Strategic Education Inc (STRA) 2015 Q2 法說會逐字稿

Good morning, everyone, and welcome to Strayer Education, Inc. second-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 and are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act. These statements are based on the Company's current expectations 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 second quarter, including our enrollment results for Strayer University's summer term. Dan will then report our detailed financial results for the second quarter; and then we'll all stay as long as you need for questions.

Karl?

Thanks, Rob, and good morning, everyone. First, let me just say that we were very pleased with both our results for the second quarter, as well as with our enrollment results for the summer academic term, and which grew on a year-over-year basis for the first time in several years, and which I will comment on momentarily.

First, regarding the second quarter's performance, revenue per student declined 1.6% from the prior year, which was less of a decrease than we originally anticipated, due largely to a lower drop rate. For the full year 2015, we still expect revenue per student to be down roughly 4%.

In terms of our operating expenses, marketing was up about 10% versus last year. And that reflects some additional expenses associated with developing new creative content and also supporting Strayer@Work. For the full year, we would expect marketing to be up in the mid-single-digits.

Bad debt continues to perform well at 3.2%, and we think that's a product of the ongoing enhancements to the academic experience which we've made, and has resulted in higher retention and fewer drops.

Now, given that we're halfway through the year, and also have visibility into the third quarter's enrollment, we have a better sense of our operating expense outlook for the full year. At the beginning of the year, we said that we expected our operating expenses in 2015 to be up 1% to 2% based on various initiatives that we would have underway. Those initiatives are still in progress, but our ability to find ongoing productivity improvements has offset some of the incremental expense associated with funding these initiatives. And as a result, instead of being up 1% to 2%, we now expect our operating expenses to be essentially flat versus 2014.

Turning now to our enrollment results for the summer academic term, our total enrollment increased 2% to 37,221 students; and, clearly, showing total enrollment growth is a big milestone for us. We were pleased that this increase was driven by continued strong improvements in student retention as well as new student growth. Our continuation rate increased 210 basis points, which was on top of the more than 200 basis point increase we had last summer. New students grew 4%, with meaningful contributions coming from two of our big strategic efforts: the Jack Welch Management Institute, and Strayer@Work.

Our national accounts continue to perform much better than the broader University. Total enrollment for national accounts grew 12% for the summer term, representing the ninth consecutive quarter of total enrollment growth. That segment has been growing total enrollment now for more than two years. New students from national accounts grew 14%, and we added 11 new clients during the quarter.

We were also very pleased today to announce our second Degrees@Work client, TeleTech, which is a large B2B outsource solutions provider for customer service and technology functions. And in addition to the Degrees@Work clients, we are also actively engaged building proprietary and customized learning solutions for several Fortune 100 companies across several industries.

And finally, the Jack Welch Management Institute continues to perform exceptionally well. Total enrollment there increased 38% versus the prior year. And their continuation rate, which is already the highest in the University, increased 78 basis points from last year.

Dan?

Thank you, Karl, and good morning, everyone. I'll start with revenue, which for the second quarter was $109.8 million, a decrease of 3% from 2014. The decrease was driven by lower enrollments, which were down 1% in our spring academic term; and lower revenue per student, which declined 2%. As Karl mentioned, the decline in revenue per student was slightly better than we expected, as lower drops offset the continued mix shift to our lower-tuition-paying undergrads.

Our income from operations was $20.9 million compared to $24 million for the same period last year, a decrease of 13%. Our income from operations includes non-cash adjustments to our liability for losses on facilities we are no longer using.

Excluding these items, income from operations was $21 million for the second quarter this year and $22.6 million last year. Our operating margin was 19.2% for the quarter compared to 20.1% in 2014, when excluding the non-cash adjustments. And as Karl mentioned, our bad debt expense as a percentage of revenues was 3.2% for the quarter, unchanged from the same period in 2014.

Net income for the quarter was $11.9 million compared to $13.7 million for the same period in 2014, a decrease of 13%.

Excluding the non-cash adjustments, net income was $11.9 million this year and $12.9 million for the same period last year. Diluted earnings per share decreased 14% to $1.11 compared to $1.29 last year. Excluding the non-cash adjustments, EPS remained $1.11 this year compared to $1.21 last year. Diluted weighted average shares increased slightly to 10,705,000 from 10,623,000 for the same period in 2014.

Our results for the first half of the year were consistent with the second quarter. Revenues decreased 3% to $221.6 million compared to $229.2 million in the first half of 2014, due to lower enrollment, which was down on average 1%, and lower revenue per student, which was down about 2%.

Income from operations was $40.8 million for the first half of 2015 compared to $49.9 million in 2014, a decrease of 18%. Excluding our non-cash adjustments, income from operations was $40.7 million and $47.6 million for the first half of 2015 and 2014, respectively. Excluding non-cash adjustments, our operating margin was 18.4% in the first half of 2015 compared to 20.8% in 2014.

Net income was $23.3 million for the first half of this year compared to $28.5 million last year, a decrease of 18%. Excluding non-cash adjustments, net income was $23.2 million this year compared to $27.1 million in 2014.

Diluted earnings per share was $2.17 compared to $2.68 for the same period in 2014, a decrease of 19%. Excluding non-cash adjustments, diluted earnings per share was $2.17 this year again compared to $2.55 for the same period in 2014. And our diluted weighted average shares outstanding for the first half of the year increased again slightly to 10,721,000 from 10,602,000 in 2014.

As of the end of the second quarter, we had cash and equivalents of $195.6 million. We generated $43.5 million in cash from operating activities in the first half of 2015 compared to $45.2 million in the first half of 2014.

Our capital expenditures were $7.1 million for the first half of this year compared to $2.3 million for the same period in 2014. And as I mentioned last quarter, our capital expenditures are up in 2015 as we continue to make investments in new programs and technology, as well in renovations to a few key campus facilities.

Now, regarding our credit facility, as of the end of our second quarter we had $115.6 million outstanding under our term loan, and no outstanding balance on our revolver. And as we previously announced, on July 2 we prepaid the entire outstanding principal balance of our term loan and amended our existing credit agreement.

The amendment extends the maturity date of our revolver from December 31, 2016, to July 2, 2020, and increases available borrowings from $100 million to $150 million, with an option to increase it another $50 million. Currently we have no outstanding borrowings under the new facility.

And finally, we continue to maintain $70 million of share repurchase authorization, though we did not repurchase any shares during the second quarter.

Rob?

Thanks, Dan. It was a fairly straightforward quarter from my perspective, so I don't have a lot to add. I did want to point out, though, that with the prepayment of our term loan and the increase and extension of our revolver to $200 million until 2020, we've cleaned up our balance sheet; put ourselves in position to take advantage both of growth opportunities in the business and potential redeployment of capital to our owners.

And with that, operator, we'd be pleased to answer any questions.

(Operator Instructions). Peter Appert, Piper Jaffray.

Those better retention numbers are very impressive. Anything you would call out in terms of what you think is contributing to that?

Sure, Peter. We've had good retention for going on the last year now. And it really is a combination of many enhancements that we're trying to make to the student academic experience. But I guess I would say it's all centered on a concept that we've developed called relative student engagement, where we're using predictive data to better understand learning styles and where students might get hung up. But using that data, we're able to make adjustments to curricula, to faculty scheduling, and pairing faculty member with students of a certain learning style. And so, those efforts continue.

We think there is still opportunity -- there is always opportunity to improve. But the retention efforts that we've had over the last year have been centered around better understanding how students learn, and then adjusting the way that we teach them in the classroom.

Got it. That's helpful, thank you. And then can you give any quantification in terms of the current scale of the Jack Welch and the Strayer@Work programs, and how big you think they could be as a percent of the total operation?

Well first, concerning the Jack Welch Management Institute, when we made that acquisition of a little over two years ago, they had really fewer than 100 students. They will cross 2015 with over 1,000 students, so we've added 1,000 new MBA students inside of two years. They grew 38% (technical difficulty) quarter. They have terrific outcomes. So we see high levels of satisfaction. We see very strong, as reported by our students and our graduates, outcomes in their professions. So, I can't give you an exact number of how big it will be, but it will be much bigger than it is today over the coming years.

And then with respect to Strayer@Work, we only had it launched about half of the quarter, and we ended up with several hundred students as a result. The fall academic term will be the first quarter that has a full quarter of enrollment opportunity for now our two Degrees@Work clients. Again, I can't peg a specific number, other than over the course of several years we expect that that will be a very meaningful part of what our student body looks like.

And Peter, we also would expect to get other clients, as well. So you've got growth in the two that we have. And then Karl's team has got, I think, a very effective effort describing what the value is of this program, and hopefully having other clients as well.

Just one last thing, please. Any meaningful cost to customize the curriculum for these offerings? Are there any margin implications around this?

There hasn't been yet. And I can't foresee what future clients might want in the way of customization, but this is a pretty complicated effort. And as I said, I think, last quarter, the Chrysler arrangement took almost a year, in and of itself, to really build out. And so, we would have to think about how we would price a Degrees@Work offering if there was some massive level of customization that we hadn't anticipated. And the economics of that would be relative to whatever that specific arrangement was.

Great. Understood. Thanks very much.

Corey Greendale, First Analysis.

I had a couple questions about Strayer@Work, as well. And if I understand -- or I'll caveat this by saying that you're not going to give away any proprietary secrets about how you're doing this -- but interested in the go-to-market approach on this. Do you have a large business development team that's calling on a bunch of employers? Or just how are you approaching the market with this?

Well, it's a wide-ranging effort that involves having ongoing discussions with companies that we already have relationships with. So, you probably know, Corey, that we have national account agreements with over 300 companies. And so we're always engaging those organizations in different ways and talking about how we can better innovate the way that higher education is imagined and delivered. And we're starting to have companies contact us now, based on the Fiat Chrysler announcement and other avenues where we get referrals from existing national account companies.

So, at any moment in time, we're having discussions with lots of organizations about the way that they are developing and training their talent. And I think what you see in Fiat Chrysler and TeleTech and future companies is they really see enabling educational access as a business driver to attract and retain better talent. It's a big strategic enabler for them, and we're happy to be a partner in that case.

Corey, I think the direct answer to your question, if it was answered by our team at Strayer@Work, is they consider themselves small but effective. (laughter)

Well, I consider myself to be that personally (laughter). So following up on that, would you say that the team is more having to work with companies to persuade them of the value of a program like this at all, versus the value of Strayer specifically?

And are you seeing, just given that there are others like obviously the very high-profile ASU-Starbucks arrangement -- are there RFPs? Or do -- once the discussion starts, is it pretty much -- do they go with Strayer without having to talk to others?

Well, we only have two of these under our belt. Neither one went through an RFP. The assumptions that we make around employee participation and turnover reduction and so forth, those are well grounded in experiences that we've had with other organizations -- Verizon, for example. We've been one of their largest, if not the largest, educational partner to them for many years now.

And so we've done a lot of research in how participating in educational programs can affect employee retention and performance, for that matter. And there are some very impressive statistics around that stuff.

And so, what we've done with Strayer@Work is we take that information and that data and we're having a different kind of conversation with the business leaders of these organizations around not just thinking about education as a benefit in the way that maybe healthcare is, or something like that, but much more as a real strategic enabler to attract the very best talent that you can in whatever market that you're competing in, and then getting pretty sizable gains in employee retention; which every CEO that we talked to, that's right up on the top of their radar screen, is talent management and particularly retention.

And employee performance, in addition to retention.

And I mentioned it in my prepared remarks, Corey, that the big headline-grabbing efforts have been Chrysler's announcement and now TeleTech. But we -- as I said, we are engaged now with several Fortune 100 companies doing what we call Skills@Work, which is another product that we have, which is proprietary and customized training solutions that are delivered across mobile platforms, online platforms. And it's all directed at achieving a higher level of performance for these organizations.

I appreciate it. And I understand you've been in this business for a while; just obviously intrigued by the -- what appears to be the traction in this new approach. My assumption -- and please correct me if this is wrong -- is that TeleTech and Chrysler, that that's going to be primarily a bachelor degree market as opposed to graduate degrees, but is that right?

Well, all degree levels are open for participation, so an employee at either organization could elect to get a master's degree if they want. To be honest with you, of the several hundred students that are enrolled for summer, I don't have the breakdown of how many were undergrad versus grad. I would imagine it mirrors to some degree what our overall performance is: one-third graduate, and two-thirds undergraduate. But I don't have the exact numbers.

And just one last quick one, and I'll turn it over. Given the success with Jack Welch, do you think there's any potential to replicate that in other verticals like the Steve Wozniak school of IP, or anything like that?

(multiple speakers) find another Jack Welch. (laughter)

Yes. There could be. It's not something that we're actively pursuing at the moment. But as I say, we couldn't be happier with the way that the Jack Welch Management Institute has performed. And we think there's just tons of opportunity there. It's still a fairly young and nascent brand as an education entity. And as awareness of that product gross, I think it will, as I said earlier, become to be a very sizable part of our portfolio of students.

In some ways, Corey, it was almost uniquely matched to what our culture and heritage has been. For over 120 years, we've taught business and management. So having someone of Jack's stature and experience associated with that, it was just a very natural harmony. If we could find similarly situated and accomplished people, we would certainly look at it. But I doubt there's another Jack Welch out there.

Maybe the Ron Bailey School of Education. Anyway (laughter). But anyway, I appreciate it, and good work on these initiatives.

Jeff Silber, BMO Capital Markets.

Just wanted to clarify one thing. The enrollment data that you report for Strayer University excludes the Jack Welch Management Institute but includes Strayer@Work, is that the right?

No, the enrollment results that we report for Strayer University include both Jack Welch Management Institute students as well as Strayer@Work students, because those students are enrolled in Strayer University. The degree that is granted to the Jack Welch students is a Strayer University degree, and the same thing is obviously true for Strayer@Work.

All right, I appreciate you clarifying that. So let's strip out Jack Welch Management Institute and Strayer@Work. Can you just talk about how the core business is doing beyond that? Any specific trends in your verticals?

Sure. So, in terms of degree mix performance, it somewhat mirrored last quarter. New graduate students, excluding Jack Welch -- it improved slightly, but it was still down low-double-digits. And new undergraduate students was quite strong. We had growth in new students when you exclude both JWMI and Strayer@Work. But obviously the strong performance of both of those is where we netted out at 4% up for new students.

And in terms of the actual degree verticals, technology versus business, are you seeing any specific trends there?

No, nothing that I would call out.

Okay, great. And then just a couple of numbers questions. For modeling purposes, what should we be using for tax rate for the rest of the year and capital expenditures?

Jeff, we're still in 39% to 39.5% on taxes. And for CapEx, I think we said before the range was $10 million to $12 million. We're at the upper end of that range.

All right. Fantastic. Thanks so much.

(Operator Instructions). Paul Ginocchio, Deutsche Bank.

Karl, any update or view on the typical classes per year a Strayer@Work student will take from one of these corporates? Thank you. And then I've got one follow-up.

Sure. I think it's just too early. I'm guessing that the performance of Strayer@Work students is going to largely mirror what our regular students do, which is take two classes at the undergraduate level per quarter, maybe attend three quarters a year. A lot of students like to take the summer off. But honestly, Paul, I think we're going to need two, three quarters under our belt to see if there's any change in things like that.

Okay, great. And just with GE finally going through, I would assume there's not much impact. But is there anything we should be watching out for as they [go someplace]? Anything that you'll need to change (technical difficulty)? Thanks.

We don't believe so, no. We've already submitted all of our program data to the department. And as we've said previously, we don't anticipate any issues under gainful employment.

Great. Thank you.

Sara Gubins, Merrill Lynch.

This is David Chu for Sara. So, in terms of revenue per student, given that 1Q and 2Q were better than your 2015 outlook, why do you still expect the 4% declines?

Yes, let me put revenue per student maybe in a little bit of a larger context. So, we obviously lowered our undergraduate tuition at the beginning of 2014. And we knew that that was going to have a detrimental impact on revenue per student over some period of time, as each new cohort of new undergraduate students was rolled in at the lower tuition.

Last year, for 2014, that reduction was about 3.25%. Heading into 2015, because more cohorts would be on the lower undergraduate tuition, we said initially we thought revenue per student would be down in the 4% to 5% range. However, in the first half of this year, as a result of better retention, which leads to lower drop rate, we've been able to offset some of that decline in revenue per student.

Those gains that we made in student retention and the lower drop rate really started happening in the third quarter of last year. So we're going to begin to anniversary those gains heading into the next quarter. And whatever offset we've enjoyed in the first half of the year is likely to not be as great, if at all, in the back half of the year. And that's why we think revenue per student will be down roughly 4% this year.

Next year, we would expect that revenue per student would be down roughly 100 basis points, excluding any impact from Strayer@Work. And that is something that we just don't know. If we see large increases in Strayer@Work students, there could be an additional decline above the roughly 100 basis point decline that we're already expecting in 2016.

But as we've said before, that would be a trade-off that we'd be very happy to make, because we see Strayer@Work as a really important strategic effort.

Okay, great. That's helpful. And on that, do you think that retention can improve in the back half? Or would it be difficult, given the improvements that you've seen over the last four quarters or so?

Well, all I can say is the efforts that are underway to impact completion and retention and student satisfaction are going to continue. Whether or not they result in future gains, that remains to be seen. We don't really comment on forward-looking enrollment. But all of the efforts that underpin the gains we've had thus far will continue, and we'll continue to make enhancements throughout the year.

Okay. And just lastly, I would imagine that these metrics are trending favorably. But if you can just discuss lead flow and conversion rate trends.

We've seen a healthy demand environment for the better part of the year. And beyond that, we don't really comment.

Okay, understood. Thank you very much.

Thank you. And that does conclude our question-and-answer period.

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

Thank you, Ben, and thank you all for participating. We look forward to talking with you again in October. If you do have any other questions, please give Dan or Karl or I a call. We'd be glad to cover whatever we can. 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.