Strategic Education Inc (STRA) 2017 Q2 法說會逐字稿

Good morning, everyone, and welcome to Strayer Education, Inc. Second 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; and Karl McDonnell, Chief Executive 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'd like to turn the call over to Robert Silberman. Mr. Silberman, please go ahead.

Thank you, operator, and good morning, ladies and gentlemen. As you heard on the introduction of the call, you are stuck this morning with just Karl and I as our crack CFO, Dan Jackson, had a biking accident and broke his hip on Sunday. He's fine but he's laid up this week and will not participate on the call.

All of the detailed financial information on the quarter is contained in our earnings release, so I will not belabor those points here. And Dan will be back next week if you have any specific modeling questions, which you can direct to him specifically.

However, I did want to highlight this morning one important issue from my perspective on the Q2 financials. Our reported Q2 GAAP EPS of $0.92 is up significantly versus the prior year. However, that $0.92 includes approximately $0.20 of noncash earnings from a reduction in the liability associated with the potential 5-year earn-out payment from our acquisition of the New York Code + Design Academy. Now that $0.20 comes from the fact that roughly half of our $25 million purchase price for NYCDA was in the form of an earn-out, which would only be paid to the sellers if the business achieved certain targets within a 5-year period, and we carry that portion of the purchase price on our balance sheet as a liability.

Each quarter, we determine the likelihood that the business will achieve those targets within the 5-year measurement window, which is all that counts for the earn-out, and adjust the liability accordingly. In the second quarter, we adjusted that liability down by approximately $2 million, and when you subtract out the EPS associated with this liability adjustment, you're left with what I call our core earnings for Q2, which were roughly flat with the prior year. However, with our current strong enrollment growth trends, we do expect those actual core earnings for the second half of the year to increase at a double-digit rate versus the same period in 2016.

Finally, before I turn it over to Karl to comment more fully on our operational and financial results for the quarter, I wanted to remind everybody that we will hold an Investor Day on October 26, 2017, here at our headquarters, which will coincide with our Q3 earnings announcement. During the Investor Day, we will provide a deep dive on our business model and academic products, including Strayer Studios, the Jack Welch Management Institute and the New York Code + Design Academy as well as discuss more fully our growth plans for 2018 and beyond.

With that, I'll turn it over to Karl. Karl?

Thank you, Rob. Good morning, everybody.

I'd like to begin this morning with an update on a couple of regulatory matters. First and foremost, we were very pleased that our regional accreditor, the Middle States Commission on Higher Education, reaffirmed our accreditation for an 8-year period, which is the maximum duration that they allow. This reaffirmation follows a review of our self-study. It included multiple site visits by a peer review team and was a multiyear effort on the part of the university's leadership team. I'd like to specifically acknowledge Dr. Sondra Stallard, Strayer University's President Emeritus; and Brian Jones, Strayer University's current President, as well as his senior leadership team for the incredible work they did not just on this self-study but on all of the improvements made since the university's last self-study in 2007.

The second regulatory update is also during the quarter. We received our specialized programmatic accreditation for our RN to BSN program from the Collegiate Commission on Nursing Education or CCNE for a period of 5 years, which is their normal duration.

Next, just a couple of comments on our second quarter financial results. Our revenue per student declined 1.8% from last year. That's better than the decrease of 2.6% we had in the first quarter. However, in a prior earnings call, I indicated we thought revenue per student would be down in 2017 on a full year basis by roughly 1 percentage point. But based on our current trends, which is more undergraduate students as well as a slightly higher drop rate, we expect revenue per student to decline between 1.5% and 2% now for the full year 2017.

Our operating expenses were up 3.4% in the second quarter when you include the reversal of the NYCDA contingent liability, otherwise they would have been up 6% excluding that adjustment. About 1/3 of that increase was associated with higher advertising costs as we work to support our various branding efforts. Much of the remaining increase is essentially timing. We have about a dozen active large projects designed to improve both student learning outcomes and the overall student experience, and we invested in those a little more heavily in the second quarter. For the full year, we think our operating expenses will increase roughly 3% on a year-over-year basis, and that figure assumes that our current enrollment trends continue.

And then lastly, on enrollment. Our positive enrollment trends continued in the second quarter with new students up 6% and total enrollment up 8%. Our continuation rate in the quarter increased 100 basis points.

Quickly on the Jack Welch Management Institute. They posted another very strong quarter with 34% new student growth, 31% total student growth. And they almost doubled the number of graduating students from 52 last year to 94 this year, and they've crossed over the 1,500 student threshold. And we couldn't be happier with their performance.

94 in the quarter.

In the quarter, yes. Lastly, our enrollment outlook for the third quarter is for both new and total enrollment to grow approximately 7% versus the prior year.

And with that, operator, we'd be happy to take questions.

(Operator Instructions) And our first question comes from Jeff Silber from BMO Capital Markets.

It's Henry Chien calling for Jeff. I was wondering if you could add a little bit more color on what's driving the new enrollment growth in the quarter, and what you're seeing for 3Q. Is there anything that you're doing internally? Or are you seeing more returns on your marketing or advertising. Just any kind of color to help us understand the trend.

Sure, Henry. First, we continue to see a pretty positive demand environment, meaning that interest in the university continues to grow at a double-digit pace. We saw that in the second quarter. And I think it's a combination of just general brand awareness; the health of, as I just commented on, the Jack Welch Management Institute; the health of our corporate alliances. All of that is contributing to the new student growth that we've had. We also had pretty healthy retention gains in the quarter, 100 basis points. So it's a combination of just the ongoing efforts to build the brand awareness of the university combined with some of the more proprietary things that we have in the way of JWMI and the 300-plus corporate partnerships that we have around the country.

And Henry, I'd also add. I think it's incumbent to focus on the fact that Karl and his team have made significant improvements in the academic product. Our graduation rate is up. And it's a virtuous cycle. As you get more satisfied students who are benefiting from the program, it just makes it easier for your brand to be perceived positively.

Got it. Okay, great. That's great to hear. And then shifting to operating margins. How should we think about -- for the next few quarters or for the remainder of the year, in terms of balancing the additional spend you're putting into the new investments and for new enrollment growth, is there a framework or any direction of how we should think of the margin going forward?

Well, you heard Robert comment in his remarks that we expect double-digit earnings growth in the back half of this year, and with that, we would expect our margins to expand.

(Operator Instructions) And our next question comes from Peter Appert from Piper Jaffray.

Continuing on the enrollment question. Can you give us any more color in terms of maybe programmatic areas where you're seeing particular strength? And then any particulars in terms of the partnership channel in terms of how that's doing?

Sure, Peter. Unfortunately, I don't have the by-program list in front of me. I know, similar to prior quarters, the bulk of the growth is at the undergraduate level. In prior quarters, the growth has been pretty spread evenly across most of our programs, but the bulk of what we teach is business. So for example, the BBA is our largest program, so that would be a program that had a lot of growth in it. And in terms of the second part of your question, the health of our corporate channels is very strong. We're benefited by the fact that we have a lot of them, well over 300, and we're also benefited from the fact that we've got this campus network which enables us to activate a lot of these relationships at a local level. So we may sign a relationship at the corporate level and let's say it's with a nationwide retailer and then our local staff in the 80 campuses that we have around the country can go visit those retailers and get to know them and build relationships at a local level. And that has always worked well for us. And in this quarter, it was a big contributor to our growth, and we expect it will be in the future as well.

And how big is the corporate channel as a percent of enrollments at this point, Karl?

Well, what we refer to is that along with community college enrollments, and taken together, it's about 1/3 of our total population.

And can you tell me what you're doing currently in terms of pricing?

We had a 1% undergraduate tuition increase at the start of this year, and we felt that implementing that tuition increase did not in any way move us up the affordability comparative universe that we look at. We still feel like we're among the most affordable institutions and basically in line with your average in-state 4-year institution on a public basis. The Jack Welch Management Institute will be implementing a 6% tuition increase for the fall term for new students, and that's, I think, about the fifth tuition increase that we've had there, reflecting the strong outcomes in the institute and the strong demand that we see there. And we haven't made a decision on 2018 yet, so we can comment on that on Investor Day.

So the lower revenue per student is exclusively a function of mix in terms of more undergrads?

Yes.

Okay. And then last thing, Karl. The reversal of the reserves for the contingent liability on NYCDA would seem to imply that the performance isn't quite as good as what you anticipated or would like to see. Can you just speak to the operating results? And I'm asking this obviously partly in the context of some of the consolidation we're seeing in that industry currently.

Sure, Peter. The -- it's actually 2 different measurements. We have an internal budget, and it was associated with the value that we anticipated the purchase of NYCDA. And then as a measure of just capital discipline, we put a fairly heavy burden on the sellers with regard to the earn-out of the full capital cost, if you will. The -- we're actually quite pleased with what we're seeing in NYCDA, and we're continuing to invest behind it. And -- but in order to achieve the earn-out, there was a very high rate of growth that was required within a relatively short period of time, and that just -- as we get farther into that 5-year measurement period, just on a pure accounting test basis, we have to measure the likelihood that, that's going to get paid. There's still a -- we didn't eliminate that liability. We just reduced it by a couple million dollars. But overall, I think the long-term attractiveness of coding as a business and as an academic area, for both Karl and I looks, I think, quite attractive. They just -- we see it within our own business our ability to automate and to drive artificial intelligence to a lot of things that we're doing. It just -- it seems to us that the likelihood that coding will be a smaller skill set in the economy going forward is pretty low. So we want to nurture this business carefully, the way we do all of our academic products and make sure that it's rolled out in a way that we can absolutely assure that we're achieving the academic outcomes. And as a separate matter, we have this calculation with regard to the other half of the purchase price. It's not really related directly in the way that you're asking.

I see. Can you give us a sense of how big the business is currently and what the impact is on your operating results?

It's still pretty small. It's just a few million of revenue. We're not breaking it out at this point. It's not big enough to break out. And it's -- we hope that it will be breakeven at the end of the year. It's not quite breakeven yet. It's still a little bit of drag on the earnings.

And I'm showing no further questions from our phone line. I would now like to turn the conference back over to Robert Silberman for any closing remarks.

Thank you, operator. We appreciate it. And look forward to seeing all of you in October here at our headquarters. If you do have any other questions, please give us a call, and as I said, Dan will be back next week if you have detailed modeling questions. Thanks very much.

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