Strategic Education Inc (STRA) 2017 Q1 法說會逐字稿

Good morning, everyone, and welcome to Strayer Education, Incorporated's First Quarter 2017 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 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. 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 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, Liz, and good morning, ladies and gentlemen. We had a strong and a fairly straightforward quarter. So I think we'll just go right to Dan reporting on the financial results. I know Karl has a few comments on both our academic and operational progress and then some comments on our outlook. And then, we will stay for as long as necessary for questions. Dan?

Thank you, Rob, and good morning, everyone. As we reported last quarter, our enrollment for the quarter ending March 31, 2017, increased 6% to 43,387 from 40,872 in Q1 2016. This enrollment drove 3% revenue growth in our first quarter to $114.9 million from $111.2 million last year.

Offsetting the impact of the 6% enrollment growth was a 3% decline in revenue per student due primarily to the continued shift to undergraduate students paying our lower tuition rate. Our income from operations for the first quarter was $18.4 million compared to $20.1 million for the same period last year. Income from operations in the first quarter of 2016 includes nonrecurring, noncash adjustments primarily related to our lease liability. Excluding these adjustments, income from operations was $18.5 million for the first quarter of 2016.

Our operating margin was 16% for the first quarter of 2017 compared to 16.6% in 2016, excluding the noncash adjustments. Bad debt for the first quarter was 3.8% compared to 2.8% in Q1 2016.

Net income for the first quarter was $10.6 million compared to $12.4 million in 2016. Excluding noncash adjustments, net income in Q1 2016 was $11.4 million. Net income in the first quarter this year was negatively impacted by a higher tax rate, which was 42.7% for the quarter compared to 38% in Q1 last year. Recall that I mentioned last quarter that new accounting standards related to stock-based compensation will result in fluctuations to our tax rate this year. These fluctuations occur as restricted shares vest at higher or lower values relative to their value when granted. Notwithstanding this Q1 increase, we expect a full year tax rate of about 39.5%.

Diluted earnings per share was $0.95 for the quarter compared to $1.15 for the same period in 2016. Excluding noncash adjustments last year, our EPS was $1.06.

Operating losses at NYCDA or New York Code + Design Academy contributed approximately $0.10 of dilution to our Q1 earnings. We ended the quarter with $147.1 million of cash and no debt. We generated $25.1 million in cash from operating activities during the quarter compared to $14.7 million in Q1 2016.

Cash flow improved significantly from Q1 last year as we anniversaried several events that negatively impacted our cash flow last year, most significantly, our acquisition of NYCDA and unfavorable timing of tax payments.

Regarding capital expenditures, we spent $3.8 million during the first quarter compared to $2 million in the same period in 2016. The higher CapEx for the quarter is due to the timing of the projects that started in late 2016, that have carried over into 2017.

However, for the year, we continue to expect our CapEx to be in the range of 3% to 4% of revenue. And finally, we continue to maintain our $450 million revolver.

Karl?

Thanks, Rob and Dave. Good morning, everybody. I do just have a couple of comments before we turn the call over for questions. First, we continue to be very pleased with our enrollment results, both for the first quarter, as Dan just noted, but also with our outlook for the second quarter, where we see new students up, approximately 8%, and total enrollment up, approximately 6%. As a result of these enrollment trends, and to reiterate what we said last quarter, we expect to report double-digit earnings growth for the second quarter, and subject to these enrollment trends continuing through the balance of the year, we also expect double-digit earnings growth in the third and fourth quarter as well.

We continue to be pleased with our ongoing efforts to improve student learning outcomes and retention, specifically the performance of our new online course format built by Strayer Studios. Having tested several of these new courses over the past couple of terms and seeing quite favorable results, our team is in the process of building and launching 2 to 3 new courses per quarter. And by the end of 2017, more than 15,000 students will have completed one of the new courses which, again, in our tests had significant gains in student achievement and retention.

The Jack Welch Management Institute continues to perform very well. They had 30% enrollment growth in the first quarter, and we expect a similar increase in the second quarter as well.

Finally, the $0.10 of dilution from the New York Code + Design Academy in the first quarter was an improvement from the $0.20 of dilution that we had in the fourth quarter of 2016, and basically, it's in line with our internal plans. We expect dilution in the remaining quarters to decrease, and our goal is to get that business to break even by the end of 2017 this year.

And with that, Liz, we'd be happy to open the call up to questions.

(Operator Instructions) Our first question comes from the line of Peter Appert with Piper Jaffray.

Dan or Karl, could you talk a little bit more about NYCDA in terms of what you're seeing from the perspective of enrollment momentum? Any changes in outcomes or completion rates as you scale that business?

Sure, Peter. First, on outcomes, we continue to see very favorable outcomes. The placement rate is in the mid-90% with strong salaries -- entering salaries, anywhere from, call it, $60,000 to $80,000 on the part of the program completers. Enrollment has been quite strong in the locations that we are operating in. We've been oversubscribed in some of our larger markets. The team there recently added a new product, a part-time web development program, which has also seen pretty strong demand. So we're pleased with the trajectory of where that business is right now.

Okay. Can you give us a sense of the scale of it, in terms of either enrollments or revenues?

We're not breaking out the revenue. We don't think it's a large enough component of our business now. And in any given quarter, Peter, per location, we might be running 2 to 5 classes, with anywhere from 15 to 40 people per class.

Okay. And you're in 9 locations, correct?

5 locations.

5, okay. And expanding to 9? Or did I just make that up?

No, we have other locations where we just are not presently offering the classes this quarter.

They're on the drawing board, Peter, but we're trying to take this reasonably carefully.

Understood. And then, Karl, could you talk a little bit about the status of the corporate partnerships, anything new to report there? The traction you're seeing from an enrollment perspective in that part of the business?

Sure. That part of the business remains quite healthy and strong. We continue to add new corporate relationships. As I said before, in any given quarter, we'll add anywhere from probably 3 to 8 new relationships. It continues, in our opinion, to be a big differentiator for us, and so that channel remains very healthy.

And can you remind me what portion of enrollments currently is from partnerships and JWMI?

Well, partnerships and JWMI is probably approaching 30%.

Okay. I'm sorry, could you break it up between the two?

It would be -- I'm just doing the math in my head, Peter, so if I exclude JWMI, it's probably 25% to 27%, and then another 3% to 5% for JWMI.

Okay. And then, probably just 1 more. On the -- so I noticed the bad debt up -- expense up a little bit year-to-year. Anything you'd call out on that?

Yes. Peter, you'll note, if you look back at Q4, we reported 4.6% bad debt. And we'd said at that time -- I said at that time it was due to a continued shift to undergraduate students. That passed a little more slowly. We were actually encouraged to see the decline from the fourth quarter to the first quarter, notwithstanding the increase year-over-year.

Our next question comes from Jeff Silber with BMO Capital Markets.

Last week, we had the announcement of the "acquisition" of Kaplan University by Purdue. I know it got a lot of media attention and client attention. And I just was wondering, irregardless of bad headline, from a competitive perspective in the market you're in, are you seeing more traditional universities expand programs to the working adult market that you tend to focus on?

Jeff, yes, we do see increased competition from state schools or what you might refer to as traditional institutions. But that's a trend we've seen growing over the last several years.

And on the margin. Is that worsening, leveling off? I mean, what are your expectations going forward?

My expectations are that more and more institutions over time will certainly migrate with online programs. Whether or not they want to serve working adults, that remains to be seen. But we're just focused on building the strongest brand that we can. We feel like we have a very rich history and a strong track record of educating students. And so we're quite proud of that and think that, that will be a differentiator for us moving forward.

Okay, great. And then shifting back to the NYCDA business. You've mentioned hopes that the unit, I guess, will break even towards the end of this year. Going forward, when that set at more of a mature level, I know it's going to take some time to get there, do you think that could be higher margin business than your core Strayer University business?

I think it's too early to project long-term margins in that business, Jeff. We're very happy with it, we know that the long-term supply demand fundamentals are quite favorable to web development and coding generally. So we'll have a better perspective on that as we get into 2018 and beyond.

Okay. And then, finally, just shifting back to capital allocation. You've got a lot of cash in your books. You continue to generate cash in the core business. Can you just remind us about your capital allocation priorities, and what would it take for the company to start buying back shares?

Well, let's start with the priorities, and then work into the latter part of the question, Jeff. And the priority is, first and foremost, return on capital, and having it sit on the balance sheet at very mediocre returns in the conservative investments we have is, obviously, not the highest return on capital we could have, but it's -- we think the value of liquidity is quite high. So we're prepared to pay that price. The highest return that we have seen over time has been improvements in our academic product. It tends to drive longer and more sustainable returns on capital because our core asset is the University, and a University's returns is never going to be higher than the returns that the student gets on their learning outcomes. And so -- Karl and -- has described in the past, a number of the investments that we make, not the least of which is the Strayer Studios, the revamp of our online courses. And a reasonable and predictable use of capital inside the business, I think is -- it will be our first priority. The second priority is to look for areas of high return, growth and expansion outside of the core business. I think it's safe to say we're not prolific acquirers, but we're constantly looking. And we're looking for assets that complement what we do, which is to teach and to provide educational opportunities. And then, exhausting both of those 2 requirements, truly surplus cash, we think, should be returned to owners in the most value-enhancing way. We reinstitute -- the board reinstituted our dividend at the end of last year because we felt like having navigated through some fairly stormy economic and regulatory seas over the last 5 or 6 years, things looked a lot calmer. And we had, frankly, built up a very strong balance sheet. In terms of share repurchases, a share repurchase is really just a dividend, because what we care about are the remaining shareholders, and you're dividending more of the company. It's slightly more tax efficient, but you take away optionality, because I can always just dividend more cash to the owners, and they can decide to buy more shares. So we look for a large discount to intrinsic value that's worth taking away that optionality to the shareholder, and we tend to be relatively opportunistic on that, and so we're always looking at it. We have an existing authorization. And as our internal opportunities arise and we measure those against the return of capital to owners, that's how we make that decision going forward.

(Operator Instructions) Our next question comes from the line of Corey Greendale with First Analysis.

So I noticed after covering Strayer for 15 years or something, that the language changed a little bit in your enrollment disclosure. It's always been stated as kind of a [pact], like a [fact] with enrollment. I think this time you said, expected. I'm just wondering what changed with the way you're reporting enrollment? Or why the language changed?

There's really no change, Corey. The -- what we decided to do is we had so many questions from your colleagues and peers and owners who are used to seeing the enrollment results match directly to the financial results, that we essentially have just added, we've restated the preannouncement of enrollment that we did last quarter with regard to the winter term, and that's what Dan referred to. And then, Karl's essentially is a preannouncement of our spring term enrollment, because we've already started the term. So the number that Karl has described is essentially what that enrollment will be. We don't really have a whole lot of movement. We have students who drop during the quarter, but that's always reflected in essentially our reduction in term revenue, which flows through. So there's really no -- that's just the restatement of what was already stated last quarter, so that you all can match the enrollment results directly with the reported financial results.

Understood. That was just set in my ways after so many years, so needed to figure out what the change was. And then on NYCDA, which you've already answered a bunch of questions on. When you talk about getting into breakeven, is that entirely revenue-driven, and are the costs still going up? Or is there anything on the cost side helping with that?

It's primarily revenue-driven. We're certainly not in a major cost-cutting mode on something that we're trying to grow. We always want to be productive and make sure that we're judicious in our expenses. But we want this business to break even on the basis of revenue and then grow from there.

Got it. And Karl, also after covering the company for so long, I know better than to ask for guidance that you're not giving. But when you talk about potentially double-digit earnings growth, I think the 3 of us on the call, our consensus is significantly double-digit earnings growth, like 30% in 1 quarter, even 79%? So anything further you can say beyond -- I'm assuming that doesn't mean we should be modeling like [teens-growth] or something like that?

I wish I could help you there, Corey. Unfortunately, I can't comment on that. Let me give you a little help, Corey. I mean, you've got our enrollment. I think Dan described revenue per student. There's nothing really significantly going on with expenses. So we'll give you the actual results when we have them in 3 months. But there is nothing that's out of the ordinary here.

Right, fine. And then, just last. Maybe for Dan. The cash flow was quite strong in the quarter. It looks like some of those was timing of tax payments. But anything -- I assume you're not going to be growing cash as well from ops at this rate for the full year?

No. Correct, Corey. It'll be stronger quarter-to-quarter this year relative to what we're seeing last year on a year-over-year basis, but the first quarter is particularly strong for a handful of reasons, some of which is the timing of tax payments, which we'll give back a little bit in the second quarter. And again, Corey, a good rule of thumb is, when we're operating normally, our distributable cash tends to be relatively close to our net income. It'll move around a little bit quarter-to-quarter based on timing, but that's a pretty strong rule of thumb in terms of cash-generative capacity of our business.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Silberman for any closing remarks.

Thank you, Liz. I appreciate the people participating. If you have questions, obviously, contact us directly. We look forward to talking to you next quarter. Thank you.

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