting in growth and marketing?

Jeff, this is Dan. Our notional model, which contemplates a couple of hundred basis points of expansion per year on a five-year basis, assumes some amount of productivity benefit. As Karl mentioned earlier, we reinvest some of the savings this year, and it contributed to some margin outperformance. From year to year, it just depends on how much opportunity we see to reinvest first and then support the margin, which is in the notional model. In some cases, we may see some outperformance.

I am not showing any further questions at this time. I'd like to turn the call back over to Karl for any further remarks.

Thank you, everybody, and we look forward to discussing our first quarter results of 2026 next quarter.

Thank you, ladies and gentlemen. This does conclude today's presentation. You may now disconnect, and have a wonderful day.