Strategic Education Inc (STRA) 2024 Q4 法說會逐字稿

One Welcome to Strategic Education's fourth quarter 2024 results conference call. I will now turn the call over to Terese Wilke, senior director of Investor relations for strategic Education. Ms. Wilke, please go ahead.

Thank you. Hello everyone, and welcome to Strategic Education's conference call in which we will discuss fourth quarter and full year 2024 results. With us today are Robert Silberman, Chairman Karl McDonnell, President and Chief Executive Officer, and Daniel Jackson, Executive Vice President and Chief Financial Officer.

Following today's remarks, we will open the call for questions. Please note that this call may include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements are based on current expectations and are subject to a number of assumptions, uncertainties, and risks that strategic education has identified in today's press release that could cause actual results to differ materially.

Further information about these and other relevant uncertainties may be found in Strategic Education's most recent annual report on Form 10K to be filed, the most recent 10Q, and other filings with the Securities and Exchange Commission, as well as Strategic Education's future AKs, 10 Qs and 10Ks. Copies of these filings and the full press release are available for viewing on the website at strategicEducation.com.

And now I'd like to turn the call over to Karl. Karl, please go ahead.

Thank you, Therese, and good morning, everyone.

We were very pleased with SEI's 2024 full year results that we reported this morning, which reflects strong performance consistent with our notional operating model which we highlighted during our fall 2023 Investor Day. For the full year 2024, our revenue increased 8% and operating income increased 26%, generating almost 200 basis points of operating margin expansion. Our adjusted earnings per share grew 31% for the year to $4.87.

Our operating performance was strong across all three segments. US higher education grew average total enrollment by 6% in 2024, and employer affiliated enrollment grew faster, increasing 16% for the full year, reflecting the ongoing strength of our corporate partnership. Student retention in US higher education remained stable at approximately 87%. US higher revenue increased 5% in 2024 but was down slightly in the fourth quarter due to higher scholarships and the mixed shift of employer affiliated students.

Our ongoing focus on productivity and discipline cost management enabled us to keep expense growth well below revenue growth at US higher ed and enabled almost 30% growth in operating income for the full year. Australia and New Zealand segment grew average total enrollment 5% for the year. The higher enrollment was driven predominantly by strong continuing student enrollment. Australia and New Zealand segment revenue grew 11% in 2004 on a constant currency basis, driven by enrollment growth and higher revenue per student, which was aided primarily by students taking more courses per term, as well as a small tuition increase.

On a constant currency basis, ANZ operating income increased 3% in 2024. We continue to monitor and adapt to the evolving political and regulatory environment in Australia. The previously proposed international student caps were recently replaced with a new regulation that will attempt to govern international student immigration through the use of visa processing speed. Though we believe this change is more favorable than the previously proposed enrollment caps, we're still studying the issue and its potential impact on our ANZ enrollment moving forward.

Our education technology services segment had a record year, growing revenue by more than 30% to over $100 million and operating income by almost 50%. Sophia Learning, our direct to consumer portal, college level classes exceeded our expectations last year, growing both subscribers and revenue by 35%. Workforce Edge also had a great year, adding another 11 corporate partners for a total of 76, collectively employing more than 3.8 billion employees. In the fourth quarter, the workforce Edge team launched our largest ever employer partner, which includes a new or higher touch employer support model.

During the fourth quarter, our operating expenses were higher as a result of several one-time implementation-related costs associated with this new partnership. We also expanded our more than decade old partnership with Best Buy, converting it from a more standard tuition discount program to an all-inclusive Strayer university's degree at work program, which offers eligible employees the opportunity to earn a certificate, or master's degree from Strayer University at no cost to the employee. Our network of corporate partners remains one of SEI's major competitive strengths. In fact, more than 70% of the incremental total enrollment that we had in US higher education last year came through our corporate partners, and we expect these partnerships will be a major driver of ETS revenue and income growth over the next five plus years.

Lastly, regarding capital allocation in 2024. We generated about $217 million pre-tax cash from operations. We paid $48 million in taxes and invested $41 million in capital expenditures, leaving us with $128 million of distributable free cash flow. We use this cash and our existing cash balance to return about $75 million to our owners through our $2.40 common dividend and roughly $15 million in share repurchases. We then repaid $61 million balance on our revolver and refinanced a $250 million revolver, leaving us with just under $200 million of cash and marketable securities at the end of 2024.

Overall, we were very pleased with our performance in 2024 across the board, and I'd like to take this opportunity to thank all of my colleagues here at SEI for their ongoing commitment and support on behalf of Mexicans. And with that, Cherie, we'd be happy to take questions.

Thank you. (Operator Instructions)

And that will come from the line of Jeffrey Silber with BMO Capital Markets. Your line is open.

Thanks so much.

One we focus on enrollment trends. I know you don't guide to a specific enrollment number, but growth did slow to some extent in the back half of the year and was a little bit weaker than we had thought in Q4. Was it just because the comps got tougher? Is there anything specifically going on either from a new enrollment or retention perspective?

Good morning, Jeff.

No, I'd say that as you heard in my prepared remarks, certainly our corporate partnership enrollment remains strong. Our non-affiliated enrollment, the demand environment there continues to be strong. You may recall the beginning really, I think in the middle of last year when our enrollment was in the high single digits, we thought that at some point it would normalize to our long-term trend and notional operating model average of about 5%.

So it's going to move around in any one quarter. Some quarters it'll be above that, other quarters it might be slightly below, but over the long term we expect that our enrollment would be in that mid-range, which is reflected in our notional model that we presented at our last investor day.

Okay, I appreciate that. Can we shift gears to Australia and New Zealand? Can you give us a little bit more color from a regulatory perspective, exactly what the changes might be?

So the liberal government had proposed these labor governments, sorry, had proposed these international student caps which did not have enough support to pass parliament was necessary to be implemented. So instead they issued what's called a ministerial direction which has the effect that instead of having a hard cap through legislation. The government has indicated they're just going to use visa processing time to effectively get to the same level of international enrollment.

So, it remains to be seen in any one quarter or throughout the year what the timing may look like. But for the purposes of our own internal modeling as though those caps would be in place because the government has actually said they're going to level out the foreign migration into Australia at those levels.

And from a timing perspective, has that started already? Is that something you expect to happen over the next few months?

No, it has not yet, but that's because when they issued this ministerial directive, they said that all enrollment up until you hit that cap, those visas would be approved kind of at normal speed, and that's where we're at since we're at the very beginning of the year. It wouldn't be until later in the year as our enrollment starts to buttress up against that cap number that we may start to see the visa slow down the international student.

Yeah.

Okay, great. And if I could shift gears to the US government, obviously a lot going on in Washington DC these days, and you guys are physically there. Any potential impact on your business in terms of, what [Doge] is doing? Do you think you might be able to get some potential students from folks that might be being let go?

Well, we've always had a large presence of federal government employees, particularly at Strayer University, over the last 15 plus years. So you know that is something that we've seen before and could certainly continue in terms of impact from the new administration. Obviously, the new political appointees are still in the process of being confirmed, so we're continuing to monitor what's happening and We'll just continue to, update any comments that we have as more policy takes shape.

All right, I'll get back in. Thanks.

Thank you. (Operator Instructions)

And that will come from the line of Alex Paris with Barrington Research. Your line is open.

Thank you and thanks for taking my questions. I have a quick follow up on ANZ. I read about the new ministerial directive 111. I heard your response. As I recall, Torrens is roughly 50/50, domestic, international, first of all, is that correct? And then second, what will you do later this year when your enrollment gets closer to that notional cap.

Well, Alex, over the last year we've really worked to pivot with our marketing and advertising dollars to emphasize our domestic student enrollment. You're right, historically it's been about 50/50, but honestly, since the country reopened a couple of years ago, we've been dealing with visa lag times for a couple of years now, so that's something we are used to.

Torrens has a great reputation in Australia, high quality academic programs. We intend to market more than we have in the past to the domestic Australian market, and we're confident that notwithstanding whatever the delays may exist, we'll be able to continue to grow the Australian enrollment over time.

Great, helpful, and then, and, adjusted operating expense, came in at $271 million, up about 10% year over year pretty much in line with expectations. And then I look at the operating income from US higher Education ANZ and ETS and see some impact there. I'm wondering, number one, the incremental expenditures for growth in ETS and to a lesser extent US higher education and ANZ.

To what extent did those incremental investments impact, adjusted operating income generally. This year I do realize that the AOI margin was up 190 bits, which is pretty close to where you had forecast at the beginning of the year. And should we expect 200 bits based on the notional model of adjusted operating income margin expansion in '25, '26, over the foreseeable future.

Hey Alex, this is Dan. The fourth quarter happened precisely how we expected it, and yes, a big portion of the increase in expense was ETS related, as we as we've talked about several times this year and definitely had an impact on their operating income. I think the expense base of $271 million. It is about where we need it in 2025.

Obviously there'll be some seasonality with marketing investment which is typically concentrated in the middle two quarters, but we think the expense base right now is in pretty good shape, even with the additional investment in ETS continue through this year.

Okay, So just to be clear, the $271 million in adjusted operating expense in 2024 is approximately where it ought to be in 2025, based on need and requirement.

Yes, but again, it won't be uniform throughout the four quarters. The two middle quarters, $223 million are typically where we have more investment in marketing and are also the higher expense periods for ANZ given that those are their two bigger quarters.

Now, sorry, just to address the other part of your question on 200 basis points that's in our notional model that is what we expect over the next several years.

Right, and then while we're on this guidance thing, perhaps you're feeling generous, how should we be thinking about enrollment and revenue growth in 2025? I think enrollment growth at US higher education and ANZ were up about 3%.

Roughly in line with the notional model, I think US higher education a little low, and then ANZ at the lower end. And I think the long-term forecast is mid-single digits for US higher education and high single digits for ANZ. Should we expect acceleration in enrollment in 2025 versus 2024?

Well, obviously we don't know what the enrollment is going to be in '25 and beyond other than just given our history over many years, we're confident that we can grow the business at roughly mid single digits over the long term. It wouldn't surprise me if that were the case in 2025.

Dan just gave you a pretty good direction on operating expenses, and I reiterated our notional model of roughly 200 basis points of margin expansion. It remains to be seen obviously what's going to happen with revenue, but I personally feel good about the 5-year plan that we laid out at our investor day in 2023.

Great, that's super helpful thank you and I'll get back in the queue.

Thanks Alex.

Thank you. One moment for our next question.

And that will come from the line of Jasper Bibb with Truist Securities. Your line is open.

Hey, good morning guys. I apologize as my line has been cutting in and out. I hope you can hear me clearly. I just wanted to level set on the framework for '25, and I know there's been a couple questions discussing this, but just can you clarify so the framework is '25, it sounds like that's revenue growth consistent with the notional model and 200 basis points of adjusted operating margin expansion. Do I have that right? And is there any other? I guess detail on what we should expect for '25 you're prepared to provide on the call today.

Thank you.

Yeah, well, as we don't provide any specific guidance. We did introduce a five year plan back in the fall of '23. We have a pretty good handle of expenses. We made a lot of the We needed to for in the back half of '24, so to Dan's earlier point, kind of the current run rate on the expenses seems pretty good for the year. We're not trying to be coy. We just don't know what the revenue's going to be other than that, we're disciplined cost managers such that we feel good about the 200 basis points of margin expansion.

Because we can all expenses up or down based on the actual volume of enrollment and revenue that we do see, but yes, are we confident in that notional model over five years? We are.

Okay.

Thanks, and I wanted to ask about the cadence of operating mortgage and expansion. Maybe we should assume in this '25 plan, I guess hoping you would comment on planned growth investments and what we could expect for a first half, second half split is maybe the normal seasonality has been a little bit off in the past two years with some of the growth investments you've made.

Hey Jasper, it's Dan.

The quarterly margins a little bit harder to peg. What we've anchored on is our notional model of 200 basis points. I think it's probably fair to assume that the margin will improve throughout the year, but to try and give you detailed quarterly would be beyond that requires a little bit more view on revenue and enrollment.

Okay, last one for me, I guess the revenue for student decline at US High Ed was a steeper than we expected in the quarter. Could you maybe explain the drivers of that decline and then how we should think about revenue per student for US high ed at 25% if the employer channel continues to drive the growth there.

Yeah, it was about what we expected. Jasper, driven mostly by the continued shift to employer, but also scholarships at US Higher Ed were higher than we would typically expect. The '25 revenue per student, US Higher Ed is likely to be pretty stable maybe slightly up, but pretty stable.

I mean, this is Rob at the broadest level we in US Higher Ed, we don't see ourselves as big price takers. Our objective is to drive down the cost of the education for our students, the individual programs may have some variability and some opportunity on tuition, but in general when we think of opportunity on tuition, it's to drive it down.

Okay, thank you guys.

Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Karl McDonnell for any closing remarks.

Thank you everybody. We will look forward to updating on next quarter's results in about three months.

This concludes today's program.

Thank you all for participating. You may now disconnect.