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spk20: Thank you for standing by and welcome to Strategic Education's fourth quarter 2022 results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. I would now like to hand the call over to Terese Wilke, Director of Investor Relations for Strategic Education. Mrs. Wilke, please go ahead.
spk01: Thank you. Hello, everyone, and welcome to Strategic Education's conference call in which we will discuss fourth quarter 2022 results. With us today are Robert Silberman, Executive Chairman, Carl McDonald, 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 annual report on Form 10-K to be filed, the most recent 10-Q, and other filings with the Securities and Exchange Commission, as well as Strategic Education's future 8-Ks, 10-Qs, and 10-Ks. 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 Rob. Rob, please go ahead.
spk13: Thank you, Therese. I just want to make sure everybody can hear us. We're actually doing this call from Sydney, Australia, and we've had a little bit of telephone difficulties. Please bear with us on that. But good evening, ladies and gentlemen. Before I turn it over to Carl to report on our Q4 and full year results, I just wanted to make a couple of comments at a high level on our capital allocation in 2022. We started the year with roughly $310 million of cash in marketable securities and $140 million of outstanding debt drawn on our bank revolver. We generated $150 million during 2022 in pre-tax cash from operations. We used that cash as follows. We paid $24 million in taxes and we invested $44 million in capital expenditures. Out of our remaining owner's distributable cash, we paid $60 million in common dividends. We took the opportunity to repurchase $40 million of our stock at an average price of $65 a share. We further paid down $40 million of our outstanding debt. That left us at year-end 2022 with $250 million of cash in marketable securities, $100 million of debt, and 23.9 million shares outstanding. We are fairly confident that 2022 will turn out to have been our trough year for earnings. So we feel our balance sheet is well positioned to support all of our opportunities, as well as to continue to return capital to our owners through our common dividend. And with that, Carl, can you walk everyone through our operating results?
spk14: Yeah, sure. Thank you, Rob. Good afternoon, everyone. The fourth quarter financial results that we reported earlier today reflect the continued stabilization of our enrollment performance throughout 2022. Total enrollment across SDI was essentially flat at just under 98,000 students and decreased 80 basis points in U.S. higher education, which is our largest segment, reflecting the continued new student growth that we've experienced at both Strayer and Capella universities. Our revenue for the full year declined 5.8% to just under $1.1 billion. And in the fourth quarter, revenue declined 1%, $270 million. The rate of decline improved as a result of strong enrollment results throughout the year. And while we were disappointed by the year-over-year declines in our full-year financial results in 2022, which were primarily driven by the enrollment declines that we had in 2020 and 21, we have been more than pleased with our current operating performance, which will inform 2023's financial performance and beyond. In 2022, our U.S. higher education segment had a strong year. U.S. higher ed revenue in the fourth quarter grew almost 1% due to essentially flat enrollment and an increase in revenue per student. Demand at Strayer and Capella universities continues to be among the strongest that we've seen in several years, and is back to pre-pandemic results. Both universities, as we previously indicated, grew new students a full year in 2022, and our employer-affiliated enrollments are at all-time highs. New employer-affiliated enrollments increased 17% from the prior year, and total enrollments grew 13%. Total employer-affiliated enrollments now comprise more than 24% of total U.S. higher education enrollment, which is up approximately 350 basis points from the prior year. The enrollment recovery at Strayer University continued throughout the year and is on track to have total enrollment growth in the first quarter of 2023, which is, again, about one full year faster than we originally anticipated. Our education, technology, and services segment also continues to perform well. ETS revenue increased 20% to approximately $17 million. Operating income decreased slightly, reflecting the continued investment in ETS technology and products, which helped drive our revenue growth last year. As I previously indicated, we expect ETF expense growth to moderate beginning this year and to essentially be flat on a year-over-year basis. During the quarter, Sophia grew in average total subscribers by 29%, and we had more than 700 SDI total enrollments coming from Workforce Edge, which is up from fewer than 100 in 2022. Our Australian New Zealand segment grew at by approximately 4% in the fourth quarter. And its revenue was essentially flat on a constant currency basis. Students as offshore online international students took fewer average classes per student. These processing issues and delays that we experienced throughout 2022 have improved and are close to returning to pre-pandemic levels. The Australian government has ruled that all students on active student visas must be in country and attending classes in person by June of this year, which we see as a positive catalyst for our international student growth. Now, based on the strong enrollment results that we've had in 2022, assuming that these results continue this year, for 2023, We expect enrollment and revenue to be up in the mid-September. However, I would like to bring two timing-related issues. First, we've adjusted the academic calendar at Torrens University to start later in the quarter. This is to allow students whose visas are currently in the process of being approved to start the term without having to miss any classes. The result of this will push more of our A&C revenue from the first half to the second half of the year. Second, we expect the majority of the year-over-year expense growth to occur in the first half of the year, which will flatten out in the second half of the year, but again on a full-year basis to be up no more than 3% from the prior year. Based on the timing issues that I've just described, we expect our revenue in the first quarter will be essentially flat versus the prior year, and our expenses will be up approximately 5% in the first quarter. And once again, I'd like to thank all of my colleagues at SEI for their ongoing commitment on behalf of our students. And with that, Lateef, we'd be happy to answer questions.
spk20: Thank you. To ask a question, please press star 1 1 on your telephone again that star one one on your telephone to ask a question please stand by while we compile the q a roster our first question comes from the line of jeff silver of bmo your line is open thank you so much um carl i don't know if you broke up for everybody but you broke up for me when you started to talk about the outlook for 2023
spk07: I think you said enrollment and revenue up in this single digit, and then I lost you until you started talking about the timing issues at Torrance. Can you just repeat what you said, please?
spk14: Yeah, apologies for that, Jeff. What I said is we expect that our revenue will be up in the mid-single digits for the full year and that our expenses will be up no more than 3%.
spk05: Okay, great. Thank you so much.
spk07: If I could just circle back to U.S. higher education, Can we get a little bit more color in terms of where the demand is coming from, whether it's at Strayer, whether it's Capella, program type, et cetera? Anything would be great.
spk14: Well, demand is consistently high across both Strayer and Capella, across all program levels. Again, some of the highest demand that we've seen really since back to 2019 levels. So it's across the board, Jeff. It's up significantly at both Strayer and Capella. And both universities experienced quite strong new student growth throughout 2022. All right, great.
spk07: I know you're not giving specific guidance, but Rob, I appreciate you going through the capital allocation and how you use the distributed free cash flow. Are those the type of rough percentages we should expect going forward in terms of how that was allocated?
spk13: No, I think that percentage as a distribution of free cash flow is much higher than we would expect normally. As I said, I think 2022 is going to turn out to have been a trough year for both earnings and cash. And we kept the dividend where it was, and we saw a significant opportunity for long-term value enhancement by buying back shares at the price that it was at. So our dividend payout, I suspect, will go down as a percent as our cash flow grows over the next several years. In 19, it was at about 40%, if I remember, in 2019. And that feels to us as a board is probably a fair kind of percentage to think about. The share repurchases are truly opportunistic. If we have distributable cash, excess cash, and access to our needs in the universities. And the share price is trading at what we perceive to be a significant enough discount to intrinsic value. We take advantage of those opportunities, but it's price dependent. So, you know, depending on what happens to the stock price, we may or may not do that. Our capital, you know, CapEx, I suspect, will be fairly consistent. But, you know, our cash flow is growing up, so the overall percentage of distribution is probably going down.
spk07: All right, that's really helpful. If I could sneak in one more, and I hate to talk about a regulatory issue, but there was an announcement last week by the Department of Education in talking about the incentive compensation rule expanding the definition of third-party servicers. Do any of your businesses potentially come under that broader definition, specifically in the ETF division?
spk14: No, Jeff. We don't have any relationships that would fall under that definition.
spk13: And I'll say that independent of that, we don't have anything that's close to incentive compensation anywhere in our divisions, just as a matter of culture.
spk07: All right.
spk06: That's really helpful. I'll jump back in the queue. Thanks so much.
spk20: Thank you. Our next question comes from the line of Toby Sommer of Truist. Your line is open, Toby.
spk04: Hey, good afternoon. This is Jasper Bibon for Tobii. Thanks for taking our question. I guess my first question was, I was just hoping you could comment on how you're managing variable expenses with the return to total enrollment growth. And obviously, if we look back at a longer time period, the company's margins were quite a bit higher a couple of years ago than they are now. So any thoughts around how the current expense base might be able to support higher enrollment levels in future years kind of beyond 23?
spk14: Sure. Well, the bulk of our expenses are quite fixed. If we have substantial enrollment growth, we would expect some small variable expense as we expand the number of classes that we're offering to support the higher enrollment. But I'm confident that the current expense base, by and large, can handle many thousands more students than we're educating today. So to the extent that our enrollment continues to grow in the way that it has over the last year, this year and beyond, I would expect that you would see a very high marginal contribution on the incremental students that we're adding.
spk03: Thanks. That makes sense.
spk04: And then the margins for the fourth quarter just came in a little bit lower than we were expecting. Was there any kind of particular driver for that, or was that effectively in line with your internal plan?
spk09: This is Dan, John. We had probably the only thing that was a little bit of a surprise. We had a little bit higher bad debt than we expected. That's typical now with the benefit of hindsight when we have faster growing new students. New students pay at a slightly lower rate than existing students. But aside from that, it was pretty on track with what we expected.
spk16: Got it.
spk04: Maybe pivoting to the Australia and New Zealand segment, we've seen some headlines around the security check requirement causing delays and students in certain degree fields getting their visas processed. Is that impacting your ability to get international students into the country, or do you think this visa issue is kind of in the rear view mirror at this point?
spk14: I think there's been some impact with respect to that. We did see visa delays throughout 2022. We commented on that throughout the year last year. But in the early part of this year, we're starting to see visa approvals and processing timelines return to what we consider to be relatively normal. And so if that continues to be the case in 2022, or sorry, 2023, combined with what I said about the Australian government's rule that all international students have to be in Australia, taking their classes, we see that overall as a net positive for Australia, New Zealand, and 23.
spk13: One other thing on that, Carl, the one thing that's kind of an immediate impact, though, is the delaying of the start of classes a couple weeks. Although that doesn't change your full year results, it does change your calendarization and move some of the revenue growth and the margin expansion to the latter half of the year.
spk04: Makes sense. Last one for me. In the ANZ segment, are you expecting any impact, I guess, positive or negative from China's recent ban on their citizens studying at foreign universities online?
spk14: No, we have relatively few Chinese students as a percent of our overall international student cohort, so we wouldn't expect any material impact from that ruling.
spk10: Appreciate the detail there. Thanks for taking the questions, guys. Sure. Thank you.
spk20: Thank you. I would now like to turn the conference back to Carl McDonald for closing remarks. Sir?
spk14: Thank you, everyone. We appreciate your time today, and we look forward to connecting with you next quarter.
spk20: This concludes today's conference call. Thank you for participating. You may now disconnect.
spk12: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. you Thank you. Thank you. Thank you.
spk20: Thank you for standing by and welcome to Strategic Education's fourth quarter 2022 results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. I would now like to hand the call over to Terese Wilke, Director of Investor Relations for Strategic Education. Mrs. Wilkie, please go ahead.
spk01: Thank you. Hello, everyone, and welcome to Strategic Education's conference call in which we will discuss fourth quarter 2022 results. With us today are Robert Silberman, Executive Chairman, Carl McDonald, 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 annual report on Form 10-K to be filed, the most recent 10-Q, and other filings with the Securities and Exchange Commission, as well as Strategic Education's future 8-Ks, 10-Qs, and 10-Ks. 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 Rob. Rob, please go ahead.
spk13: Thank you, Therese. I just want to make sure everybody can hear us. We're actually doing this call from Sydney, Australia, and we've had a little bit of telephone difficulties. Please bear with us on that. But good evening, ladies and gentlemen. Before I turn it over to Carl to report on our Q4 and full year results, I just wanted to make a couple of comments at a high level on our capital allocation in 2022. We started the year with roughly $310 million of cash in marketable securities and $140 million of outstanding debt drawn on our bank revolver. We generated $150 million during 2022 in pre-tax cash from operations. We used that cash as follows. We paid $24 million in taxes and we invested $44 million in capital expenditures. Out of our remaining owner's distributable cash, we paid $60 million in common dividends. We took the opportunity to repurchase $40 million of our stock at an average price of $65 a share. We further paid down $40 million of our outstanding debt. That left us at year-end 2022 with $250 million of cash in marketable securities, $100 million of debt, and 23.9 million shares outstanding. We are fairly confident that 2022 will turn out to have been our trough year for earnings. So we feel our balance sheet is well positioned to support all of our opportunities, as well as to continue to return capital to our owners through our common dividend. And with that, Carl, can you walk everyone through our operating results?
spk14: Yeah, sure. Thank you, Rob. Good afternoon, everyone. The fourth quarter financial results that we reported earlier today reflect the continued stabilization of our enrollment performance throughout 2022. Total enrollment across SDI was essentially flat at just under 98,000 students and decreased 80 basis points in U.S. higher education, which is our largest segment, reflecting the continued new student growth that we've experienced at both Strayer and Capella universities. Our revenue for the full year declined 5.8% to just under $1.1 billion. And in the fourth quarter, revenue declined 1%, $270 million. The rate of decline improved as a result of strong enrollment results throughout the year. And while we were disappointed by the year-over-year declines in our full-year financial results in 2022, which were primarily driven by the enrollment declines that we had in 2020 and 21, we have been more than pleased with our current operating performance, which will inform 2023's financial performance and beyond. In 2022, our U.S. higher education segment had a strong year. U.S. higher ed revenue in the fourth quarter grew almost 1% due to essentially flat enrollment and an increase in revenue per student. Demand at Strayer and Capella universities continues to be among the strongest that we've seen in several years, and in fact, the pre-pandemic was up. Both universities, as we previously indicated, grew new students in the full year in 2022, and our employer-affiliated enrollments are at all-time highs. New employer-affiliated enrollments increased 17% from the prior year, and total enrollments grew 13%. Total employer-affiliated enrollments now comprise more than 24% of total U.S. higher education enrollment, which is up approximately 350 basis points from the prior year. The enrollment recovery at Strayer University continued throughout the year and is on track to have total enrollment growth in the first quarter of 2023 which is, again, about one full year faster than we originally anticipated. Our education, technology, and services segment also continues to perform well. ETS revenue increased 20% to approximately $17 million. Operating income decreased slightly, reflecting the continued investment in ETS technology and products, which helped drive our revenue growth last year. As I previously indicated, we expect ETF expense growth to moderate beginning this year and to essentially be flat on a year-over-year basis. During the quarter, Sophia grew in average total subscribers by 29%, and we had more than 700 SDI total enrollments coming from Workforce Edge, which is up from fewer than 100 in 2022. Our Australian New Zealand segment grew at by approximately 4% in the fourth quarter, and its revenue was essentially flat on a constant currency basis. Students, as offshore online international students, took fewer average classes per student. These processing issues and delays that we experienced throughout 2022 have improved and are close to returning to pre-pandemic levels. The Australian government has ruled that all students on active student visas must be in country and attending classes in person by June of this year, which we see as a positive catalyst for our international student growth. Now, based on the strong enrollment results that we've had in 2022, assuming that these results continue this year, for 2023, we expect enrollment and revenue to be up in the . However, I would like to bring two timing related . First, we've adjusted the academic calendar at Torrens University to start later in the quarter. This is to allow students whose visas are currently in the process of being approved to start the term without having to miss any classes. The result of this will push more of our A&C revenue from the first half to the second half of the year. Second, we expect the majority of the year-over-year expense growth to occur in the first half of the year, which will flatten out in the second half of the year, but again on a full-year basis to be up no more than 3% from the prior year. Based on the timing issues that I've just described, we expect our revenue in the first quarter will be essentially flat versus the prior year, and our expenses will be up approximately 5% in the first quarter. And once again, I'd like to thank all of my colleagues at SEI for their ongoing commitment on behalf of our students. And with that, Lateef, we'd be happy to answer questions.
spk20: Thank you. To ask a question, please press star 1 1 on your telephone. Again, that's star 1-1 on your telephone to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jeff Silver of BMO. Your line is open, Jeff.
spk07: Thank you so much. Carl, I don't know if you broke up for everybody, but you broke up for me when you started to talk about the outlook for 2023 and I think you said enrollment and revenue up in this single digit, and then I lost you until you started talking about the timing issues at Torrance. Can you just repeat what you said, please?
spk14: Yeah, apologies for that, Jeff. What I said is we expect that our revenue will be up in the mid-single digits for the full year and that our expenses will be up no more than 3%.
spk05: Okay, great. Thank you so much.
spk07: If I could just circle back to U.S. higher education, Can we get a little bit more color in terms of where the demand is coming from, whether it's at Strayer, whether it's Capella, program type, et cetera? Anything would be great.
spk14: Well, demand is consistently high across both Strayer and Capella, across all program levels. Again, some of the highest demand that we've seen really since back to 2019 levels. So it's across the board, Jeff. It's up significantly at both Strayer and Capella. And both universities experienced quite strong new student growth throughout 2022. All right, great.
spk07: I know you're not giving specific guidance, but Rob, I appreciate you going through the capital allocation and how you use the distributed free cash flow. Are those the type of rough percentages we should expect going forward in terms of how that was allocated?
spk13: No, I think that percentage as a distribution of free cash flow is much higher than we would expect normally. As I said, I think 2022 is going to turn out to have been a trough year for both earnings and cash. And we kept the dividend where it was, and we saw a significant opportunity for long-term value enhancement by buying back shares at the price that it was at. So our dividend payout, I suspect, will go down as a percent as our cash flow grows over the next several years. In 19, it was at about 40%, if I remember, in 2019. And that feels to us as a board is probably a fair kind of percentage to think about. The share repurchases are truly opportunistic. If we have distributable cash, excess cash, and access to our needs in the universities. And the share price is trading at what we perceive to be a significant enough discount to intrinsic value. We take advantage of those opportunities, but it's price dependent. So, you know, depending on what happens to the stock price, we may or may not do that. Our capital, you know, CapEx, I suspect, will be fairly consistent. But, you know, our cash flow is growing up, so the overall percentage of distribution is probably going down.
spk07: All right, that's really helpful. If I could sneak in one more, and I hate to talk about a regulatory issue, but there was an announcement last week by the Department of Education in talking about the incentive compensation rule expanding the definition of third-party servicers. Do any of your businesses potentially come under that broader definition, specifically in the ETF division?
spk14: No, Jeff. We don't have any relationships that would fall under that definition.
spk13: And I'll say that independent of that, we don't have anything that's close to incentive compensation anywhere in our divisions, just as a matter of culture.
spk07: All right.
spk06: That's really helpful. I'll jump back in the queue. Thanks so much.
spk20: Thank you. Our next question comes from the line of Toby Sommer of Truist. Your line is open, Toby.
spk04: Hey, good afternoon. This is Jasper Bibon for Tobii. Thanks for taking our question. So I guess my first question was, I was just hoping you could comment on how you're managing variable expenses with the return to total enrollment growth. And obviously, if we look back at a longer time period, the company's margins were quite a bit higher a couple of years ago than they are now. So any thoughts around how the current expense base might be able to support higher enrollment levels in future years kind of beyond 23?
spk14: Sure. Well, the bulk of our expenses are quite fixed. If we have substantial enrollment growth, we would expect some small variable expense as we expand the number of classes that we're offering to support the higher enrollment. But I'm confident that the current expense base, by and large, can handle many thousands more students than we're educating today. So to the extent that our enrollment continues to grow in the way that it has over the last year, this year and beyond, I would expect that you would see a very high marginal contribution on the incremental students that we're adding.
spk03: Thanks. That makes sense.
spk04: And then the margins for the fourth quarter just came in a little bit lower than we were expecting. Was there any kind of particular driver for that, or was that effectively in line with your internal plan?
spk09: This is Dan, John. We had probably the only thing that was a little bit of a surprise. We had a little bit higher bad debt than we expected. That's typical now with the benefit of hindsight when we have faster growing new students. New students pay at a slightly lower rate than existing students. But aside from that, it was pretty on track with what we expected.
spk16: Got it.
spk04: Maybe pivoting to the Australia and New Zealand segment, we've seen some headlines around the security check requirement causing delays and students in certain degree fields getting their visas processed. Is that impacting your ability to get international students into the country, or do you think this visa issue is kind of in the rear view mirror at this point?
spk14: I think there's been some impact with respect to that. We did see visa delays throughout 2022. We commented on that throughout the year last year. But in the early part of this year, we're starting to see visa approvals and processing timelines return to what we consider to be relatively normal. And so if that continues to be the case in 2022, or sorry, 2023, combined with what I said about the Australian government's rule that all international students have to be in Australia, taking their classes, we see that overall as a net positive for Australia, New Zealand, and 23.
spk13: One other thing on that, Carl, the one thing that's kind of an immediate impact, though, is the delaying of the start of classes a couple weeks. Although that doesn't change your full year results, it does change your calendarization and move some of the revenue growth and the margin expansion to the latter half of the year.
spk04: Makes sense. Last one for me. In the ANZ segment, are you expecting any impact, I guess, positive or negative from China's recent ban on their citizens studying at foreign universities online?
spk14: No, we have relatively few Chinese students as a percent of our overall international student cohort, so we wouldn't expect any material impact from that rule of
spk10: Appreciate the detail there. Thanks for taking the questions, guys. Sure. Thank you.
spk20: Thank you. I would now like to turn the conference back to Carl McDonald for closing remarks. Sir?
spk14: Thank you, everyone. We appreciate your time today, and we look forward to connecting with you next quarter.
spk20: This concludes today's conference call. Thank you for participating. You may now disconnect.
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