Strategic Education Inc (STRA) 2016 Q3 法說會逐字稿

Good morning, everyone, and welcome to Strayer Education, Inc.'s third-quarter 2016 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 Dan 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 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 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 would like to turn the call over to Robert Silberman. Mr. Silberman, please go ahead.

Thank you, operator, and good morning, ladies and gentlemen. Pretty straightforward quarter from my perspective, so we will go right to Karl discussing our operating results, including our enrollment for Strayer University's fall term. And we will report on the detailed financial results for the third quarter, and then we will stay as long as you need for questions. Karl?

Thank you, Rob. Good morning, everyone. I have just a few comments on our third-quarter results and our fall term enrollment before Dan will walk you through the financials in more detail.

Our third-quarter revenue of $102 million grew 3% from the prior year, and that represents our first year-over-year growth in revenue since the second quarter of 2011. When we reduced our undergraduate tuition by 20% at the start of 2014, we said that once we achieved consistent enrollment growth, revenue growth would trail by roughly four quarters -- and that is essentially the case here, as our total enrollments have been growing since the third quarter of last year.

Our third-quarter operating expenses were up 6% over last year, as we previously indicated they would be, to support our various growth initiatives. And these are investments that we anticipate continuing throughout the fourth quarter. And based on that, we expect our operating expenses for the full year to be up somewhere between 5% and 5.5%.

Turning to the fall term enrollment results, we grew our total student population by 6% to 45,509 students. That is the highest fall term enrollment we have had since 2012, and that is our sixth consecutive quarter of total enrollment growth. For the fall term, our continuing students grew 4% and our new students grew 13%.

We were also very pleased that the Jack Welch Management Institute was recognized by the Princeton Review as one of the top 25 online MBA programs in its very first year of consideration. For the fall term, JWMI grew 29%, and it increased their continuation rate 300 basis points to a University-leading 97%.

Lastly, late last week we received the Department of Education's draft gainful employment data, which showed that none of our programs failed. Draft data did show that two of our very small associate programs indicated in the zone. We are in the process of reviewing all of this draft data and will report once the data is finalized. Dan?

Thank you, Karl, and good morning. First, I would like to remind everyone that our financial statements continue to include the impact of non-cash adjustments to our liability for losses on facilities that we ceased using during the fourth quarter of 2013. Consequently, we will continue to describe our operating income, net income, and earnings per share with and without these non-cash adjustments.

Now onto our third quarter. Revenue for the quarter was $102.2 million, up 3% from last year; and as Karl mentioned, the increase was driven by increased enrollment, partly offset by lower revenue per student. Income from operations was $4.8 million for the quarter compared to $7.3 million for the same period last year. Excluding non-cash adjustments, income from operations was $4.6 million and $6.9 million for the third quarter of 2016 and 2015, respectively.

Operating margin was 4.5% for the third quarter of 2016, compared to 6.9% for the same period in 2015, excluding the non-cash adjustments. The roughly 6% increase in total operating expenses was primarily the result of accelerated investments in NYCDA expansion, academic program enhancements, and brand awareness initiatives.

Bad debt expense was 3.8% for the quarter compared to 2.3% for the same period last year. Bad debt for the quarter was in line with our second quarter this year, though higher than the same period in 2015 due to a one-time true-up we recorded in our third quarter last year.

Net income was $2.9 million compared to $3.7 million in 2015. Excluding non-cash adjustments, net income was $2.7 million for the third quarter compared to $3.5 million for the same period in 2015. Consistent with the first half of this year, net income in our third quarter benefited from lower interest expense resulting from the payoff of our term loan last year.

Diluted earnings per share was $0.27 for the quarter compared to $0.35 for the same period in 2015. Excluding non-cash adjustments, earnings per share was $0.25 for the quarter compared to $0.32 for the same period in 2015. Our ongoing investment in the growth of NYCDA resulted in about $0.17 of dilution to our Q3 earnings.

Moving to year-to-date results, revenues year to date increased slightly to $321.8 million compared to $320.8 million for the first three quarters of 2015 due to increased enrollment, offset by lower revenue per student.

Income from operations was $37.8 million for the first three quarters this year compared to $48 million in 2015, a decrease of 21%. Excluding non-cash adjustments, year-to-date income from operations was $35.9 million and $47.6 million in 2015.

Our operating margin was 11.1% compared to 14.8% for the same period in 2015 when excluding the non-cash adjustments. Net income was $23.1 million for the first three quarters of the year compared to $27 million last year, a decrease of 14%. And excluding non-cash adjustments, year-to-date net income was $21.9 million compared to $26.7 million in 2015.

Earnings per share was $2.14 compared to $2.52 for 2015. And excluding non-cash adjustments, EPS was $2.03 for the first third of this -- sorry; three quarters of this year compared to $2.49 last year.

And year to date, our investment in NYCDA has resulted in about $0.34 of dilution to EPS. Our diluted shares outstanding as of the end of our third quarter increased 1% to 10,803,000.

We ended the quarter with $120.5 million of cash and no debt. Year to date, our cash from operations was $30.1 million compared to $54.5 million in 2015. And as I mentioned last quarter, our cash flow from operations of this year has been negatively impacted by a few moving pieces, including our investment in NYCDA as well as a 2015 tax payment we made in the first quarter of this year; higher graduation fund redemptions; and in this third quarter, some unfavorable timing on a few large vendor payments.

Regarding capital expenditures, we spent about $7.5 million year to date 2016 compared to $9.6 million in the same period 2015. We expect full-year capital expenditures to be at the lower end of my previously communicated range of 3% to 4% of revenue. And, finally, we continue to maintain $150 million in available credit on our revolver. Rob?

Thanks, Dan. And with that, operator, we would be pleased to answer any questions.

(Operator Instructions) Jeff Silber, BMO Capital Markets.

In looking at the new student number, the growth was 13%, which is a pretty large number. We haven't seen something like that in a long time. I know you don't usually comment directly on these metrics, but I am just wondering: what drove that growth? And is that something you might think is sustainable?

Well, good morning, Jeff. We said at the last quarterly call that we seem to have seen a better economy -- a firming up of the economy, which seems to have helped our unaffiliated undergraduate students. I would say that that is a trend that has continued into the fall term.

We saw a lot of interest among that segment of students. It remains to be seen what happens in future quarters, but it definitely is an improved environment from our perspective with respect to undergraduate students.

And were there any specific programs that those folks were interested in?

No. It was pretty consistent across most of our programs. So I can't say that it was concentrated in one particular area.

Okay. Great. And can you give us an update on your plans for the NYCDA rollout?

Well, we are in seven locations. We are --

Seven new.

Seven new locations -- nine total. It is still relatively early. They have only been operating just starting into their second quarter. So that is something, Jeff, that we will comment on in future quarters. But we are very excited to have made the acquisition, as we said last quarter. And we are working to integrate their systems where we can inside of Strayer. And we will comment on it as we get forward into the future.

And, Jeff, it is a pretty broad geographic exposure now. We are in Seattle, Salt Lake City, Austin, Atlanta, Raleigh, Philadelphia, as well as New York and Amsterdam. So I think we will have a good view over the next 12 months as to what this can be.

All right. Great. And just one more. I knew you commented about bad debt. I'm sorry, I just missed some of that. What was the reason that bad debt as a percentage of revenues was up relative to last year?

Last year we had a one-time true-up that was related to what we determined was an overaccrual on some of our AR. So it was a benefit in the third quarter last year.

Got it. All right. Appreciate the color, Dan.

(Operator Instructions) Peter Appert, Piper Jaffray.

On NYCDA, the $0.17 investment spend in the third quarter -- should we think about that as sort of the run rate number going forward for at least a few more quarters?

On the expense side?

Yes.

Not necessarily, Peter. For the full year, we expect that the dilution will be in the range of $0.45 --.

Yes, he is talking about the expense, though. I think you're right, Peter. I think that is a relatively good number on expense. And as the revenue ramps, that dilution will come down.

And some of the expense, though, is --

For the integration.

Integration related. And that is not going to continue into next year, Peter.

Got it. Got it. Okay. So the $0.45 dilution in 2016 would probably be the peak level, presumably?

Correct. Correct.

Okay. And then can you comment on what you are seeing in terms of some of the other channels -- in terms of the corporate affiliates, what you are seeing at the Forbes School from a starting enrollment perspective?

We think you mean the Welch school.

Yes, the Forbes School is a different organization.

Sorry. Sorry, sorry, sorry.

We think we have a better brand, actually, with Welch.

Got it.

Well, the Jack Welch Management Institute is becoming a big part of our graduate enrollments. It grew just under 30% in the quarter. As I said, it was rep recognized by the Princeton Review as a top 25 online MBA program, and it is basically five years old.

So to go from a standing start to a top 25 program inside of five years -- we are very proud of that, obviously. Our corporate channels remain very strong. Enrollments in that channel were up 9% for the quarter. So we continue to see strength there, and it remains a big part of our focus.

Can you remind me what the current mix is in terms of an affiliate versus corporate versus Welch as a percent of the total enrollments?

Well, the JWMI enrollments are about 1,300 students now, so you can just divide that by our total population to get the mix. Our affiliated students are about a third of our total student population.

Okay. Got it. And is that -- the mix change really has not -- you don't view the mix change as a driver of margin, correct?

No. We don't.

Got it. Okay. Great. Thank you.

Jeff Li, Credit Suisse.

(technical difficulty) labor. Last quarter, you mentioned a labor disruption at a large corporate partner. Did the 13% new enrollment growth benefit from any sort of catch-up bounce-back at that partner?

No, it did not, Jeff.

Yes, that actually -- that impact sort of carried over into this quarter, to be honest.

I see. Okay. And then, given NYCDA is new and different business for you, can you give us an overview of your marketing efforts, and how they might be different than Strayer University's marketing efforts?

Well, it is a completely different program, obviously -- much shorter in duration. Most of the students so far that have gone through NYCDA's programs are already college graduates. Some of them actually have graduate degrees.

Typically, these are individuals either who just have a love of programming or mobile app design -- or, more frequently, are interested in career switching. And they find that this is a good value proposition for them to spend 10 weeks full-time or about 16 weeks part time to become a junior web developer, mobile app designer.

With respect to marketing, we use similar channels -- meaning digital, some radio advertising, and so forth. The message is a little bit different, obviously, because, as I said, it is a very different program. We have seen some early traction in some of these other markets in terms of generating awareness. But as I said, it is so early that we really need to get a few more quarters under our belt before we'll have a better sense of what the trends look like.

Okay. Great. Thank you. (Operator Instructions)

Thank you. I am showing no further questions at this time. I would like to go ahead and turn the call back over to Robert Silberman for any closing remarks.

Thank you, operator, and thank you all for participating. We will look forward to talking to you in February, when we have our year-end results. Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may now disconnect. Everyone have a great day.