Strategic Education, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Strong third quarter results with 5% adjusted constant currency revenue growth, 39% operating income growth, and 400 basis point margin expansion. Operating expense growth was less than 1%.
• Leveraging technology, with restructuring costs in the third quarter related to productivity initiatives.
• Education Technology Services division had strong growth, and Sophia Learning experienced 42% growth in subscribers and revenue.
• U.S. Higher Education saw revenue per student growth, employer-affiliated enrollment strength, and health care portfolio growth.
• Australia and New Zealand faced challenges with international student enrollment but had domestic growth and upcoming cap increase.
• Capital allocation included regular dividend, repurchasing ~429k shares for $34 million, with $134 million remaining on share repurchase authorization.

Segment Performance

• Education Technology and Services: Revenue increased 46% to $38 million, operating income rose 48% to $16 million. Operating margin was 41.7%. Sophia Learning saw 42% growth in subscribers and revenue. ETS' share of consolidated operating income is 1/3.
• U.S. Higher Education: Total enrollment slightly down, but revenue per student grew due to fewer drops, less discounting, and more courses. Revenue grew 3%. Employer-affiliated enrollment up 8% (now 33% of total). Health care portfolio enrollment up 7%, representing half of U.S. Higher Education enrollments. Operating expenses decreased by $6 million, operating income doubled, and margin expanded 520 basis points.
• Australia and New Zealand: Total enrollment down 2% due to international student enrollment restrictions. Revenue fell 2% to $70 million, operating income decreased to $13 million. Encouraged by domestic growth and 3% increase in international caps in 2026.

Guidance

• Expect $100 million in operating expense savings by end of 2027, with $30 million run rate from restructuring completed in Q2/Q3, and $70 million remaining over 2.5 years.
• Anticipate new student growth in Australia/New Zealand in 2026, aiming for total enrollment growth by end of 2026.
• Anchored on the notional model from Investor Day, confident in hitting targets.

Risks

• Regulatory restrictions on international student enrollment in Australia/New Zealand impacting total enrollment.
• Uncertainties around government shutdowns and potential impact on military/veteran students, though currently no significant impact seen.

Question and Answer

Q: What drove the healthy revenue per student gain in the quarter and what should we expect on a revenue per student basis over the next few quarters?

A: Jasper, it's Dan. On the revenue per student, Karl mentioned lower drops and higher seats per student. It was also some lower discounts, and I think we'll see some benefit from that through the balance of the year. So there'll be some upside on revenue per student at U.S. Higher Ed.

Q: Could you frame where you're at on the journey to $100 million in annual operating expenses and is it company-wide?

A: It's company-wide. In my prepared remarks, I referenced the restructuring that we completed at the end of the second quarter, beginning of the third quarter. On a run rate basis, that equated to probably $30 million of expense reduction. So I'd say there's another $70 million or so over the next 2.5 years. Some of that, we're going to reinvest as growth capital to continue to support the various businesses and some of it will show up as increased margin.

Q: Could you frame the relative growth rates for Strayer and Capella at this point and how you're managing each?

A: I'd say that Capella has been stronger. The weakness that we've seen at Strayer is primarily attributable, as it has been in prior cycles, to a reduction in non-affiliated students, but it's also a function of just, frankly, more efficient marketing dollars at Capella. So we don't necessarily -- we're not fixated on spending a set amount at both Strayer and Capella. We tell the U.S. Higher Education management team, solve for whatever is going to result in the overall highest growth for U.S. Higher Education as a division. And over the last 18 months or so, that's been much more effective at Capella. So we've worked to grow Capella at a higher rate of growth than Strayer, and we're seeing that in the performance that's playing out.

Q: Are you still expecting that business to return to total enrollment growth in 2026 in Australia/New Zealand?

A: Total enrollment growth, I would like for it to return in 2026. Definitely new student growth in 2026 when we anniversary the caps. It generally takes 4 to 6 quarters of new student growth to overcome any declines you've had over the preceding 4 to 6 quarters. So getting to total enrollment growth by the end of '26 would be a little bit of a stretch goal, but I would definitely expect new student growth beginning in the first part of '26.

Q: Do you think the '26 for the company level would align with the notional framework you outlined a few years ago at the Investor Day?

A: Yes. We are very anchored on our notional model. Nothing that I see now at either the revenue line or the expense line, which we obviously control, leads me to believe that we won't be able to hit the targets that we laid out at our Investor Day.

Q: Can you remind us of the exposure in pre-licensure and post-licensure programs in U.S. Higher Education health care?

A: We are not in the pre-licensure field in nursing. We are in the post-licensure with the RN to BSN program, and that's a FlexPath program, which is the largest program at Capella. And we've seen, I'd say, a little softness in that program. They are in the BSN throughout 2025. But we further believe that we're advantaged because that's also our largest program from an employer-affiliated enrollment standpoint. And as I've said in my prepared remarks, that part of our business remains strong.

Q: What's the potential impact of government shutdown on military and veteran students?

A: To my knowledge, we haven't seen any impact. And when I think about our largest clients like CVS Health or Best Buy or Dollar General, they're not really impacted by the government shutdown per se. So as of yet, Jeff, we haven't seen any adverse impact. Daniel Jackson added we have very few direct military students. So the exposure there is really insignificant.