Earnings Call Transcript - STRA Q4 2021

Operator, Operator

Welcome to the Strategic Education's Fourth Quarter 2021 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.

Terese Wilke, Director of Investor Relations

Thank you. Good morning, everyone, and welcome to Strategic Education's conference call in which we will discuss fourth quarter 2021 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 may be found in Strategic Education's 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.

Karl McDonnell, President and CEO

Thank you, Terese, and good morning, everyone. This morning, we released our fourth quarter and full year 2021 results. And I'm not planning to go through those results in detail since everything's in the release. Instead, I'd like to provide our owners with key updates on all of our segments beginning with our largest segment U.S. higher education. First, Capella University had a very strong year in 2021. In the year, Capella conferred more than 15,000 degrees, which was an 11% increase compared to any prior year. Employer affiliated enrollments now comprise 30% of all Capella enrollments, with healthcare being the strongest sector. FlexPath continues to be a significant source of growth, and FlexPath enrollments now represent 18% of all U.S. higher education enrollments, which is up 300 basis points from the prior year. In 2021, we made substantial progress improving the enrollment results at Strayer University; the bulk of Strayer campuses have reopened, and there was more inquiry volume in those reopened markets. Course success, or the percentage of students who earn their academic credit in any given term, improved each quarter during the year. Technological improvements to our admissions process have enabled our staff to more efficiently and effectively interact with prospective new students. And we saw improvement in Strayer enrollment results in the second half of 2021. We expect their new students to grow on an annual basis in 2022. Turning now to our second segment, in our release this morning, we announced we've renamed our alternative learning segment to Education Technology Services, or ETS, which better reflects our products and services. Education Technology Services is SEI's fastest growing segment. It consists of three entities. The first is Sophia Learning, our direct-to-consumer portal of low-cost college courses. In 2021, Sophia generated $17 million in revenue, which is an increase of more than 460% from its pre-pandemic annualized run rate. Sophia had more than 19,000 average monthly paid subscribers, who collectively completed more than 36,000 courses. Consumer satisfaction with Sophia was also very strong, with a net promoter score of 63. For the full year 2021, Sophia's operating margin was 54%, which is net of ongoing investments we continue to make. Over the next several years as the product begins to mature, operating margins at Sophia should be approximately 75%. Workforce Edge is our education benefits management platform, which also includes our proprietary network of affiliated institutions, the largest of which are Strayer and Capella universities. And I'd like to take just a minute to help our owners better understand our monetization strategy for Workforce Edge, which is a key element in SEI's long-term strategy to reduce the number of students receiving title IV loan dollars while increasing the number of students whose tuition is being paid for by their employer. First, we built a proprietary technology platform for employers to manage their education benefits, which includes the ability to process their tuition benefit payments. In addition, the platform allows the employer to feature for their employees a select number of colleges and universities as preferred partner institutions, which have the highest benefit coverage and, in some cases, cover the full cost of a degree program. In all cases, this preferred network of schools is SEI's proprietary brokered network, which again always includes Strayer and Capella Universities. In terms of monetization, the platform itself is free for employers to use, and monetization occurs when an employee from a participating company enrolls in one of the institutions in the network. If either Strayer or Capella is selected, we receive the tuition dollars from the employer, or if a partner school is selected, we receive an annual fee from that partner institution. At maturity, we expect the percentage of employees on the Workforce Edge platform who select either Strayer or Capella University to be approximately 2%. In 2021, which was our first year in operation, Workforce Edge signed 32 corporate agreements, which collectively employed approximately 650,000 employees. We expect to see the initial enrollments from these accounts to begin this year, as well as in 2023 and beyond. Ultimately, our goal here is to have several million employees on the platform and have Workforce Edge be the largest driver of new student enrollments within our U.S. higher education segment. The third component of our ETS segment is our Employer Solutions Group, which is responsible for managing SEI's network of more than 800 corporate partnerships. In 2021, employer affiliated students comprised 26% of all new enrollments and 21% of total enrollments. In 2021, we added a total of 80 new corporate partnerships, including six enterprise healthcare accounts, each employing more than 50,000 employees. We were also very pleased to announce our exclusive partnership with the new United States Football League to provide their athletes and staff members with the opportunity to earn a tuition-free, debt-free degree from either Strayer or Capella University, with the USFL covering the full cost of the program. Last year, our Australian New Zealand segment completed its first full year of operation within SEI, and we couldn't be happier with their performance. Total enrollment for the Australian segment increased 1.5% on an annualized pro forma basis, despite operating in the strictest COVID-related lockdowns anywhere in the world. In early January, the Australian Government announced the country would resume allowing foreign students to enter the country to attend college, which is an important development since approximately half of our new students at Torrens University are international students. After completing the integration of ANZ assets on the SEI platforms last year, we're now focused on harvesting revenue synergies, which we estimate could be more than $80 million over the next three to five years. The first of these synergies will be to launch SEI's suite of proprietary AI-based technological tools, which are designed to improve learning outcomes and increase student retention. We also plan to offer courses from the Jack Welch Management Institute, as well as curricula from Capella’s postgraduate catalog. Longer term, we're evaluating the feasibility of offering a subscription-based tuition pricing plan for FlexPath within Australia. In addition, we also plan to export New Zealand's prestigious Media Design School to the United States, likely taking advantage of existing real estate in Strayer University's campus footprint. And before closing and taking questions, I just want to make a few comments about this year, 2022. First and foremost, we expect to have positive year-over-year increases in new student enrollment across all of our universities, including Strayer University. And as we said in the past, the total enrollment within our U.S. higher education segment for any given quarter mostly depends on the continuation rate and the new student enrollment for the six to eight quarters preceding it. Based on declines in new student enrollment within our U.S. higher education segment that we experienced in 2020 and 2021, we expect average total enrollment for SEI could be down in 2022 in the mid-single digits. We also expect SEI's full year operating expenses to be roughly flat on a year-over-year basis. I should note that our current expense base is net of approximately $150 million in reductions that we've made over the past two years. We believe the current run rate is both necessary and appropriate to continue to invest in our long-term growth while maintaining the high levels of academic quality across our institutions. Lastly, I'd like to once again thank all of my colleagues here at SEI for their continued hard work and dedication. And with that, Carmen, we'd be happy to take questions.

Operator, Operator

Thank you. We have a question from Jeff Silber with BMO Capital Markets.

Jeff Silber, Analyst

Thank you so much. Karl, I just wanted to clarify one thing you said. I think you said when looking at 2022, the average total enrollment for the entire company was going to be down mid-single digits. Was that correct?

Karl McDonnell, President and CEO

We said it could be, Jeff. It could be. It depends obviously on the performance of our new student cohorts across all of our universities as well as retention rates. But as we've said in the past, we did have new student declines, particularly at Strayer University in 2020 and 2021. There's roughly, depending on the performance moving forward, somewhere between a six and an eight-quarter lag before you would see that total enrollment beginning to grow again. So a lot depends on how we perform this year. But we wanted to at least highlight that it could be down in the mid-single digits.

Jeff Silber, Analyst

Okay. And I'm assuming most of that is in U.S. higher education; would you be looking for enrollment growth in ANZ?

Karl McDonnell, President and CEO

That's correct. It would be mostly in U.S. higher ed.

Jeff Silber, Analyst

Okay, appreciate it. If we could just go back to the most recent quarter results, and maybe just focus on U.S. higher education. In prior calls, you've given a little bit of color on trends, either by school or by program, undergrad, grad; any color you can give us would be great.

Karl McDonnell, President and CEO

Well, I would just maybe amplify what I said in my prepared remarks, which is we've seen considerable stabilization at Strayer University. In fact, at the very end of 2021, Strayer was actually growing on a year-over-year basis. Capella's performance has been consistent throughout the year with new students.

Jeff Silber, Analyst

Okay. Any difference between grad or undergrad? I know Strayer does a little bit of both.

Karl McDonnell, President and CEO

No real difference from prior trends in the year.

Jeff Silber, Analyst

Okay. And just one quick clarification question just on the ANZ universities. Are they fully open? I know you said foreign students are allowed to come back. But are they fully open? Are there any restrictions going on there?

Karl McDonnell, President and CEO

They are fully open. In fact, they've been fully open throughout the pandemic. They are one of the very few, if not the only university in Australia that was able to migrate all of the programs online. So they've been open, they are open. And now we look forward to being able to welcome international students back into the country to begin their studies at Torrens.

Jeff Silber, Analyst

And I misspoke, forgive me, I realized that we're fully open. I was just curious about the campuses themselves. Are they fully back to where they were before the pandemic?

Karl McDonnell, President and CEO

Not yet. But we are in the process of opening all the facilities in Australia and New Zealand. It hasn't really impacted us per se because we've been able to operate online, but we expect to have everything open this year.

Operator, Operator

Next question is from Tobey Sommer with Truist Securities.

Tobey Sommer, Analyst

Thank you. Could you talk about pricing in your existing businesses and maybe provide some context about how that pricing compares among your principal competitors? Thanks.

Karl McDonnell, President and CEO

Sure. Well, it depends on what part of our organization you would be referring to. For example, at Capella, we have FlexPath, which is designed to get people through their programs in roughly about half the time that it would normally take, which by definition means it'll be roughly half the cost comparatively. At Strayer University, on an absolute basis of tuition, we feel we're very competitive with most choices that another institution would have similarly, within Australia. But even more broadly than that, as a corporate strategy, we want to really begin to dramatically increase the number of students that we have from our employer affiliated accounts and reduce the number of students who are coming to us via access on title IV loans. When you make that commitment to build corporate relationships, most of the time, you have to have discounted tuition so that the employer can afford to cover large parts of their workforce. And that, by definition, will reduce the cost of our programs over time. That's a strategy that we are very much leaning into. It also speaks to the importance of productivity for us. We're a very cost-conscious organization. The fact that we're maintaining relatively flat expenses this year is net of about $30 million to $50 million in reductions that we've made just to stay flat because we have wage inflation, we have an increase in the number of employees, and so forth. Our actual run rate has been brought down by about $30 million to $50 million to stay flat. But we expect over time our revenue per student to gradually decline. We expect our corporate enrollments to increase as a result. On a margin basis, we expect relatively stable margins while this migration happens. Because the students that come to us either through Workforce Edge or our 800 corporate partnerships come with very low to no acquisition costs. It's a trade-off that we think strategically is very valuable, and again, it's a big cornerstone of our strategy.

Tobey Sommer, Analyst

And where do you see? I understand the internal strategy and how you're mapping it out to the impacts on the income statement. How do you see this fitting into sort of if you could contextualize it among your principal competitors in terms of that strategy, leaning into corporate enrollments, etc.? Is that differentiated in the marketplace? Or is the entire market moving in a similar direction? Thank you.

Karl McDonnell, President and CEO

Well, sure, SEI, from my point of view, has been the leader, or among the very few leaders in this space over the last almost 10 years. We found a degree that works, which to this day is the only program in the country that covers all employees plus immediate family members. To my knowledge, we have the largest network of corporate partnerships with well over 800. We continue to innovate new programs and products with Workforce Edge being the leading example. Roughly a quarter of our students now come from these corporate partnerships. These companies wouldn't continue to support sending their employees to our institutions if they didn't have confidence in the quality. So notwithstanding the fact that there's always going to be some level of competition, we think we're very well positioned to remain a leader in the corporate education space.

Tobey Sommer, Analyst

So last question for me, I'll get back in the queue. Any sort of page changes to the movements on the regulatory front? Any clear update you could give us there about incremental change would be helpful.

Karl McDonnell, President and CEO

Well, the process of developing new regulations is still underway. Recently, the department completed its first negotiated rulemaking. We have to publish any proposed new rule associated with that. They've also announced their intent to commence a second negotiated rulemaking around gainful employment. It's something that we're obviously paying very close attention to; we'll continue to monitor it. But from the broadest possible sense, we are very confident that all of our institutions, and obviously those particularly here in the United States, would be able to comply with any reasonable set of regulations that could come about.

Tobey Sommer, Analyst

Okay. If I could sneak one more in on the corporate side, when you sign up an employer, what is the competitive dynamic like within that employer? Are you getting an exclusive? If not, how many alternative providers typically sign up with the prototype corporate client that you're going after?

Karl McDonnell, President and CEO

We have both. We do have exclusive arrangements where we're the only education partner with the coverage to allow an individual to get a completely tuition-free degree. For instance, BestBuy, CVS, FCA, Chrysler. But really, we're migrating to this Workforce Edge model. The best analogy I can give you is when I talk about our proprietary network of institutions, which includes Strayer and Capella, and the Noodle Partners schools; think of that as being the healthcare equivalent of in network. When an employer signs on to the Workforce Edge platform, the employee at that organization can choose to go to any accredited institution they want to. But if they go to one of the in-network schools, they get a much more substantial set of benefits, just as you do if you go to a preferred provider in your health insurance. You can still go to a school that's not in our network, but the coverage for the education benefit will be substantially less. What Workforce Edge does is it highlights that fact for the employees. We think, as I said, over time, that will ultimately become the largest driver of new students for Strayer and Capella Universities.

Operator, Operator

Thank you. And this concludes our Q&A. I will turn the call back to Mr. Karl McDonnell for his final remarks.

Karl McDonnell, President and CEO

Thank you very much, everyone. We look forward to chatting with you next quarter.

Operator, Operator

And with that, ladies and gentlemen, we conclude our program today. Thank you for participating, and you may now disconnect.