Strategic Education Inc (STRA) 2015 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Strayer Education Incorporated first quarter 2015 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 the results are Robert Silberman, Executive Chairman for Strayer Education; Karl McDonnell, Chief Executive Officer; and Daniel Jackson, Executive Vice President and Chief Financial Officer. Following Strayer's remarks we will open the call for questions and answers.

I would like to remind everyone that today's press release contains, and certain information in this call may contain statements that are forward-looking statements and are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act. Statements are based on the Company's current expectation and are subject to number of assumptions, uncertainties and risks that the Company has identified in the paragraph on the forward-looking statement 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 full press release are available online and upon request from the Company's investor relations department.

Now I would 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 first quarter, including the more detail on both the launch of our new Strayer@Work initiative, as well as our partnership with Chrysler which we announced on Monday. We'll then welcome Dan Jackson, our newly minted Chief Financial Officer to report our financial results for the first quarter, and then we'll all stay on as long as you need for questions. Karl?

Thanks, Rob, and good morning, everyone. I'd like to begin this morning with just a few comments on the first quarter. As Rob mentioned, Dan will go through them in more detail in just a moment.

Our revenue per student declined 3.1% versus the prior year, but was essentially unchanged sequentially versus the fourth quarter of last year. The decline is a little better than we initially anticipated and is the result of continued improvements we see in our drop rate as well as slightly higher seats per student. In a prior quarter, I said I thought revenue per student would decline between 4% and 5% for all of 2015, but based on where we are now and including our spring term enrollment, I think it's likely to be on the lower end of that range.

Our operating expenses came in just a tick above $92 million, and there's nothing to really comment on there, other than to note that they were basically right in line with our expectations. I would note, however, our bad debt expense improved significantly to 3.1% of revenue, down from 4.3% in the prior year, reflecting both continued improvement in student performance, as well as our team's strong performance in collecting outstanding balances.

Turning to our enrollment results for the spring academic term. Our total enrollment declined 1% to 40,875 students. We ended up 450 students away from breaking even. Our new students declined just under 1%, and our continuation rate was flat to the prior year.

New and total enrollments from national accounts grew 3% and 10% respectively, so that area continues to perform well. And the Jack Welch Management Institute continues to do well with new JWMI students increasing 38%, and total enrollment growth at JWMI growing 41%, to just under 1,000 students.

Now I'd like to update everyone on the exciting partnership we announced earlier this week with Fiat Chrysler Automotive Group and our new Degrees@Work program. Chrysler has done a tremendous job over the last five years, and they've told us one of the keys to sustaining and improving that performance lies in their ability to attract and retain the best possible talent throughout their dealer network, which consists of roughly 2,400 dealerships and about 120,000 employees in the United States.

Our partnership with Chrysler began nearly a year ago and initially was focused on working together to review some of their internal training programs. We quickly learned of their desire to be innovators in talent management and we put a joint team together to design Degrees@Work. The foundation of the program is that the employer, in this case Chrysler and Chrysler's dealers, pay 100% of the tuition so that the employee has zero out-of-pocket expenses to earn a college education.

There is no need for the employee to wait for reimbursement, and there is no need for the employee to take on any level of student debt. To further enhance the value to Chrysler we will be customizing some of the course work to include Chrysler and automotive industry specific case studies, examples and other assignments to make the learning even richer and more relevant for the student. We're absolutely thrilled to be Chrysler's exclusive educational partner for this, and believe Degrees@Work can be a powerful tool for companies seeking an edge in the war for talent.

In addition to Degrees@Work, our team is also working with a number of Fortune 100 companies to develop customized performance improvement and training system, which we refer to a as Skills@Work. We see both of these products as important enablers of bridging the gaps between higher education and US businesses, and we look forward to expanding both of them in the coming years. Dan?

Thank you, Karl, and good morning, everybody.

Our revenue for the first quarter of 2015 decreased 4% to $111.9 million, compared to $116.5 million in the first quarter last year. As Karl mentioned, the decline was due to enrollment, which decreased 1%, and revenue per student, which decreased 3%. Income from operations was $19.9 million for the quarter, compared to $25.9 million for the same period in 2014.

Income from operations in the first quarter of 2015 and 2014 includes non-cash adjustments to reduce our liability for losses on facilities no longer in use. Excluding these items, income from operations was $19.7 million for the first quarter this year, and $25 million last year. Our operating margin was 17.6% for the quarter, compared to 21.4% in 2014, when excluding the non-cash adjustments. Net income for the quarter was $11.4 million, compared to $14.8 million for the same period last year. Excluding the non-cash adjustments, net income was $11.3 million this year and $14.2 million for the same period last year.

Diluted earnings per share was $1.06 for the quarter, compared to $1.40 for the same period in 2014. Excluding the non-cash adjustments, EPS was $1.05 for this year, compared to $1.34 last year. Diluted weighted average shares outstanding was 10.738 million, compared to 10.581 million in the same period last year.

During the first quarter we generated $30.4 million in cash from operations, compared to $33.2 million during the first quarter of 2014. Our capital expenditures in the first quarter increased to $2.8 million from $1 million in the first quarter last year, driven by new program and technology investments, as well as enhancements to a couple of key campus facilities.

Turning to our credit facility. As of March 31, we had $117.2 million outstanding on our term loan, and full availability of our $100 million revolver. And finally, regarding bad debt, as Karl mentioned, we are pleased to see it improve to 3.1% for the quarter, down from 4.3% in the first quarter last year. Rob?

Thanks, Dan. It wasn't so bad, huh? Operator, with that we'd be pleased to answer any questions and we'll stay as long as there are questions.

Thank you, sir.

(Operator Instructions).

Our first question comes from Jason Anderson from Stifel. Your line is open. Please go ahead.

Good morning, guys.

Good morning, Jason.

I'm just wondering if you could comment maybe on the new student trends, maybe split between undergrad versus graduate? Sorry if I missed it, if you already said it. And then maybe any of your commentary on what you're just seeing in the market between those in general?

Sure, Jason. The enrollment results for spring were somewhat similar to what we had in the winter term. Our undergraduate population increased 4%, and I believe that's the sixth consecutive quarter where we've had undergraduate growth -- new student growth, yes.

I think at the graduate level, new student enrollment was down in the low double digits. We've seen that number move around. It's been up some quarters and down some. We also recognize that there's a fair amount of competition, particularly at the graduate level, and it's something that we're watching.

Thanks. And then I guess regarding graduate, do you guys -- if I remember correctly, your discount that you've done is not on graduate programs. Is that something you'd consider looking into here in the future for graduate?

I think our graduate programs are fairly competitively priced at the tuition level. I'd note, too, that at the Jack Welch Management Institute we've had two price increases and that program is growing quite well. So at the present moment, Jason, I'm comfortable with the tuition and don't necessarily believe that's the reason why the new students at the graduate level aren't growing.

Okay. And then just intrigued by your Strayer@work program you announced. Should we expect any kind of impact, meaningful impact from this, either, one, with the FCA contract you have, or partnership, but also any further ones you may add or should we think of an impact in 2015 or is this looking more into 2016?

Well, it's brand-new and any program like this is going to take some amount of time to ramp up. Chrysler plans to roll this out initially in their largest dealer area, the Southeast of the United States, and I believe it will follow nationwide in the third quarter. So there is some ramping up. They're offering it to 120,000 employees, and if you just take national averages on employee participation rates, over some period of time we think that could equate to several thousand students. We don't know the timing of that, obviously, but we think over time that there will be a substantial number of students participating and we're happy to have them, obviously.

Great. Thanks for that. Appreciate it.

Sure.

Thank you. Our next question comes from Sara Gubins from Bank of America. Your line's open. Please go ahead.

Thanks. Just a follow-up on that. Would the program with Chrysler follow normal tuition discounts that your corporate partnerships typically get?

Well, we've developed a special tuition level specific to Chrysler, Sara, and beyond that I'm not going to disclose the details of it.

Okay. And the nature of this being exclusive is that Chrysler will pay for people who are working in dealerships, if they go to Strayer, but not to other institutions?

I don't know that they will continue to reimburse for other institutions, Sara, but this program where they'll pay 100% of the cost of the degree is only if they attend Strayer University. I should say that the only requirement Chrysler has put in place is that an individual be employed for 30 days. Beyond that, it's open to all part-time, full-time employees in their dealer network.

Okay. I know a certain -- I don't know if you can answer this, but I know a certain amount of tuition is tax deductible for employers. Does the tuition for this program get to those levels or is it still above?

I think it's unlikely in a given year that would be an issue for Chrysler or their employees.

Meaning that it's still above the amount that's tax deductible?

Meaning I don't foresee instances where Chrysler will have to impute tax for employees as a result of this program.

Got it. Okay. And then you provided a framework a few quarters ago on how to think about 2015. Based on the current enrollment trajectory, are we still within the framework of 2015 revenue being flat to down about 2%?

I think we need to see the summer term's enrollment, obviously.

Well, the framework was assuming a certain new student enrollment. It was never an absolute framework. We're within the framework with regard to -- given a certain level of new student enrollment, we would expect the follow-on effects on overall enrollment and the price impact of the lowered undergraduate tuition to have the same impacts that we described earlier.

But the variable is always the actual new student enrollment. The continuation rate, Karl, I think was still strong, wasn't it?

Continuation rate was basically flat, but that includes slightly fewer reinstate students which we include. When you exclude reinstates, the percentage of students who sequentially continued was up close to 200 basis points. So the retention is still quite strong.

I mean, I think at it's clearest level, Sara, at the latter half of 2014 we were growing new students overall in the low single digits. That's flattened out some in the first two quarters of 2015. We still have a lot of momentum with the continuation rates gains that we've had. And so the latter half of the year I think will really be a story with regard to the new students.

Okay. And then just last -- do you still expect costs to be up about 1% to 2% on an absolute dollar basis.

I think that's still accurate, yes, Sara.

Okay. Great. Thank you.

Thank you.

(Operator Instructions).

Our next question comes from Jeff Silber from BMO Capital Markets. Your line's open. Please go ahead.

Thank you so much. I apologize. I joined on a little late. Really intrigued about the Chrysler deal. I'm just curious if you can give us a little bit of background on the genesis of that.

Was that something that they approached you with? And I'm curious if we may see other deals like this with other major corporations? Thanks.

Sure. The genesis was we've been thinking a lot about how to bridge what we see as a fairly wide gap between higher education and employers. I think you know, Jeff, we have several hundred of these partnerships and so we're constantly talking to them about their needs. And we wanted to challenge ourselves to see if there wasn't a way somehow that we could create a program where a company could offer a college education to their entire workforce, because obviously that would be game-changing, and do it in such a way that it would create value for them by attracting and retaining top talent, and it would be economical for us. It would create some economic value for us.

We started talking to Chrysler about a year ago on a completely different track, which was really just to consult with them on maybe bringing some of their dealer-based training through some digital channels. But we quickly realized, they had an appetite to be innovators. And the turnover statistics in the automobile industry are pretty tough, and so we started talking to them about this idea and they were very intrigued. And so we put a full-time team together that consisted of some of their top people and some of our best people, and together they worked through all the details which was not insignificant, obviously.

And I do believe it is a model that other companies probably will adopt. We're happy to do that, although not in necessarily in the automotive manufacturer space because we want to protect this competitive advantage for Chrysler, but to the extent other companies and other industries want to get the same kind of benefits for talent, then yes, I think it is possible that you would see more of these.

And just to confirm something, is there an exclusive with Chrysler in the automotive manufacturer sector?

There's is exclusivity for OEMs, US OEMs.

Okay. Great. That's helpful. And in terms of just modeling, is there anything out of the ordinary from an expense perspective for the rest of the year that we should be aware of, or is it just the normal seasonality that you typically have?

Normal seasonality.

Okay. Great. Thanks so much.

Sure.

Thank you. Our next question comes from Peter Appert from Piper Jaffray. Your line is open. Please go ahead.

Thank you. Good morning.

Hi, Peter.

Hi. One point of clarification. You mentioned in terms of the revenue per student you had said initially down 4% to 5%, now you're saying at the lower end of the range. I just want to be sure, does lower end mean better or worser?

Closer to 4% versus down 5%.

Better.

Got it. Great. Thank you. And then sorry to keep drilling on this Chrysler thing, but it's obviously really interesting. Are there significant upfront costs in terms of customization of curriculum you have to create for this?

No. We obviously have a lot of capabilities in instructional design and we do that collaboratively. And one of the things that we're able to do with Degrees@Work is just leverage the scale and infrastructure that we already have. So we've made investments over the years to be able to handle, quite honestly, significantly more students than we have now and this is a good way to put that infrastructure to use with an arrangement like we have with Chrysler.

But it's existing program areas, it's not new programs created specifically for Chrysler?

Correct. We are creating some customized components that will go inside of courses, but basically we're opening our entire program catalog up to Chrysler's employees. So an employee will be free to choose whether they want an associates, bachelors or master's degree.

Got it. Okay. Great. Thank you. And then in terms of the profitability of a program like this, doesn't have to be specific to Chrysler, but is it fair to think that the profitability could be equivalent to what you would do in, I don't know, a normal student in the context of maybe lower marketing costs offsetting the impact of lower revenue per student? Is that how we should think about it?

I think that would be fair, yes.

And also scale. The benefits of scale. Not just in the marketing, but in the instruction and everything else.

Right. Got it. Understood. And then one last thing. Just any -- you mentioned I think in passing the competitive dynamic, so any color in terms of current commentary on what you're seeing in the marketplace in terms of competitive issues?

Well, I think that there is increasing competition, and generally speaking, that tends to help students because there's more choice. We're continuing to work on our branding strategy to make sure people are aware of Strayer and our long history of serving adult learners. We tend to fare well when people are aware of us and they consider us. And so nothing beyond the fact that, somewhat stating the obvious, that there's a lot of competition and on some level that's going to have an impact.

Understood. Great. Thank you.

Sure.

Thank you. Our next question comes from Paul Ginocchio from Deutsche Bank. Your line is open. Please go you ahead.

Great. I just want to go back one more time to the Chrysler thing. You mentioned that you probably don't bump up against the $5,250 of corporate reimbursement that has to be taxed on tuition. Is that because the number of classes they'll take in one year, or because of the discount they're getting?

It would be a combination of several factors that I really don't want to discuss, Paul, simply because we consider it proprietary.

Okay. All right. But I guess can you talk -- pricing -- I don't know how you answered the question before. I don't think you answered it, but basically pricing here is a little bit more attractive for Chrysler than your typical corporate relationship due to their size or --?

We obviously are considering scale and the fact that this is being offered to 120,000 people. We have a set and flat tuition level that is specific to Chrysler and beyond that, I don't want to get into details, again, because we do consider it proprietary to the program.

Understood. And just maybe a wider question. We've seen the fading of new enrollment trends, not just for Strayer, but across the spectrum, almost all the for-profits are -- whatever the trend was, it's gotten worse over the last couple quarters. Is there something -- is it -- our going thesis was that the better job market might empower or give students the confidence to take on more debt and go back to school, but that doesn't seem to be happening. Is there something else going on that we're missing in the marketplace that's causing incremental weakness in new enrollment?

Paul, this is Rob. What I'd say is that if you're looking at it on a one quarter or two quarter basis, it's going to be too microscopic. We tend to look over a several year basis.

What's really happened is I think the economy hit sort of a bottom in terms of labor force participation rate and employee confidence, is I guess the term I would use, probably three years ago and it hasn't really bumped off of that significantly. We've had increases in job formation, but you still have a very, very low labor force participation rate. And our new student enrollment has, on an absolute basis, actually been relatively flat over the last 2.5 years.

It was -- on a comparative basis it showed a lot of growth in 2014 versus 2013, and now it's bumping along a bottom, up a little bit, down a little bit. I think that's reflective of the fact we haven't seen the increase in potential student confidence that one would hope to get as the economy starts to add jobs at a much faster rate. Remember, the job formation rate relative to coming out of a deep recession is probably the weakest that economists have ever seen.

I think on top of that, as Karl mentioned, you do have a more competitive environment. You've got traditional universities which are enabled, particularly in online, and that's eating away a little bit at the supply/demand ratio. But in general, I would say the situation has been stable. I wouldn't say -- obviously on a mathematical basis you're down 1% this quarter, that's worse than being up 3% two quarters ago. But it's well within the range of, I think, student decision making and it's not one that for us is really reflective of a trend. Or to the degree that it's a long-term trend, it's a relatively stable bottom is the way I would put it.

Okay. And then finally, just on the bad debt, it was a good number. Is this a sustainable level or do you think it can get better from here? How do you think about it?

It is a good number, as you note, and a little bit better than the trend that we've had in sort of the 4% range. But I think it's going to be somewhere between the 3%, 4%, 4.5% range. Move around in that area.

Thank you.

Sure.

Thank you. I'm showing no further questions at this time. I'd like to hand the conference back over to Mr. Robert Silberman.

Thank you, operator. And thank you all for participating. If you have any particularly difficult detailed questions please feel free to call Dan directly and give him a hard time. And, obviously, we're available to talk if there are more conceptual questions with regard to the Degrees@Work program that Karl mentioned, and we'll look forward to talking to you again in August. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect.