Strategic Education Inc (STRA) 2014 Q4 法說會逐字稿

Good morning, everyone, and welcome to Strayer Education, Inc.'s fourth-quarter 2014 earnings results conference call. This call is being recorded. For those of you who wish to listen to the conference via the Internet, please go to strayereducation.com, where the call will be archived.

With us today to discuss results are Robert Silberman, Executive Chairman for Strayer Education; Karl McDonnell, Chief Executive Officer; Mark Brown, Executive Vice President and Chief Financial Officer; and Daniel Jackson, Senior Vice President and Treasurer. (Operator Instructions).

I would like to remind everyone that today's press release contains, and certain information on this call may contain, statements that are forward-looking, and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. The statements are based on the Company's current expectation and are subject to a number of assumptions, uncertainties, and risks that the Company has identified in the paragraph on forward-looking statements at the end of its press release, and that could cause the Company's actual results to differ materially.

Further information about these and other relevant uncertainties may be found in the Company's annual report on Form 10-K and its other filings with the Securities and Exchange Commission. Copies of these filings and the full press release are available online, and upon request from the Company's Investor Relations department.

And now I'd like to turn the call over to Robert Silberman. Mr. Silberman, please go ahead.

Thank you, operator, and good morning, ladies and gentlemen. We're going to begin this morning with Karl discussing our Company's operating results for the fourth quarter, and then Mark will report our financial results for both the fourth quarter and the full year.

As we announced last July, Mark will be retiring on March 1, so this will be his last earnings call. I encourage you all to direct the most difficult questions his way. Mark will be succeeded as CFO by Dan Jackson, who has been our Senior Vice President of Finance for the last five years with Mark. Dan is also here with us today, so feel free to rough him up, as well. When Mark's done, I'll conclude with some comments on our capital allocation over the last year, and will try to leave as much time as possible for your questions.

Karl?

Thanks, Rob. Good morning, everyone. I'd like to begin this morning with a few comments on our fourth-quarter and full-year performance; and, first, on revenue per student. The 4.2% decline in the fourth quarter and the 3.3% decline for the full year were basically right in line with our forecasts. Revenue per student will continue to decline in 2015 as each cohort of new undergraduate students increases the overall mix of students who are on the lower undergraduate tuition.

At this point, for 2015, we're forecasting a decline in revenue per student of between 4% and 5%, which obviously is dependent on our enrollment performance and student mix. By the end of 2015, nearly all of our undergraduate students will be on the lower tuition, and so we would expect any future declines in revenue per student to be quite minimal.

We continue to do well with our cost management. In the fourth quarter, excluding last year's restructuring cost, our operating expenses were down 6%. About one-third of that it is due to savings in marketing, with the remaining two-thirds coming from lower headcount and favorable bad debt expense. These savings helped our operating margin, which declined only 60 basis points despite the 6.5% reduction in revenue.

Taking into account savings we began realizing in the fourth quarter of 2013, along with the savings throughout last year, we achieved slightly more than our $50 million operating expense reduction target. Regarding the marketing savings, I'd like to reiterate comments I've made earlier, which is that we don't plan those savings in advance, which means they may or may not materialize this year. Our plan for this year is to spend at least as much as we did in 2014, if not slightly more.

Turning to our enrollment results for the winter academic term, our total enrollment of 40,728 students was down less than 1% from last year, and we continue to benefit from strong gains in student retention. Our continuation rate for the winter academic term improved 108 basis points from last year, and that marks the fourth consecutive quarter where we've had year-over-year improvement.

In addition, our cohort persistence -- which tracks new students who start and then continue into their second, third, and fourth terms -- was up substantially in every quarter for the academic year 2014. Our new students were flat, versus prior year. And within that, we were quite pleased that our new undergraduate students grew 5%; new students from national accounts grew 18%; and that was offset by a decline in new graduate level students, bringing us in flat for the quarter.

Last quarter, I indicated should our enrollment trends of 2014 continue into 2015, we would expect to grow total enrollments by the first or second quarter of this year. This morning I could reiterate, based on the trends now through the first quarter, that we maintain that view.

I mentioned our new students from national accounts increased 18%. I'd also like to note that total enrollment in that segment grew 2%, marking the sixth consecutive quarter of enrollment growth in that area. We also signed five new agreements, bringing the total number of national accounts to over 300.

We were also very pleased to announce this morning a new program. The RN to BSN program was approved by our accreditor, Middle States, in January, and we expect to begin enrolling her first students in that program in July for our fall academic term.

The Jack Welch Management Institute continues to perform very well. Their enrollment grew just under 40% for the quarter, and we expect they'll cross over the 1,000-student threshold sometime soon this year, which is clearly an important milestone for JWMI.

Also, their continuation rate, already the highest in the University, increased another 300 basis points to just under 90%, which is really quite remarkable, and we continue to be very pleased with their performance.

Lastly, there were no big shifts in our student mix. Our national accounts and institutional alliances comprised just over one-third of our total student body, and our graduate students comprise roughly 34% of total enrollment.

Mark?

Thanks, Karl, and good morning, everyone. I'll start with revenue. Revenue for the fourth quarter of 2014 decreased 6% to $116 million compared to $124 million for the same period in 2013. The decrease was primarily driven by lower enrollments, which were down 2% for the fall academic term, and lower revenue per student, which declined 4.2%, as Karl described.

Income from operations was $22.6 million for the fourth quarter of 2014 compared to a loss from operations of $30.1 million for the same period in 2013. Loss from operations in the fourth quarter of 2013 includes $54.7 million in expense related to the Company's restructuring. Excluding these charges, income from operations was $24.6 million for the fourth quarter of 2013.

Our operating margin was 19.5% for the fourth quarter of 2014 compared to 19.8% for the same period in 2013, when the restructuring charges are excluded. Net income for the fourth quarter of 2014 was $12.9 million compared to a net loss of $19 million for the same period in 2013. Net loss for the fourth quarter of 2013 includes approximately $33 million in after-tax charges related to the restructuring.

Excluding these charges, net income would've been $14 million in the fourth quarter of 2013.

Diluted earnings per share was $1.21 for the fourth quarter of 2014 compared to diluted loss per share of $1.80 for the same period in 2013. The diluted loss per share for the fourth quarter of 2013 includes $3.12 per share in after-tax charges related to the restructuring. Excluding these charges, diluted earnings per share was $1.32. Diluted weighted average shares outstanding increased 2% to 10,734,000 from 10,557,000 for the same period in 2013.

Revenues for the year ended December 31, 2014, decreased 11% to $446 million compared to $504 million for the same period in 2013, principally due to lower enrollment and lower revenue per student. Income from operations was $81.7 million for 2014 compared to $32.7 million for 2013.

Income from operations in 2014 includes $4.1 million in non-cash adjustments to reduce the Company's liability for losses on facilities no longer in use. Income from operations in 2013 includes $54.7 million in expense related to the Company's restructuring. Excluding these items, income from operations was $77.6 million in 2014, and $87.4 million in 2013.

Operating income margin was 18.3% for 2014 compared to 17.4% in 2013, when excluding the restructuring charges. Net income was $46.4 million for 2014 compared to $16.4 million in 2013. Net income for 2014 includes approximately $2.6 million in after-tax benefits from adjustments to the Company's liabilities for losses on facilities no longer in use. Net income in 2013 includes approximately $33 million in after-tax charges related to the Company's restructuring. Excluding these items, net income was $43.8 million in 2014, and $49.3 million in 2013.

Diluted earnings per share was $4.35 for 2014 compared to $1.55 for 2013. Diluted earnings per share for 2014 includes $0.23 per share in after-tax earnings, related to the reduction of the Company's liability for losses on facilities no longer in use. Diluted earnings per share for 2013 includes $3.10 per share in after-tax charges related to the Company's restructuring.

Excluding these items, diluted earnings per share was $4.12 for 2014, and $4.64 for 2013. Diluted weighted average shares outstanding increased slightly to 10,650,000 from 10,624,000 for the same period in 2013.

At December 31, 2014, the Company had cash and cash equivalents of $162 million. The Company generated $78 million in cash from operating activities in 2014 compared to $84 million during the same period in 2013. Capital expenditures in 2014 were $7 million compared to $9 million for the same period in 2013.

Regarding our credit facility, at December 31, 2014, we had $119 million outstanding on our term loan, and no outstanding balance under our revolving credit facility.

Finally, for the fourth quarter of 2014, our bad debt expense as a percentage of revenues was 4% compared to 4.8% for the same period in 2013.

Rob?

Thanks, Mark. Just a brief comment on the capital allocation for the last year. And I'd put it in the context of Karl's comments of what really is a firming business for us. As you remember, back 15 months ago, at the end of 2013, we were faced with pretty significant declines in new students, which we knew were going to roll over into declines in total students and revenue throughout 2014.

So we started the year 2014 with $95 million in cash on the balance sheet, and we were at the tail end of a fairly active share repurchase program. We had 10.6 million shares outstanding. When Mark and I started, I think it was about 16 million shares back in 2001. And we had $121 million in principal outstanding on a bank term loan.

As Mark mentioned, during the year we generated around $78 million in cash flows from operations. We used that cash during the years for the $7 million in CapEx Mark mentioned, mainly academic technology, routine maintenance. Our CapEx budget was down significantly, without new campuses opening. And then we used another $3 million to make the required principal payments on the term loan. The remaining $67 million we added to the $95 million we started the year with. So at year-end, we have $162 million in cash and only $118 million of principal on the term loan, and no draws on the $100 million revolver.

So we have a net cash position of almost $45 million, still with the 10.6 million shares outstanding. So as you can see, in a period of some uncertainty and transformation within the Company, we significantly strengthened our balance sheet, going from $28 million of net debt to $44 million of net cash. And we're confident we have sufficient reserves to take advantage of opportunities to both grow our business this year that we see, and to return capital to our owners.

And with that, operator, we'd be pleased to answer any questions, and we will stay as long as we have questions.

(Operator Instructions). Jason Anderson, Stifel.

About the start there, the flat start. And, obviously, I know they can move around, and you guys aren't in the business of protecting your starts. But is there anything you saw in the market differently in this quarter? I realize you're going against a bit tougher comp than the last few quarters, but you had been seeing some growth. And just interested in your color on the trend there.

Sure, Jason. As I said in my prepared remarks, we were very pleased that our undergraduate students continued to grow. They were up 5%. And our national account channel account continues to do very well. It was up 18%. We did see a decline in new graduate students, sort of low-double-digits. That number has moved around a little bit over the last year. A year ago, it was up around 14%. It's been up and down. And we've said that there is obviously some volatility in the new student enrollment, but we were particularly pleased with the growth at the undergraduate level.

Okay. And then so -- sorry. Did I cut someone off?

Well, I was just going to add to that, Jason. Just qualitatively for us, the sustained growth in the -- at the undergraduate new students, is probably the most important trend that we're tracking, because it was the largest contributor to our overall downturn in enrollment starting in 2010.

And if you think back to the impact of the downturn in the economy, although it started in early 2009, I think we had quite a bit of inertia rolling through 2009. It was really mid-2010 when it began to take a big chunk out of our enrollment. It was mainly focused on the undergraduate side. And as Karl said, our graduate enrollment has been up and down, but generally relatively strong. So that blip in the graduate enrollment is of a lot less concern to us, particularly with the emerging strength of the Jack Welch Management Institute.

And then maybe just to even go a bit higher level, but in similar lines. When you go to market, do you know -- and this might even be interesting to know, between undergrad and grad -- why students are choosing you, maybe what your competitive advantage is in the marketplace? Or maybe, conversely, when they don't, do you know where you might be losing them to, or why you might be losing them?

Well, over one-third of students are coming to us from our national accounts, so those are relationships that we have with the large and medium-sized employers. That definitely helps. Our campus footprint clearly is an advantage. Many of the students that come to us express a desire to have the flexibility to take their classes on ground or online. Along with a very strong brand, and a long history of teaching working adults.

We don't tend to get a lot of feedback from students who inquire and then subsequently don't enroll, so I can't really comment on where they may have ended up, if anywhere. But the students that do choose us typically articulate the flexibility, our reputation, or our institutional alliances.

Great. Thanks for that.

Corey Greendale, First Analysis.

Mark, first I wanted to ask you about the update on FASB standards, subtopic 340-40.

(laughter) We might have to handle that off-line, Corey.

But seriously, in the more than a decade I've been covering the group, I think you're the last CFO standing, so congratulations on that.

(laughter) Thank you, Corey. I appreciate it.

So, a couple questions on the quarter. So I appreciate, Karl, your update on the thoughts on 2015. And I also appreciate that the marketing spend, as you pointed out -- that may or may not continue the trend we've seen. But I think last quarter, you'd said if trends continued, you'd expected operating expenses to be flat to up 2%. Can you just comment on whether that's still the case?

Yes, that is still the case, Corey.

Okay. And there was no -- so we should not expect -- I had anticipated somewhat less of a decline in operating expense in Q4. And I understand some of that's the marketing, but -- in other words, we shouldn't expect in Q1 that we're going to continue to see the same rate of decline?

No. Well, I can't comment, obviously, on Q1. But the comments that I made about we expect our operating expenses to be generally up 1% to 2% on a full-year basis, that is still our view.

Okay. And then the revenue per student, am I thinking about it correctly that if the graduate mix were to continue in this direction, or it sounds like things are directionally moving favorably for undergraduate in the winter term, less favorably for graduate. Would that suggest that the decline in revenue per student would be at the more negative end, since the tuition didn't change for graduate?

That is true, yes. That is correct.

Okay. And then, Rob, I appreciate the perspective on the uses of capital in 2014, and your thoughts on 2015. But should we be thinking mostly about a re-implementation of the share repurchase program at this point, as opposed to re-initiation of the dividend?

Well, we talk about that at the Board level, every quarter. And we think of them as just two different ways of returning capital to owners. And it really depends on -- the first step is, do we truly have excess cash? Because our first desire is to invest our capital in the business in high-return areas. If we are unable to do that and we have sufficient capital to both run the University and fund future growth, and we want to return it to owners, then we look at both the intrinsic value, as we can calculate it, of the stock and whether it's trading at a significant enough discount to the intrinsic value, that it makes sense for us to take the optionality away from our owners by essentially dividending them more of the Company when we repurchase shares. Or to take some amount of that excess capital, and dividend it as actual liquid cash, and let them make the decisions.

We've done both in the past. It has tended to be tactical, and based on our view of both the markets and the -- whatever creates the highest after-tax return to our owners. So I couldn't really give you any guidance right now. And we'll be looking at that through the year, and also relating it to our operational performance, and whatever other opportunities Karl and Dan come up with, with regard to investing in the business.

Okay. And then I have one real specific thing, which was -- you just hit on Jack Welch. I think there is a channel partnership with Skillsoft. I was just wondering if you're willing to comment on how that's going; or, more broadly, other channel current partners or opportunities for the Jack Welch program.

Sure. We do have a relationship with Skillsoft. And it's designed to license our Welch Way management training programs that we initially developed, but then subsequently handed over to Skillsoft. They've almost completed their first year with that under their auspices, and they had a pretty good year. They hit the objective that they had set. And we expect that, over time, that could be a meaningful part of our business. But it will take years before it really builds up.

And to be clear, Corey, those are management training material, as opposed to academic course offerings in the MBA program.

Yes, they're non-credit.

Got it, got it. Great, thank you.

Sara Gubins, Bank of America Merrill Lynch.

Could you give us start trends for the unaffiliated bachelor's degree programs? I'm assuming the 5% incorporates the benefit of the institutional relationships.

It does. I don't have it broken out in front of me, Sara. But just given that the undergraduate population as a whole was up 5%, I suspect it was up. But I'd have to look at the numbers and follow up with you off-line.

Okay.

But the trend was better, if you're asking trends.

Yes, okay.

(multiple speakers) quantify them.

And then I know graduate, or anything really, from quarter to quarter, term to term can be choppy. But any sense of what happened to the graduate programs? Were there particular areas where you saw more of a fall-off? Did you change your marketing approach during the term?

No, nothing changed from a marketing or advertising standpoint. It wasn't really isolated to any one particular geographic area. And as I say, we've seen fairly choppy performance in that. It could be up 14%, as it was in some of the quarter's last year. It was down in the low-double-digits this quarter. So it has moved around a little bit, and we're comfortable with that.

To Rob's point, what we were really focused on, given the weakness we had over a multi-year period at the undergraduate level, was tracking those undergraduate new students. And as I said, we were pleased that those grew 5%.

Great. And then, last quarter, you had given us the underlying start growth, excluding the 20 campus closures. Do you have that again for this quarter?

Well, we are no longer breaking that out. The bulk of the campus closures were essentially complete by this time last year. There was a handful that might have worked its way through, through the coming months a year ago. So we've stopped breaking that out.

Okay. And then just (multiple speakers). I'm sorry.

Sara, I was going to say, I think it's fair, though, to say that there's probably still a little bit of a drag in those markets, which runs through our global online center. That's where we serve them now. Because you're a year removed away from having physical campuses there. I think it will probably be by the end of this year where that really is on an apples-to-apples basis.

Okay. And then just last question on retention. So, you've been seeing nice improvement in retention. Do you think there's a significant runway for that to continue to improve?

Well, I definitely think there is continued room to improve. I think the gains that we've seen in retention are a result of a lot of efforts just to continuously work to make that classroom experience as strong as we can get it. We're looking at different ways to deploy our faculty and our courses, and those are things that are ongoing. So we're going to continue to work to make that classroom experience as strong as we can get it. And I do think there's additional room for retention to improve.

Thank you.

Jeff Silber, BMO Capital.

Thanks. Just wanted to follow-up, I think it was on Corey's question regarding revenue per student. So, it looked like, last quarter, you thought it was going to be down -- or flat to down 2% for this year. Now you're saying 4% to 5%. Is that solely because of this mix shift towards more undergraduate, as opposed to graduate students?

Jeff, I think you might be referring to my comments on revenue for the year, which I said we would expect to be down in sort of that 2%-ish range, again if those enrollment trends continue. Just given the mix shift of undergraduate students on that lower tuition, as I said, we're expecting revenue per student, all things being equal, to be down about 4% to 5% this year.

Okay, my mistake. I apologize about that. And actually just to confirm some other numbers for this year, can you give us what your budget is for capital spending, stock-based compensation, and what the tax rate we should expect for 2015?

Sure, Jeff. On the CapEx front, we're estimating $10 million to $12 million; and on stock-based comp, in the neighborhood of $10 million to $11 million. And in terms of tax rate, we're modeling 39%.

Okay, great. And, Mark, congratulations. And Daniel, best of luck.

Thanks, Jeff.

Trace Urdan, Wells Fargo Securities.

First question was if you could just briefly speak to the variance at the G&A line in the quarter. It was up year-over-year and sequentially. Is that compensation-related, or something else?

Yes, Trace, it's just a handful of things. It's not one thing in particular. Professional services and a handful of other things. There's nothing really -- not one thing to point to.

Okay. And then I wonder if you could elaborate a little bit on the decision to get into the BSN market. I'm wondering what kind of research you did. That's obviously a field that a lot of folks that are publicly traded are seeing strength in, but one that probably doesn't continue at the current rate of growth forever. Since you guys are the most recent to get into it, I wondered if you might just take a minute and talk about the opportunity that you see in entering that market.

I think he's calling you slow, Karl. (laughter)

No. No -- careful, deliberate, you know.

Deliberate. I appreciate that (laughter). Sure, Trace. So we have looked at that for quite some time. We do see and believe that there is a strong growth in the nursing field across the United States. And so we think it's an excellent program. We've studied outcomes; we've studied salaries of graduates from BSN programs. And it's not too far afoot from our core mission of educating a business-related, managerial-related component. So these are nurses that have already been licensed, and are now coming to get their bachelor's degree. And so it just seems to be a good fit for us.

And do you guys anticipate having any relationships with some larger healthcare providers, in terms of national accounts for that program? Or is it too early to talk about that?

We already have some healthcare-related national accounts, but it certainly could be an opportunity that we would look at. And, of course, we would announce those when they're consummated.

Got it. All right, thank you.

(Operator Instructions). Paul Ginocchio, Deutsche Bank.

Karl, just a question about the new enrollment trends. I just wanted to make sure I'm clear on this. So it does look like you cycled a little bit of headwind from the branch closures, which should have helped the Q1 -- or the acceleration. But is all the real change from the third quarter into fourth quarter around grads? Because it does look like your ad spend was down about the same in both the third and fourth quarters. I'm just trying to isolate the delta we saw from the growth in the third quarter to the flatness in the fourth quarter. Thanks.

Sure, Paul. Yes, it really was an isolated to new graduate students. The change in marketing dollars, I don't think, impacted the new students in any way. And so it's something we'll watch moving forward. But for the fourth quarter, it was just the reduction in new graduate-level students.

Great. And you had reiterated that your view that new enrollment goes back positive. So I guess we can imply from that, or infer from that, that the first-quarter trends might reaccelerate or be better than what we just saw?

Yes. You mean total enrollment growth in the second quarter.

Which means new enrollment might be back positive here in the first?

Well, it could be. Obviously I don't know; and, therefore, can't comment on it. But the largest driver of the change in our enrollment is the continuing population, since that's the bulk of our students. And given now that we've gone a year-plus with improvements, my comments are around, should trends continue, really puts a great deal of emphasis on those retention gains. And should those trends continue, then I think there is a strong possibility that we would break even on total students in the second quarter.

Even if we we're flat on new students, Paul, I think is the significance to that.

And last one, just number of graduates, as you see them coming through in 2015 versus 2014.

Probably going to be around 7,000 or 8,000 students.

Yes, it's slightly more than 8,000, I think we projected.

And relative to -- sorry. What's the 2014 number?

It was about 8,000. So we're -- we have declining student population over the last three years, increasing graduation rates, and a relatively stable number of graduates.

So 8,000 in 2014; 8,000 in 2015?

Yes.

And finally, Karl, if I can sneak one more in; I don't know if you want. Just can you talk about quarter-to-date trends, or you just don't want to talk about first quarter at all?

No, I prefer not to, Paul.

Great. Thank you.

Peter Appert, Piper Jaffray.

Yes, you've got John Crowther on for Peter. Just real quickly -- I apologize if maybe this was covered previously, but I hopped onto the call late. But it sounds like on the grad side, the new start issue, potentially could have been a little bit of a tough comp issue. I'm wondering what that looks like. If maybe you can just remind us how that tracked through this year, and how that would impact over the next year -- that trend line.

Yes, it's -- I can't give you too much information on that, John, other than to say, as we said earlier, it's got some choppiness in it. We've had quarters over the last year, or year and a half, where it's been up single digits; it's been up double digits. This particular quarter, it was down low-double-digits. So it just appears to be a little choppy at this point.

Okay. And then just -- again, I apologize if you've already addressed this -- but in terms of the guidance for operating expenses to be up modestly. Wondering if you could maybe talk about organic trends there, versus maybe incremental spend around the BSN program, or any sort of internal investments you guys are doing to try and reaccelerate the business.

Sure. We do have incremental operating expense associated with launching the new program, so that's baked into the roughly 2% increase that we're expecting. On the G&A line, roughly speaking, the numbers that we've had over the last couple quarters I think represent a good run rate for this year. There's a handful of other things that we're experimenting with, with some technology, the classroom experience. All that, though, is baked into our forecast to be up modestly, around 1% or 2%.

Okay. Great. Thank you.

Thank you. And I'm showing no further questions in the queue.

I'd like to turn the conference back over to Mr. Silberman for any closing remarks.

Thank you, Ben, and thanks, everyone, for participating. We'll all be available the rest of the day if you have any questions you want to follow up on. Look forward to talking to you in the upcoming quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.