STRA - Earnings call transcript Q3 2018 | Strategic Education, Inc.

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Operator

Good morning, everyone, and welcome to Strategic Education, Inc. conference call in which we will discuss Third Quarter 2018 Results. With us today to discuss results are Robert Silberman, Executive Chairman for Strategic Education; Karl McDonnell, President and Chief Executive Officer for Strategic Education; and Daniel Jackson, Executive Vice President and Chief Financial Officer for Strategic Education.

Following the remarks, we will open the call for questions. Please note this call may include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. release on assumptions, and Strategic uncertainties identified today’s based a subject Education are actual in of cause number and press statements current differ are expectations to has results The to could materially. that risks that these and about uncertainties relevant well future Strategic Exchange XX-Q Commission other Strategic other filings X-Ks, maybe today Education’s XX-Ks. be as filed and and in XX-Qs with Education’s information Further found to the and Securities as press release Copies available filings of the full at these on viewing website are the and for strategiceducation.com. to And would the I Robert now, to Silberman, Education’s like turn Chairman. call Executive over Strategic Mr. ahead. Silberman, go please

Robert Silberman

between Thank you, Education on Education X our SEI’s is report and of operator This August on this good merger and consolidated results and consummation Strayer gentlemen. opportunity the to ladies Capella first since year. morning our of

we morning. this activities. an to for to as as a I ask lot on well am the our So, of Karl material merger integration first results on our operating quarter comment to cover have third update going provide

Dan our adjusted the allocation, both for which capital results finally, on stay GAAP quarter. will as long comments have provide for you questions. will we Karl? And brief financial will third details I after and our as make Next, some on

Karl McDonnell

Thank you, Rob. Good morning, everyone.

strongest universities years these highly working learners. on first executing have results generated simultaneously has mentioned, our XX,XXX directly now team our of professionalism outset, are the by of everyone on operating at am results our the and like generating detailed just organization our while of financial merger to to speak primarily comments update. how for incredibly a nearly results would Dan And results saying many our level Rob complicated will cover talent I that to intend and integration. As my momentarily, strong behalf and and in Many within students so proud of focus the and the I planning I integration begin a

third a all X.X% program, regard $XXX U.S. Capella’s continue XX% for Capella by direct Strayer’s University end with and be year fewer under X% enrollment increased University’s results, new the in interest enrollment increases continue assessment been preliminary new they’re instructional in operating FlexPath the It non-doctoral track increased enrollment our Capella’s XXX continues Strayer overall feet these breakeven student It for margin of under XX% square University’s of model enrollment University just operating all XX.X%. between campus we just Capella versus learners. Capella are year. XXXX again, and campus prior additional continuing very the the overall to FlexPath new square student campuses up of X their in the now reduced revenue year. quarter. a increased was enrollment basis XX,XXX new and plan while the on Strayer total during FlexPath that as that’s growing regulatory requirement Orlando, over than also opposed X new track opened of is its expansion XX.X%. within operating learners the unchanged approvals. XX% to staffing to second additional students an University’s XX,XXX open two Florida strong million at pending of to model to Strayer and highest X And broad is we Strayer’s and margin driver in University first differentiated more grew and from the from total and increased also XXXX operating university’s smaller both campus open consisting increased feet campuses XXXX in campus versus X% new points XX% Georgia quarter in the by enrolled XXX enrollment of X% per to versus half smaller used on XXXX. significantly significantly during Capella highly and million to last XXX. physical basis X% the of than economy increased in to the of $XXX That’s growth X,XXX revenue primary Alabama. a see student XXX XXXX. model, year. the each and demand. in and roughly new learners quarter since locations calls enrollment XXXX, our to campuses, points First, with just to has Strayer XXXX. the quarter prior aided prior Capella’s level has be to fall grew total Atlanta, to to growth its of are first Montgomery,

following camps During asset in quarter, into operating to entities, three business to to And in began these to strategic and structure and single reorganized organize a service the + reduce value single management decided we New SEI’s Academy’s boot support all non-degree productivity expenses. non-degreed Design entirety. the of have Code also order increase overall components York a its we shared coding eliminate a review

and under now equating key half run-rate since are on be in target, are savings basis, The the realized in synergy XXXX. and million just the be implemented million $XX in XXXX. Turning will By impact $XX end marks $XX end our $XX the to of the day run the of in of $X have August to million our XXXX have estimated million of a be in total will million million rate added savings synergies realized XXXX by of approximately XXXX with which integration saved remaining savings today to will our integration-related million in full merger $X Realized which on XXXX. means back update, when to been XXXX $XX actually will X in track. closed the million, we already all $XX in implemented occurring savings on XXth of activities

will cost $X synergies or these the We be achieve continue million $XX every approximately to for saved. dollar forecast to

practices In offer numerous Strayer-developed implement innovations Capella on of inside our intelligence actively plans, and the working two within programs the artificial of tools implementing work and seek to to including regulatory approvals addition our potential University. across to deployment best teams evaluating universities, to the the also FlexPath opportunity synergies are Strayer

We also plan December to first on integration systems system. major in of to complete year, our Capella migrating Strayer’s this HRIS

continue and learners’ our success. place continuing with our to combined the and on great deal emphasis students to by integration, deepening overall of Lastly, we our to which new culture, starts our ultimately respect a commitment

track incredible synergies and is results for more team our now, company beginning organization. our target again, across financials merger, would detail. into a to And quarter. And deliver like XXX efforts to our run to last thank will exceptional the So over I I days on implementing our operating our gains ask of already in as has Dan practices once our harvest best their delivered is result through to

Daniel Jackson

occurred Thank solely you, and Karl consolidated of segments: the segment, Note Education, approximately and segment, non-degree results we Academy, the good Institute; the Hackbright quarter three Sophia. University and for our of which Capella of DevMountain, that exclude prior which of August Strayer exclude University consolidated reporting Management Code flow results. Today, the Strayer and our includes third morning will Design QX and Thus, the the program now Capella to Jack New reporting + revenue Academy Company are results cash results Inc. Capella University; University includes consisting Welch financial X. York expense everyone. Strategic one-third that Education segment, consisting Capella’s

references the I segment our that results, reflected addition or of This our non-GAAP slide of level financial the strategiceducation.com. website the pro business quarter intended results our our the third release for Relations want earnings in deck the results quarter QX to of please results. forma see to numbers reported view segment, illustrate to posted as GAAP or at For GAAP Investor the adjusted and release core everyone as full performance also remind format our earnings including results. the section is in Capella to adjusted

merger, revenue acquired integration non-core valuation associated purchase exclude of amortization the items of expense adjustments transaction results adjusted assets in related revenue, and University for the costs other with additional Capella number Capella morning refer to Our certain and third non-GAAP of including included Please tax financial in the issued information accounting deferred value to a adjustments, with merger, adjustments. the to the the impairment related merger-related this discrete associated we charges information. asset contingent consideration, quarter release adjustments earnings

of Now was XXXX adjusted XXXX. operations period for compared quarter to million QX the a $XX.X results, consolidated our the same few comments $X.X for for third million income in SEI’s on from

operating margin XXXX. quarter adjusted in to XXXX the X.X% of third for compared XX.X% Our was

amortization of intangible purchase in assets with $XX.X of the XXXX adjusted York + expense adjustment the assets results merger-related Design Capella a intangible merger, a revenue to million in with quarter $XX.X $XX.X deferred the New $XX.X costs a impairment million the Code non-cash Third million Academy. accounting for and related merger, million associated acquired exclude associated

New million adjustment income forma value prior third have Academy. consideration costs adjusted to a adjusted non-cash XXXX. with quarter million $XX.X includes contingent exclude for XXXX Third pro fair On + been million basis, would merger-related results and quarter the Code resulting in $XX.X a to to a $X.X which benefit compared August X, in Design York from results million Education operating Capella associated $X.X the

in income income net million to of Third net the $X.XX for share was $X.XX earnings period adjusted compared and merger XXXX was adjusted quarter compared the XX.X%, tax XXXX which million XXXX. revenue adjustment, in $XX.X to adjustments. per assets, intangible impact same adjusted $X.X intangible other of rate costs, amortization and quarter discrete third for effective assets of impairment of tax the was the SEI’s excludes adjusted

quarter be rate expect tax for effective to adjusted We approximately of XXXX XX.X%. fourth the our

segment deferred XXXX quarter declined student. which our student term million quarter we few million per by revenue the of enrollment revenue from offset Revenue by the per to acceleration Strayer is $XXX.X to segment $X about expected of driven than one $XXX.X of Now lower better revenue results, corporate on due X%, million for notes in partners. from about University a for increased higher X.X% third summer

student XXXX. And quarter and in forma the X.X% to the pro Moving enrollment for XXXX. as compared increase for as the into in segment million $X.X University in quarter third $XX income it year adjusted was Strayer million the the segment for $XX.X year-over-year compared operations the XX.X% revenue the per increased was for about same improved for Karl to million $XXX segment revenue a was higher and from slight University to revenue fourth Capella quarter. segment margin the quarter, QX million million, Strayer of University we per the for expect to revenue last operating quarter quarter reflecting be the mentioned, $XXX.X third to change Capella the third from learner.

Adjusted revenue mainly an adjusted due in from was quarter. Academy the QX fourth operations increased at The of expect revenue learner loss Pro QX to operating $X.X was million XXXX. QX be $XX.X the was $X.X and to for forma roughly for Capella adjusted Sophia. segment DevMountain, flat period the from in revenue the non-degree million $X.X the per year, $XX.X income operations quarter Capella from $XX.X XXXX. XX%. same the to segment income $X.X and from million million to program for We Hackbright for million last operations adjusted compared of the from was to million University in adjusted million for loss margin in segment inclusion Capella compared

X.X% quarter of debt to during that quarter cash the Strayer merger-related reflecting compared debt. students. Capella the first and the the was generally million of graduate of X bad Moving of the quarter in University University transaction and revenue, the August operations of million proportion The used equivalents period the cash SEI months of flow, generated with lower to debt, incorporation with for $XX.X X. from of cash, of the from cash balance the operations which during has $XX.X $XXX.X higher was concentration adjusted and securities same close XXXX been to million costs marketable on in use than no cash the due coincided the ended Bad to in XXXX and sheet of due cash

have debt improve We subside next to expense the quarter. started financial continue quarters to as tuition in consolidated to aid-related the delays fourth University bad far few the expect our thus Strayer and collections over at

period first compared same of million SEI capital $XX.X during in to Regarding months the spent the X $XX million XXXX last year. expenditures,

million on year $XX full maintain And credit which at the to capital Rob? not any prior CapEx be of finally, expenditures to we’re million available between include we revolver. our and XXXX, Capella $XX For $XXX August expecting the million in X, to XXXX. continue does

Robert Silberman

Dan. you, Thank

expenses, perspective my result associated and cut have as the of statements a the But through reported, more impact of from cash $XX.X by with with flow purchase particularly non-cash each our the closely our accounting million which the our Just and slightly the third all distributable results, for quarter financial the one which I I the amplifying think on reflects accounting. at in is from comment merger-related look owner’s operations. the merger per our financial ultimately, generated And you most business. figure cash as complicated businesses share the generated Dan purchase grown after-tax economics, when adjustments quarter,

reported. or share a of as flow per EPS $XX fund $X.XX Dan flow. If cash answer operator, paid finally, we distributable owner’s expenses. allocation, pleased that quarter XX% $XX our or $X.XX roughly adjusted cash the integration share any during compares roughly quarter the those We million per and transaction capital mentioned, you million million during to about And dollars during to in would be of our we the used, merger cash share invested that quarter, questions. This we think And favorably very with $X.XX that the of per CapEx dividend per flow cash leaving to distributable of we $X.X in share.

Operator

question you. Thank our comes Jeff [Operator Markets. first And from Silber BMO Capital Instructions] from

Your open. is line

Jeff Silber

segue I about ended Rob, guess your off at the to before forward? I the all you much. How going from allocation theme merger? if strategy so you just that Thanks changed on. capital get it’s wanted Can talk the

Robert Silberman

foremost Jeff, long-term in students our highest our academic generates first improving because highest we the Well, of return the use of return. capital that and is really changed, think it outcomes hasn’t that financial

and find in to of team we Karl as are his so And always fund going of much terms can as opportunities. that

of As University work we intelligence, be Capella bit a of got will think ported he to which, in mentioned, as the some I have a area of over artificial well. quite

are use to guess third would I quarter. the capital, described the business, would we going forma basis. of of will on then probably the that particularly numbers be CapEx but So our that return a to described analogous more for don’t of can’t the employ as put it to for I business, a we look opportunities pro a quarterly acquisitive. fulsome if And outside into to on sort high be continue we capital I basis think

the giving for those which always to those XX reasonable repurchase But entity We a capital, of And in truly is we and repurchase we investment taking opportunities. value-enhancing the that when option to we circumstances significant trading will away like past, have a discount are we a shares, those ownership use that and dividend to talked additional from we which discount owners redeploy to we in do educational we way way. owners. is acquisition major one done have owns We do maintain in we large that internal positive most at a capital a years. or to want to them excess healthy an we in authorization, will and capital in very intrinsic return feel company return Because essentially for And owners that predictable of look that requirements, fairly of as the for we finally, then that intrinsic share shares want we when value. the it are only to to are dividend institutions think feel value. a our which

Jeff Silber

new quarters that, Appreciate putting enrollment to have it. Strayer nobody numbers kind the dramatically. could What’s industry we for numbers? got past has been core putting while. that. back up really the Capella, has couple the University Okay, that a underlying pretty of in stellar else I been the enrollment If those is up improved of switch seen operations,

Karl McDonnell

Jeff. morning, Good

on campus but footprint, with that, see we on their a across the demand. interest student across in growth the healthcare. basis our macroeconomic in geographically, strong they FlexPath, by organic program I on and on widespread, I prepared particularly side, emphasis and conditions, side, pretty year-over-year well are is large which to my particular As said remarks, Capella seeing continue generating The really has been growth also portfolio increases represented mean, in and new strong interest Strayer

I macro portfolio lot diversified combined So of very conditions with it’s interest. good say, would a a generating that’s

Jeff Silber

look but mentioned Can you those is centers that going next learning just to old Capella the tell us And be believe support the, guess, like? great. center more know you what opening, I Alright, differs new I it’s bit little I learner year. that? a your footprint, how your about from do footprint

Karl McDonnell

going Strayer essentially mimic are They to location. a

any We are square centers, will enrollment it will so be be call support interested advising will services. open for in not These than on-ground meaning but the They size, the they we roughly X,XXX but instruction services, we going will in they to Strayer latter to in locations, there the that learner the middle be roughly have quarter, same leverage part testing those. feet. the Capella the they of later design expect quarter. could second are And first no

Jeff Silber

into Okay, will much. great. so Thanks back queue. jump I

Karl McDonnell

Thanks, Jeff.

Operator

question from Jaffray. Thank you. our [Operator Instructions] comes Appert from And next Piper Peter

Kevin Estok

good This in about seen should we anything My strategy, and Peter with question first how to if do for Estok with has this you I pricing? Kevin industry-wide Hey, have morning. was think wondering is Appert. pricing

Karl McDonnell

we first affordability. pricing is concern and maintain primary thinking Good about overall are foremost, our an to Kevin. morning, eye When on

may Strayer time undergraduate their the that in recall You at that XX%. about back XXXX programs University by of reduced cost

any And maybe University take And are That an have program. will of a University about Capella moderate Capella we we to will be I of the year. and think fourth but that the in the Strayer alternatives have said, effective we want is may prospective in based Strayer band It’s cost think within quarter degree this X% think the on. institutions. constantly given increases students be University tuition year, a able to have, fact maybe affordability and quarter tuition in focused of being changes in local something small that the increase, vary range in So, do announced we there we an issue. slightly to public particular both on may that particularly prior where increase a X% overall

year relatively concern sure overall and So program’s the overall make increases this affordability maintain modest our are we is forward. moving that these again that eye on to

Kevin Estok

the second great. current Okay, with mix. my And do to question enrollment Thank you. has

online, to physical and campus a network? for important wondering maintain between you campus So I was I it guess was how

Karl McDonnell

the strong Well, we student and about have over more decade, to last more in seen a shift online. preference

So X had might ground close of Strayer University be By XX% half year, ground. Strayer on in the being than taught to have will XX years location. ago, a you on physical this University classes end of to taught of fewer classes

opposed at However, about campus, for XX% we’ve is been purely to optionality Strayer on because out-of-area meaning side, University And side, we as a have campus-based there than in of that also, that out-of-area outcomes difference always the students to students academic to achieve campus purely compare on levels tend University continues higher significantly at quite to attend students. able students. enrollments to the be there are online, no Strayer

on campus a we and student is They to student. that’s more like us a want bank So the side with where banking. helps we few and the having The use campus we people purely network network. of more bank. more preference online, a bank Very a shift optionality even think analogy probably the branch, online serious the attract Strayer world think a would in to analogous Strayer continues

trends, into we learner open centers, We once take time that we the similar some will if Capella XXXX. but see, see will resource

the important. continue So for Strayer be very campuses to

we to regulatory to X plan we generate helps we have. year and us said, year, want that the it students open more I X think up approvals this of next types pending to As and

Kevin Estok

Okay, guys. Thank you.

Operator

any you. remarks. questions Robert back I And the closing from I lines. like Thank to any Silberman turn further am over to would phone our not showing for now conference

Robert Silberman

participation. operator. Thank Well, we everyone’s appreciate you,

please between some with look us Thank give particularly has we other got crosswalks you a As directly if and to the forward questions, quarter. data as-reported again Dan first the have results. any And said, adjusted talking website we on call our you. and amplifying the that in anybody

Operator

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

Strategic Education (STRA) 11 Nov 182018 Q3 Earnings call transcript