STRA - Earnings call transcript Q4 2017 | Strategic Education, Inc.

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Operator

Good morning, everyone, and welcome to Strayer Education Inc.'s Fourth 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. pursuant remind on today’s statements Securities this forward-looking are to and release that Litigation like Harbor and information Safe certain call made Reform would Act. everyone the press that contains are provisions I of the Private to may contain its These based paragraph the company the has company's in the on release current subject at and are press that statements a and number could differ of company's risks forward-looking that are on end statements results to actual of materially. the cause expectations assumptions, and uncertainties identified the to Further information on found Form other Exchange with uncertainties Report in its and may and other filings about be these and XX-K the Annual the company's Securities relevant Commission. full upon online are Relations the press company's Investor Copies release request the of and department. filings available from these and I'd Silberman. Robert And over turn to now, call the to like Mr. please Silberman, ahead. go

Robert Silberman

operator, you, Thank good gentlemen. and and ladies morning,

material want from couple today fair Dan. a cover but to have before perspective, my brief did I to of it turning amount Karl We over and a make opening of to remarks,

its any for transaction. conditions. application And Commission. Department the pre-acquisition University accreditor, of of without submitted January FTC Capella Hart-Scott-Rodino to the U.S. transaction approvals In with the all our its Last regional its pending we merger of we XXXX, XX, milestones. received transaction material Company, companies their Learning with week, review finally, the regard respective received Education executing control First, issued the are On our key of approvals. both Higher its has to for Education November, Capella on change and shareholder

transaction close quarter XXXX. of the appear with our consistent announcement So, third we last November, in on to track the of

status and what details pleasure activities. it working been Now, on actual perspective, just Gilligan me has his of Karl integration will with a say, from team. my have our more let Kevin But the

group and performance, of the and hand-in-hand Capella’s mentioned I to admirers the more regard so we months, been having no long educators. to close student high University dedicated in at but Learning academic even As announcement, wonder we now Department held work Commission seeing both such as have Education. the the Higher a is model the the of U.S. why the are up opportunity such is by after time it Capella last to certainly and of After with us of six university

fall through is category, we the in the this throughout adjustments but close second Dan detail the I The ordinary two general walk quarter These to of the reduction you the XXXX from fourth that and Education's our XXXX well to release, this in our make costs the made the the federal our our the or of in of point adjustments reported the timing transaction the tax the in costs cost Capella Nothing of core XXXX, nonrecurring in GAAP tax corporate large recently and to our as to second to lower both are call extend book adjustments regards transaction. expenses the as on first new release to rate These introducing, morning's owners some to Company, both understand, rate; adjust statements. by grew depending bill, expenses the and to with achieve with merger. tax quarter economics. to Education tax results XXXX federal possible with cash these associated began is significantly deferred a third XXXX, to wanted of the of will merger to asset executing and will Strayer get Capella earnings I what due passed out difficult of categories; noncash our into increase financial

Education noncash similar some to addition in company's will from also per earnings companies, the in accrue high rate, have expenses. To share of level savings amortization in close, sets cash public Education the after our economics, of at corporate the course, two cost terms adjustments, will owner’s intangible combining Of the Strayer a summarize these Capella and along with future. increase lower significantly which new tax we

be However, short of no noncash the earnings of per share term, share. earnings increased cash impact in these will and per And course cash offset the have the transition by severance on will amortization partially costs. intangibles

XXXX. morning's to in of you to serve are position let this a results. but for for to that, capital details, the in put decision Strayer your perspective, wanted openings underscore, give make my work will in more Finally, new University detail we regard I last more very is our from me with the campus to Strayer point expanding students to on University reintroduce earnings importance over Karl to with release it Karl operating excited to turn Karl? to in And more to our again investments be

Karl McDonnell

through functions plan IT, plans. morning representatives Rob. legal, specifically I'd merger both to established HR. Company. integration this offering finance, a both more this to integration our pending detailed the Education of is and like for our of our stage, Functional been you, focus by primary on teams for everyone. Good Capella with in the planning various morning, begin Thank detail corporate At with companies to have companies work bit

of of to appreciate plans on these part disruptions planning the I'm week very the And companies. primary of any is and minimize Rob, disruptions our level to second finalized expectation pleased like both our a at both we're professionalism of to our teams. and avoid where current the with of terms is collaboration to will and the company in performance that And during April. phase, be focus by current Our planning

expand new on a bit plans to I'd like to opening to Next, return our campuses.

campus ways. past new will format new new This format the the in campuses our two XXXX in in differs been over Our future four we've Macon, subject the to our the new from XXXX we to months. which we opened significantly in approvals. XXXX These regulatory to an balance new testing campus campus open model to will several campuses campus be of since and legacy first Georgia XX plan from XXXX be additional during we've opened which of

the approximately average less operating taking compared been to people First, the open XX are investment at to our students campuses. XX,XXX to three prefer capital staff legacy we've to in our XX more compared physical students legacy require square design roughly and XX% reach in XXX legacy to to online, they smaller And that students campuses at breakeven of of able continue to designed space as feet XX And only people to to as require the square X,XXX a in classes compared our square such, XX,XXX a feet feet significantly to five model. people model.

So to locations they we specific the announcing to look throughout year. as open forward

for Turning our of next results to first XXXX. quarter fourth our outlook the enrollment quarter and for the

represents total Our our term quarter grew X% new year which enrollment grew prior X%. fourth teaching academic the versus our fall students and

our both just Our quarter student. declined year. lastly, the and XX increase prior revenue quarter versus grow is fourth versus in X% to some I mentioned per the students to on and for current for total X% our growth quarter, new outlook actual detail provide basis revenue And I revenue the first the fourth Notwithstanding in points the wanted enrollment year. prior

in offset a X% revenue was per enrollment growth just X% our over student. by decline entirely So,

and lower program our expected to Some more population was our enrolls of as decline this our Degrees@Work of grow, tuition. as total planned continues student and on undergraduate

the XXXX, note, United however, nature the the anywhere implemented our are set nature, However, we during of our student scholarship portions X% due most that assuming onetime When per a in of year I with XXXX, anticipate And scholarships, detail. trends will revenue decrease revenue to notably X%. fourth quarter should will this the in first to to financial States. and longer the weather broader These quarter being to significant a again decrease footprint severe full turn of the to in basis in over Notwithstanding the current campus we special approximately our our that southeast XXX X% approximately it programs offered in of decline for revenue approximately university. first these that total forecast points of will they student continue. current revenue reduction quarter Florida XXXX. I'll planned decline Dan? were programs we Texas, cover response small due for student, shows contribute in results in that that, was have to in enrollment per with Dan of in no XXXX growth multi-quarter per impacted combined to our

Daniel Jackson

Rob I morning, format by Thanks, everyone. to reporting the want Karl, to referenced. orienting new you and that start good

new performance numbers this our results results GAAP now non-GAAP core is the events. term note Rob financial the both the will business as or that indicated, earnings as in in illustrate and of is or You'll XX-K in results. the reference our adjusted the near which and adjusted three reflect reflected intended to impact And release reported GAAP which of format

First our and and the merger ongoing associated expenses. with integration transaction Capella

illustrating been the income continue disclosures including adjustments mentioned, which facilities fourth zero XXXX the this was of ceased impact the as to impact way. our fair including visibility liabilities format provide operating And that each GAAP the these to tax passed we on the albeit refinements of using contingent forward value have quarter. columns are To this point. and with the to we reconciliations our the sheet acquisition events ongoing with in latest this reduced our liabilities at NYCDA on and with of Rob plan Second three EBITDA We law additional balance results. in new reported moving with in along our of new leases associated third

million results. million slightly which XXXX. compared $XXX.X fourth I'll start revenue to $XXX.X the quarter was for the for down QX to with in Now

just X% program our launched large disruptions scholarship in quarter a hurricane our student across of per to much we was footprint. mentioned Karl revenue part down for due widespread geographic the to response As in

million in costs. GAAP in Our for QX XXXX million income $XX.X for operations to income year. million operations includes the last from period GAAP $XX.X same approximately was fourth quarter the from compared merger-related $X.X

income million Excluding the consideration noncash the to to compared to value adjustment in associated of $XX.X income with operations benefit NYCDA. these contingent excludes costs, $X.X million a $XX.X operations from for from for quarter XX% QX million increased an Adjusted our XXXX. adjusted XXXX

We to with XXXX corporate was $XX.X which quarter of noncash in assets is in taxes $X.X to associated the the deferred are Our to the million compared the federal lowered of reporting value million XX% recently rate. our QX due adjusted margin XX.X% fourth result reduction tax in loss operating primarily tax charge the net a quarter a for of

income compared to million charge $XX.X in XX% costs, the this well to merger for as $XX.X adjusted Excluding the net as quarter million grew fourth XXXX.

share from per outstanding period of the loss per to for XXXX. for GAAP Adjusted Our $X.XX the XX% in average XXXX XXXX. compared compared fourth to same $X.XX earnings grew diluted $XX.XXX increased earnings weighted $XX.XXX same and $X.XX per million period share the to net in was for share shares million $X.XX quarter to diluted our in

QX XXXX was in Our proportion bad students debt last year. impacted significantly in Education our anomalous was Title expense X.X% the increase of debt of in the compared Department verification. X.X% selected an Bad by for to IV by

to this We as problem the levels. back in to algorithm expect verification they recently adjusting department recede are indicated normal the XXXX

to per a million. by was up percent for X% average results. Total year total on full to Moving our increase revenue about contributing X% while in the XXXX to year enrollment declined revenue $XXX.X student X%

per XX.X% to $XX.X increased to earnings XXXX million $XX.X net million $XX.X GAAP GAAP up for to increased $XX.X diluted to XXXX. from increased year net slightly outstanding XXXX. million $X.XX $X.XX $XX.X last million for the $X.XX shares year to $XX,XXX from was was last operations the in in X% compared year. $XX.X million XXXX in for $XX.X for XXXX. margin from compared XXXX million X% for to million from $XX,XXX in XXXX in last Diluted share to income EPS to Adjusted XX.X% income was in $XX.X from operations XXXX. to Adjusted XXXX. million in year million operating GAAP $X.XX year. Adjusted X% increased year. income compared million to Adjusted diluted compared was income compared Our the

an expect includes new the due tax a the passed the federal $XX.X On XX% merger As impact expect tax into costs. reduction fourth tax largely discussed impact tax to earlier, million deferred are of our be in to XX% a tax rate of benefit law this to costs projecting XXXX meaningful the of our merger onetime reported resulting basis nondeductible. in from the reflecting of excludes and to the an which expense XX% income quarter. we in effective XXXX basis, range XX% rate of we in charge corporate as lower Notwithstanding approximately XXXX assets cash are value rate that rate federal tax during a nondeductible charge, of effective tax GAAP on adjusted or from the

Our due from compensation variability based quarter quarter costs. to the of effective vary of stock to tax rate will vesting merger timing and

in and higher on that adjusted the are the Karl at And book as declines The We projecting finally, rate stock indicated, quarter rate rate XXXX grant X%, employee expect in tax an and tax of year the costs. our quarter, our effective with XX% prices. of quarter about revenue deduction associated the basis lower X% than is tax growth full positive to due XXXX between values first for enrollment rate XXXX XXXX an exceed reasons. merger of tax for growth original and QX we XX% first excluding QX per projected our Recall the in of that outlook, revenue the student similar regarding approximately quarter. for of we had tax vesting variability

For of X%. operating decline first approximately $XXX million. we're student are or other estimating onetime not quarter, including revenue merger expenses, Rob? the expenses, per for total approximately operating the year, estimating of expenses we And

Robert Silberman

balance questions. Dan. our year. used through Even we Dan more up at At the million $XXX capital year. during the we $XX million debt. XXXX Strayer $XX on XXXX, prior comment significantly and most in it of for tax with state allocation million to comment million Capella on the pretax new go and in future; and as likely the in high that we Karl equivalents that million time which deal We $XX our our level to cash Education our Thank $XX spending year, no One of you, sheet the bill XXXX expenses of always started bringing follows; balance a on after mentioned open decisions and before like $XX cash roughly in We from run in of operations this $XX area; in year local under and we is $XXX cash additional added million and leaving expenditures, I to million debt. end million federal, our before, and $XX down was paid to no cash was number mentioned taxes, capital as which in to technology an owners, that distributed generated sheet, at million invested concentrated we dividends outstanding total and the

stronger rock-solid pleased We even providing have balance acquisition, by in Capella us the with a opportunities be any sheet that, in significant questions. we'd students’ to And experiences the future. will with operator, be our invest which made to answer

Operator

first question our of And Instructions] Jaffray. comes Peter from [Operator Appert Piper

open. now Your line is

Peter Appert

given the on previously the some First, if merger, on just outlined the the wondering confidence update changed your I'm all. on at synergies numbers around you've visibility have cost

Karl McDonnell

a third pretty early about, have not planning. I would estimate announcement we I'd say, when and this of good say, And, estimates of none of even so we're our stage, through our changed detailed made at has changed at we have the all. the our and synergies visibility, No, way

Peter Appert

And is that their the consider meeting? the will merger June HLC expectation at

Karl McDonnell

Capella consider and conducted That made understanding. our made was Strayer representatives it the We've they I their application application. that visit is of Virginia understanding site say June meeting. our Herndon, A with is in the both has here Capella should and will or at

Peter Appert

Which that conceptually, July is here imply anything, perhaps would you put closing on spot not to or that the a realistic. but

Karl McDonnell

approves meeting. if June realistic during be would transaction acts closing and the HLC July A their

Peter Appert

about economics new bit of step driving to further What's new around decision And talk campuses decision bit openings the you the the a about up campuses? and again? process then, the, campus can a

Daniel Jackson

the the to two investing a opening economy of One Well, openings in let the Karl required decision stopped would the comment firming me Peter, on said economics. and talk the things. a less students within campus that we investment that plan And such and of time. campus XXXX, new the ability such then positive period adversarial. at at level create a really could to was was reinitiate could about a thing markets in which we one more regulatory stable in in us process particularly then to that that be second reasonable was new time structure, attract around return was Bachelor's we was the the our ask what recover somewhat for campuses When

excited they grow months. in rates. They XX about over very for firming in I place but think those haven't yet, now labor circumstances the to the shrinking the last We're of the of haven't XX least at months. lessening last economy, really both participation started are of the reduction been the

And that's reflected in that, of I we enrollment. the when think see so, strength some our of

back way why Our on brand view the it economics to was and our a investment the run that sort expand of you Karl, near-term that build mode us don’t to get the as was time basis? board a university. through the into in allows

Karl McDonnell

Sure.

that, to campuses, in to designed legacy generate And only on about a million roughly XX its format new million campus XXX CapEx. So, all to a to and require about capital require twice which average, model and three a students would almost of required XXX students, basically not quarter. one just take only in size breakeven our breakeven. typically It This would little that it of our given up what-have-you is $X years. requires put any that of about to staffing context then open $X.XX campuses around

a what half amount does campus quarter. a breakeven of in the So is

of You to year that year campus' level payback. the over essentially achieve a first need course one

metrics we students campus-based for when substantially students board, even about out are And their that across help we of given look higher true. the is amongst view students better students, education campuses that metric classes campus-based appear is, is important levels. be to serious the that care most more the and though, us at our retention versus remains at their online, areas campus-based who every about the get significantly think students I for point academic perform that taking who they

lot So, open metrics makes footprint the economic campus, think to quite physical Rob's continue we new And vastly is to we sense, important. the to improved a designed it around know them. the point, given of

Peter Appert

charges the And that maybe score? Will any take? the you're we score Dan. in for around any to financial to thinking question the have Should going just about on one the responsibility last have of bearing incremental be context implications cost and the

Daniel Jackson

No. We don't impact negative on score. to significant it expect financial a have the composite

Karl McDonnell

To more expect X.X to we specific, so. forward, at for be be universities both going

Operator

And Markets. comes Silber from Jeff question our BMO Capital next of

open. now is line Your

Jeff Silber

I are decision What up of to you the you What that forward? go wanted to criteria I'm to new why there? new would curious campus. looking open attracted going be Macon? back the just a types locations for

Karl McDonnell

time. some a are demographics us is level attainment, we've to Macon Atlanta, a for adjacent little somewhat terms we looked new scale openings campus It's to that dollars got the to think, which It's forth. income bit. market in media that at educational enables favorable, so of

team our XXX looked has around forward, at States. moving So the between United XX and MSAs

to between I our existing to where media locate five to of markets. open by in to release, State plan in to we’ve this extend close And in year. said three areas and anyway trying XXXX think in as states dollars already them meaning existing campuses, be somewhat where maybe to might and will able we we we have similar we try concentrate states, Macon University

Jeff Silber

states? retrenched in your some states in easily you is Can that And from, you still enter the of licensing those available? have

Karl McDonnell

of Jeff. on kind depends the It state,

to good. we'd still will Others, of and the lapsed have Some is them have license reapply.

Jeff Silber

be just And remind just for we milestones to need what shifting us merger, going to watching forward? the gears the you then can

Karl McDonnell

– else and Everything one only Capella that's the the change Higher is of University Central basically really Learning there's done. of Well, North Commission approval left control.

that’s last on. one So, the an to keep eye

Jeff Silber

the for that describe meaningful mentioned reform. savings is used you what the your And Can you tax I word cash meaningful are guess, and then, plans you cash? the what from potential for,

Karl McDonnell

the I Jeff, lower of in would income statement million to lot And it, say, $X is $X the ours. tax Capella’s federal XXXX, savings tax we're a other rate. that looks thing, from call like cash estimating, million

as so, are there And tax expect cash that savings savings, for we significant savings, well. them tax

combined a it’s excess on million. in well So, basis, $XX of

of the In that decisions. terms do really of that into regard overall investment Jeff, it goes planning we capital, to use with process all

by need over we want The because is sustainable our investments campus first returns. new that's the for a the that, then to investments outside to of other then and proven in for look highest universities, we openings, ways truly the And what may way. us. that and available value-enhancing return of in grow is part after cash, then long most And existing And and, the themselves process. way, that next the cash the of we owners excess which for thing we lend universities universities support consider most in have at we finally, term to to look to time - that

for So, for in from any generate. we that does come the any than difference cash decision there dollars be it process other tax the savings won't incremental that

Jeff Silber

of And couple Dan. I questions, a then, for of just guess, numbers

You thing to tax to that the be in rate? XX% the for tax GAAP rate had quarter. first effective the mentioned the same Would be XX%

Daniel Jackson

again, can't much deduct transaction-related rate basis, going The bit be an will of GAAP it's costs, little we higher the to a some tax higher. on but because, adjusted be not

Jeff Silber

for we And for then, what expenditures modeling be this should year? capital

Daniel Jackson

X% to revenue. X% of

Operator

Instructions] our Analysis. Greendale [Operator Corey First question from next of And comes

Your line is now open.

Corey Greendale

questions Just the to geographic add on a expansion. first follow-up couple

a about lot the way in atypical they be talking different there sort campus you're in person than activities going the were that function what should the place of it, of that can be or is old In take campus not of of under model? that classes are to we a student thinking what the that Like terms offered? take and

Karl McDonnell

new would the last in really legacy be and online. years, online. be true quite campuses probably has to have classrooms. five offered And student The will on from significantly These more XX But that's will would XX online. In classes campuses need cases shifted more two. preference like anywhere offered. and are students On-ground particular where choosing only ground one class over cases to both that,

student we’ll campus yes, we're instruction format. in do preference so, online. be able you'd but continue prefer that will to And be this anticipating Everything new - else on-ground some to

you very lab you will have the we probably to computer in obviously, a can existing in, can small campuses talk staff today. come as members, We So do could you our enroll.

So classrooms. really, the only be number change the of to is going

Corey Greendale

And going or used opened I back a years when were on-campus several if worked, can’t who shifted the remember you you XX online think separately were enrolment, that report miles that the if it students - to way campus, I and it’s new something campus, and them there online. in within into you

range online is, number reason areas when hit XX quickly asking of potentially? students I’m about places there are in breakeven, a that are the So in significant students XX pretty where you talk already looking those you that to

Daniel Jackson

shift clarification the them Yes, students online other take the and is that one Karl... But we reported would way, to we the campus. We shift as would Corey.

Karl McDonnell

today you is out just them area, our if Southeast States. reside portion the a Corey would of what in United look considered of at - significant

new where be would would be in they likely opening So we areas campuses.

Corey Greendale

it? how And that as if thinking about of about thinking miles people those there's XX just many the like count the how toward about XX breakeven within, as as you're Macon that thinking way by by far we're

Karl McDonnell

all it's our It’s No anticipated… incremental.

Corey Greendale

It’s all incremental?

Karl McDonnell

Yes.

Corey Greendale

or so, makes reason Strayer would to the physical the locations sense any about whether And talking add thought And if Capella. to on be then not for to way - any physical you're what early location? it early co-locate with those given locations, thoughts

Karl McDonnell

on from concept It's our side an campuses. with the we seen We, obviously Capella. having discussed physical interesting Strayer that significant counterparts has value have at a

be counterparts it's there. with we quite So, explore in over at that continue that it seriously may to we'll future. look our something And the something

Corey Greendale

would ask back that K, in be I in that in in too in just a can items slightly the numbers given operating trends I couple expect or current up excluding but just maybe slightly could K XXXX It reported not question. else of as says clarify, easy queue is anyone to of But I'm off in. back XXXX. many. the more, XXXX? nonrecurring up expense did kind a couple an If if would that things on want get of I you sure in waiting

Karl McDonnell

It’s an the excluding adjusted on Corey. non-recurring basis all of

Corey Greendale

were in numbers in proxy. terms openings? And the new that campus those of the Did contemplate

Karl McDonnell

the projections? five-year If

Corey Greendale

Correct.

Karl McDonnell

significantly, Not much Macon The that. beyond but not no. campus yes

Corey Greendale

announcing in those couple or today make is what over think months that of past seen you've projections there So, the you're shift? what you would anything terms would of

Karl McDonnell

I projections for proxy, the this at think plans time those were our done point at changing. and are the

too So, much those projections. I wouldn't assume from

Daniel Jackson

on I units. that would smaller Corey are these is much Well, thing, other the say

individually a difference. quite positive needle five-year there they're So, year. enough period, do to we going gone beyond they're investments really that the haven't But but And not the move significantly. planning over be could the we could meaningful next for

Corey Greendale

of addressable I on Karl team or potentially could XX your think I And this you run. before I apologize, looked at looking that? But market campus, smaller is to just realized could. terms footprint what I that open said, of a in sort eventually the couple of are thoughts other if number like quick walk at ones, you for that MSAs, XXX your

Karl McDonnell

it We've belt. decade, three I be already We these get the yes. time under locations for thinking about tasked over our Corey, to a want five on depends horizon, the team XXXX. mean, to number the and to

year. have report we as we'll of this through get the on to more balance that So,

Corey Greendale

last the trends from in enrollments had the are undergrad I It And then divergent. pretty like looks also the question versus grad K.

on factors love do would I at those and point? thoughts hear why that to is macro normalize of some kind your Just

Karl McDonnell

say, very we I'd level, see the continue Well, strong at undergraduate highest to performance at level. the

undergraduate XX%. to trailing the at has and quarters, If enrollment XX% new XX most you look months, undergraduate grown over

decline to year, a to at Jack a JWMI. X,XXX-ish excluding to percent the look in continued institution be students. they're When continues now at have getting albeit Welch XX-plus grow see alone, that Management you Institute graduate We overall enrollments, and sizable-sized per

strong for in So, we're the graduate growth. has of transaction rationale that intensity. market, its know with degree by area. very Capella whole, The we competitive high a a quite was the that of Part pleased they're as is one

on we approved undergraduate considerable So, of that continue help us, combined basis that the strength transaction been the it's level have and grow believe at education. we will the once But to story a for hope level. graduate a really

a unique to to have programs the grow. will that this going time We graduate program work that and in on continue JWMI we're over grow. continues to believe transaction And

Operator

And conference closing you. over today. remarks. for Silberman concludes I'd our to session the question-and-answer like Thank any Mr. for turn to that back

Robert Silberman

Thank We with all you communicating for participating. operator, to forward you, thank you. and look

the on If you any financial questions please have statements, contact us.

we transparent sort the as as conference communicating you objective nature forward of this we'll Thank be changing possible in much. Our transaction. organization to of quarter May very our on the are to look call. as second is again And with

Operator

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

Strategic Education (STRA) 2 Mar 182017 Q4 Earnings call transcript